Due dilligence before purchasing tax liens is so important because what you don't know WILL hurt you. This business, like most, is full of blanket statements which many times have exceptions. One of the biggest I hear is that the foreclosure of a tax lien 'wipes out all over liens' or that the property is now 'free and clear of all other liens' . This general rule can be more accurately stated as: The foreclosure of the superior lien will eliminate the rights of any junior interests in the realty or personal property. When a superior lien (one that was recorded or 'perfected' before all others) is foreclosed (i.e., through the state's legal foreclosure guidelines) any junior interests will lose their interest in the property. But there are exceptions to this general rule, including, but not limited to:
1) Federal Tax Liens - Since most liens on a property will likely be liens from the state or a municipality within the state you must be aware of the possibility of a federal tax lien. You can ask your title company to search for this, however a good title company should spot this lien pretty quickly.
2) State Income Tax Liens - Some states which have a state income tax may give priority to any liens for unpaid state income taxes. As the purchaser of the property or the holder of the lien you could still have these liens surviving as encumbrances on your property even after foreclosure.
3) State Sales Tax Liens - Unpaid state sales taxes can result on a lien which attaches to the property of the delinquent taxpayer. You should contact an attorney to find out if your investment state has a sales tax lien which could survive foreclosure.
4) Mechanics Liens and Materialmen's Liens - Work performed on the property where improvements or repairs are made can result in a mechanics lien if payment is not made by the party who contracted for these services. You will find many different names for this type of lien, for example: mechanics liens, materialmen's liens, artisans liens, workers liens, etc. Don't forget to learn more about your investment state as your state could include others or exclude some of these liens. Don't be scared off by this list, BUT be glad that you are now informed about this potential risk. Since you have the knowledge you need only perform adequate research to avoid the risks in this area.
These should not scare you off from investing, they just need to be factored into the costs when evaluating the investment.