Tax
Lien Investing Tips And Risks
I've
compiled a list of tax lien investing tips and risks to help
you get better prepared for investing in tax liens.
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 some risks and disadvantages associated with tax lien
investing. It is important to be aware of them.
First
of all, your money is tied up. It's not liquid, so you can't
get at it like you would be able to with a money market account.
Or even like some other forms of investing that charge penalties
for early withdrawal. Once your money is invested it is gone
until the tax lien certificate is paid, whenever that occurs,
and there is nothing you can do about it. This isn't necessarily
a bad thing. If you're relatively positive you will get paid
off on the lien it may be good to not have the money at your
disposal to spend on something else.
Then
of course, the property owner may not pay off the lien. You
do NOT lose your money in this situation. It just may take
longer to get your money, there is some legwork involved.
As the lien holder, it is now your responsibility to foreclose
on the lien.
There
are time and travel expenses associated with tax lien investing.
It takes time to learn the ropes. There may be traveling,
food expenses, lodging, it adds up. This is of course assuming
you are traveling long distances for your auctions, which
you may not be doing at all.
There
are other risks, for instance, what if the IRS has a lien
on the property? What if the property owner goes bankrupt?
Both are real risks, though unlikely enough that I won't bother
going into detail about them. A big risk worth being concerned
about is investing in a worthless property. It may be an odd
size and can't be built on, or the property may be a drainage
ditch. So if it doesn't redeem and you can't build on it or
sell it to anyone you've just completely lost your investment.
I've
talked about this scenario before and it can be easily avoided
through due diligence
before the tax lien auction. An interesting aspect of this
last risk is that it can partly be avoided through buying
more expensive liens, which are most likely nicer homes or
businesses. I understand it may be a contradiction to my earlier
tip in which i suggest purchasing smaller liens. The question
the investor has to ask him or herself is whether it's more
important to secure being paid off, or whether they're willing
to gamble on getting a higher percentage rate on a property
with less competition.
If you're looking for something more serious
than some generic tips and tricks, you might think about investing
in a tax lien program.
They are pretty cheap, and the help they provide could save
you countless hours of research as well as tons of lost money
due to inexperience.
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