A Brief Guide to the Risks of Tax Lien Investing

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Tax liens are liens placed on a property by the city or country when the property owner fails to pay their taxes. When a tax lien is imposed on a property, the property can’t be sold or financed again until the owner has paid all the taxes and had the lien removed. Many people choose to invest in or purchase these tax liens. They do so by participating in an auction and bidding the full amount (including the value of the property, taxes, and other penalties) mentioned in the tax certificate issued by the municipality.

Properties of Tax Liens

There are many different properties used in tax liens, such as residential, commercial, etc. There are benefits to investing in tax liens for the people that do so. When someone buys a tax lien, they pay the full amount and become the legal holder of the lien. In order for the property owner to get their property back, they must now purchase it from the lien holder by paying the full amount of the lien, along with an interest charge that is typically between 5 and 36%. The repayments take place over a period of between six months and three years, depending on the lien.

There are a number of disadvantages to purchasing tax liens, even though the purchaser does make a profit thanks to the interest charge. There are some properties that don’t generate much interest, and there are property owners who aren’t interested in paying the taxes and the interest to the lien holder. There may be several benefits to purchasing a tax lien, but there are also a number of risks. Below is a brief guide to the risks of tax lien investing.

Tax Lien Investing Risks

Many people investing in tax liens are confused by the tax lien sale and the tax deed sale. It’s important for customers to understand this difference. There are some cases where tax lien purchasers immediately become the property owner, but there are also cases where the purchaser must allow time for the real property owner to pay back their taxes by paying back the lien and interest to the purchaser.

One of the biggest tax lien investing risks is the purchaser not doing their homework. They need to call the tax collector and find out when the next sale is, along with which kinds of properties will be available during the sale. They might also find this information in newspaper advertisements. Customers must also check the condition of the property, neighborhood, and other amenities to understand the real value of their investment.

Checking What the Investment is Worth

Many people find themselves purchasing properties that are ultimately worthless because they don’t have enough information about the property. Sometimes they purchase a property only to find out it is a worthless vacant lot. It’s possible to avoid these tax investing risks by just understanding the fact that when properties have lots of pending taxes, it’s a good sign that the property is one that you shouldn’t invest in. There could be a number of elements to the taxes, which are owed to a number of agencies. Customers should inquire about the taxes on the property to understand the complete cost of the purchase and the value of the investment.

Tax lien purchases are done through auctions. If someone turns up to an auction late then all the work they’ve done beforehand goes to waste, and this is something else customers need to be careful about. Another main tax investing risk is getting excited and overbidding for the lien. This results in having to pay a large amount of money. If you can’t pay the money, or refuse to, then you can be banned from participating in future auctions; missing out on plenty of potential gains. Customers must also avoid purchasing a lot of liens. They must be aware of how much money they have to spend and how much they have spent. You must be careful with your money before and after purchasing a tax lien.

Following the Proper Procedure

It’s important that you follow through the proper procedure when purchasing a property with a tax lien attached to it. Customers must understand all about the redemption period before they purchase property. They must also hire an attorney during the purchasing process when buying property with a foreclosure date. This ensures that the purchase is completely legal and it reduces the tax lien investing risks of having to pay fines or fees. Another risk with tax lien investing is the risk of bankruptcy. This is when the real owner of the property files for bankruptcy before the auction or the advertisements about the sale of the property starts. The agency often doesn’t have the time to take the property out of the auction when this happens, which maximises investor risk. The customer will get their money returned to them, but it leaves them unable to make the profit they were after.

Other Relevant Information

Tax liens will come with an expiry date. The holder will be unable to collect any unpaid balances after this expiry date passes. If the property should pass the foreclosure date, then the property lien holder must understand there are other liens linked to the property that will make it impossible for them to become the legal title holder.

Melissa Thompson writes about a wide range of topics, always revealing interesting things we didn’t know before. She is a freelance producer for USA Today, and a contributor at Technorati. She lives in Utah with her 2 kids and husband. Melissa Thompson can be reached via LinkedIn or Twitter @melthompson88. Please follow and friend her on either site.