Tax Lien Sales: A Viable Investor Option?
By Paul Esajian on October 21, 2013
Real estate investors are always looking for the next trend. Whether it is foreclosures, short sales or tax lien investing; they are always trying to get ahead of the curve. Not that tax lien investing is new, but many investors are just now dipping their big toe in these waters. For the right investor, in the right situation, these deals can be very profitable. However, like anything else, tax lien investing is not as easy as it is made out to be. For every investor who has had a successful tax lien purchase, there are five others who wish they never got involved. So how do you know if tax lien sales are for you?
Tax lien sales are very specific based on the state you are buying in. Each state has specific rules regarding the redemption period and the interest they offer. When you purchase a tax lien, you are bidding on the unpaid taxes on the property. Contrary to what you may see on those infomercials, this lien does not give you ownership interest in the property. You get a certificate for the right to earn a guaranteed interest rate on the bid amount and the right to foreclose if you have not paid your principal and interest.
After the auction ends, the homeowner will have a redemption period to pay back the bid price and redeem their property. If they could have, they would have already, as they have received notices for at least one year prior to the auction date. If they somehow do find the money, the owner of the lien will earn an interest rate of anywhere between 12-24% guaranteed on their money. If they cannot come up with the money, the lien-holder can proceed with foreclosure and take ownership of the property.
As you can see, you are already looking at a minimum of 90 days for the redemption period and another 3-9 months for the foreclosure. When all is said and done, waiting at least a year is not out of the question. Since most tax lien auctions do not allow you to see the interior of the property before you bid, you have no idea what can be inside when you open the door. The value that you thought you were bidding on may be completely different than what you find when you take ownership. If you get a disgruntled homeowner, they may cause more damage during the redemption period out of sheer spite.
The idea of a guaranteed interested rate and ownership of a property at a reduced price may be tempting, but what is happening with your money in that time? You are essentially tying up your funds for the better part of a year without knowing when, if and how much you will get back. This money could be used for other investments throughout the year. If your money is tied up, you may miss out on other opportunities.
You are guaranteed to get back the winning bid plus interest if the home is redeemed, but if you take ownership, you can hit the pot of gold or you could be sitting on a lemon. For some investors, this is exactly the risk vs. reward that they are looking for. Other investors see too much risk for it to make sense and will run away from them. If you are interested in these auctions, you need to know the specific guidelines and requirements for tax liens auctions in your state.