In my last article I gave a brief introduction to what tax liens
are and talked about how you can earn huge returns by invest
ing in tax lien certificates and tax deed sales. But it's
one thing to know that investing in tax liens can make you
money, and it's a completely other thing to actually invest in
them. To help get you started I've put together a general
guideline of tips to follow and risks to be aware of. Hopefully
these help you on your road to becoming immensely wealthy
through real estate investing.
Tax Lien Investing Tips
Buy liens at smaller counties. There will be less
competition as most institutional bidders will not attend these.
Institutional bidders are individuals who are bidding for large
companies which invest their money in tax lien certificates. It
is not worth it for them to attend tax lien sales at smaller
counties as there will be less liens to go around, and the liens
themselves will also most likely be smaller.
Buy smaller liens. You will probably get a higher
interest rate due to less competition.
Stay during the off times of a sale. Lunch breaks, end of
the day, and the last day of a sale are prime examples. Catch
people asleep and snag the good liens right out from under their
noses. Also, at the end of the day it is important to go up to
the clerk and ask if there are any more liens for sale. It
happens that investors will buy too many liens and not be able
to afford to purchase all of them at the end of the day. The
county will not re-auction these and 9 times out of 10 will sell
them to you over the counter at the maximum percentage interest.
Set max bid amounts. Be loud and assertive. Don't
hesitate. Wait till the bidding has settled and bidders have
dropped out, then jump in with a decent sized increase. Know
your limits. Buy from obvious commercial properties, using
recognizable company names. These liens will almost definitely
redeem.
Tax Lien Investing Risks
There are also some negatives associated with tax lien
investing. As with everything in life, tax lien investing is not
without its dangers. It's extremely important to come to a tax
lien auction well prepared and aware of the pitfalls that many
people succumb to.
Inaccessible Funds Your money is NOT liquid. This isn't
like a savings account or even stocks or mutual funds that you
can sell at will. Your money is tied up until the tax lien is
paid off. This can be a week, a month, a year, or possibly never
if the owner doesn't redeem. Do NOT use money you need to pay
bills to invest in tax liens!
When a property owner doesn't pay off their lien, this doesn't
mean you are SOL, you just may have to do a little more legwork
to recoup your investment. As the lien holder it may now be your
responsibility to foreclose on the lien. Or in certain states
you may be lucky enough to be the new property owner!
Time and Travel Depending on where you are attending lien
auctions you may have to take into account travel time, lodging,
food, gas, etc...It may not seem like a lot, but it adds up. An
easy way to avoid this is to only buy liens in your county or
the immediate area. This will save on expenses, but will also
limit the amount of liens you can purchase each year.
Losing Your Investment There are instances that can occur
that may result in you losing your investment. Some can be
avoided easily, and others aren't so easy to avoid. For
instance, what if the IRS has a lien on the property? What if
the property owner goes bankrupt? These are both real
possibilities and risks, but in all honesty, are extremely
unlikely. A bigger risk in my opinion is investing in a
worthless property. The property may be an odd size and can't be
built on. Or it might be a drainage ditch. Or it might be
completely run down. If you invest in a property that doesn't
redeem, and then subsequently cannot be sold, you're now stuck
with a worthless property and have lost your investment.
These last examples can be avoided in two ways:
Buy more expensive liens. Expensive liens are usually
nicer homes and businesses which are more likely to be redeemed.
Prepare for the auction. These scenarios can easily be
avoided through due diligence. Which is basically a way of
saying, "Do your homework."
Conclusion
Investing in tax liens can be a great way to earn extremely high
percentage yields from real estate investing, but you must come
prepared. Do research on the properties being auctioned before
the day of the sale. Become familiar with the auction process
and your county's specific bidding systems used. The more
prepared you are coming in to the auction, the better able
you'll be to bid efficiently and effectively.
About the author:
Gregory Nirshberg owns and operates Tax Lien
Investing Resource. A website dedicated to providing free
quality information about tax lien certificates and the tax lien
investing process.
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