Attending tax lien sales seems like a great way to get a property on sale, and in rare cases it can be. Tax liens certainly offer a decent return on your money; in many cases, up to 25% APR or more.
On the surface, it seems like a win-win situation: get a bargain property, or worst case scenario, get a great return on your money. However, as someone who has attended many tax lien sales in the past, I can tell you that there are some pitfalls you might not recognize until you jump:
- Make sure the actual performance you expect to make is worth it. More than 95% of tax liens are written off before the underlying property can be acquired. Therefore, you should be satisfied only with the interest that you can earn on your investment. It takes substantial effort to research all the properties on the tax lien list, and if you’re investing only a small amount of money, like $10,000, you’ll only earn perhaps $1,000 on your investment if all the liens pay off. You may need to invest at least $1,000 of your own time researching properties prior to the tax lien sale, reducing your actual return to zero.
- Do not forget about the legal costs associated with the acquisition of property. You may have to spend several thousand dollars with an attorney to serve the owner and perfect the deed to the property. In many cases, these costs can be more than what you spent on the link itself!
- In many tax lien sales, properties with city code violations will be offered. It is important to check all the properties that you can buy a bond on, with the city building inspector before you buy the bond. The property could be demolished at the time you acquire it, and/or you may have to negotiate immediately with the city upon acquiring the property. You will want to avoid this or bid accordingly.
- Plan to wait potentially much longer than just the redemption period to get the deeds to the tax lien sales properties. It can take anywhere from several months to a year to get a short date to apply for your deed and wait for the county to issue the deed. So you will almost always have to take a discrete title action to get marketable title to your property. Please keep this in mind when bidding!
- Don’t forget about other bidders who will be attending the sale. In some states, the price of the link is raised until a winner emerges. In these cases, be sure to set a maximum price that you are willing to pay. In other states, the interest on the bond is offered at a discount; On good properties, the interest rate is often offered at zero. Still other states have a random system for choosing who can purchase a particular tax lien if multiple bidders are interested. No matter what the system, establish what you’re willing to pay for a particular lien and review the entire list before you hit the sale; you may not be able to purchase the exact links you want and may need to choose some alternative ones.
After being a tax lien sales investor for over 10 years, I can tell you with certainty that tax lien sales are not for beginners or those with only a small amount of funds to invest. They are dominated by experts who have millions of thousands, or even millions of dollars to invest, and who can earn significant interest returns due to the vast amounts of money they have access to. Property acquisition is a very small part of the attractiveness to invest in tax lien sales.
Most new investors investigate tax lien sales as a way to acquire property for a small fraction of its value. They are soon disappointed to find that all their links have been redeemed and they are left with a small amount of interest.
However, tax lien sales create a way for us to buy cheap property without even participating in the sales: we can simply let the other tax lien buyers fight over the liens and then, near the redemption period, we’ll look to see what liens remain. without paying. .
We will then contact the owners of those properties directly and get the property under contract. Most of the properties in this situation are free and clear, and the owners do not want them. Some will sell for as little as $50 just to get ownership off your name.
Now, we don’t have to worry about investing our own money, legal costs, or code violations (if we find them, we’ll approve or deal with them). We don’t have to wait for a redemption period to end as we are looking at prior tax liens that have already been sold, we don’t have to compete with other bidders or take quiet title action on the property.