Purchasing a tax lien or tax deed may sound easy. You go to an auction, buy a lien or deed, and after that collect interest on the lien or take title to the property. An investor could possibly get some really good returns (as much as 18%) or get a property for pennies on the dollar. But those fantastic returns do not come without risk. There is a reason why the returns can be so good, and that is because there may well be a significant amount of risk.
Tax Lien Investing Consider these 5 Important Risks
The underlying real estate could possibly be worthless.
Or it may be almost worthless. That tax deed property you picked up in Tennessee might be a sliver of land 3 feet wide by 10 feet long. What exactly are you planning to do with that? That tax lien you obtained in Florida might be situated in the Everglades and also have a perpetual flood easement on top of it.
No wonder these property owners stopped paying the taxes on them. They didn’t want them and neither should you. In fact, now that you own them, you have incurred liability and have to pay to maintain them. Do your research and know what you’re getting into. There are actually reasons some properties have been on the tax sale books for many years.
The underlying property might not be maintained.
Property owners which get in to arrears with their property taxes often have few resources to take care of their properties or have no desire to do so. Remember with a tax lien you may not actually get title to the property, merely a lien on it. The owner may take what you thought would be a nice little income property and let it crumble into the ground. With a tax sale property, the original owner typically has a redemption period where they can compensate you for the taxes owned plus interest and get the house back.
What if a tree falls through that property during that time and the property owner either cannot or won’t fix it? Guess who that could fall on? You. Just how much would you like to spend on a property you don’t own yet? The code enforcement department can also be a real pain here. They will often levy fines for a whole host of problems, from tall grass to broken windows. We have even heard of folks buying properties or liens and then going by the property 30 days later only to discover the home was condemned and torn down by the city. Ok now what are you going to do with that vacant lot? Again, know and research what you are getting yourself into.
The government makes mistakes.
Hard to believe, we know, but they do. Some can be really big ones. Imagine buying a property at tax sale only to find out that the government did not notify the appropriate owners they were taking it. Congratulations, you are stuck in the center of a lengthy court battle. Or the government can declare your tax lien in error and take it back with simply a 0.5% rate of interest. Not nearly the return you expected to get, is it? Make certain and ask to see every one of the records the government has related to the property. Do your very own title search to make sure the right people were notified. It will save you a lot of trouble down the road.
Laws and politics change.
All it takes sometimes is just one story about an old lady getting thrown in the street by a “greedy” real estate investor to have a world of hurt come down. You could have every right to do what you do and also have the law working for you. However that does not mean that an elected judge or official is likely to side with you and throw old ladies into the street, so to speak. Plus, the existing foreclosure crisis has heightened understanding of these issues. There’s not much you can do when politics are going against you, but make sure everything you do is proper and legal while understanding the risk.
Bankruptcy law varies.
Bankruptcy law differs from state to state, just as the methods for dealing with delinquent property taxes do. If a owner of a house declares bankruptcy, that could potentially delay or crimp your investment. A bankruptcy could reduce the amount of interest on a lien or affect the payment schedule. They may also delay a planned tax sale. Again, the existing foreclosure crisis has heightened awareness of these problems, and many judges are taking more active roles in these matters.
All in all, tax liens and tax deeds can be great real estate investments. However, savvy real estate investors perform significant due diligence and know the perils associated with what they’re entering into. If you plan to buy either of these two items as a part of your real estate portfolio, you’ll want to also.
So if you are ready to get into real estate investing, Nick & Cindy Davis work with several investors here in the Tampa Bay and surrounding areas already. We can assist you too. You can always reach us at 813-300-7116 or simply click here and we will be in touch.