Tax lien investments can provide high yields and does not require large capital commitments. As any investment though it entails risks and that is why the use of the help of specialists in tax lien can prove invaluable.
Advantages of Tax Lien Investments
• High yields ranging between 8% and 36% depending on the state and the property
• Low risk because tax liens are secured by real estate and are issued by the county government and as such are protected by state law
• Liens are secured w/priority status against the property
• Small competition as tax lien investing is unknown to the general public
• Recognized as an IRA Qualified Investment• Payment of interest is mandated and enforced by Government
• Yield does not fluctuate with changes in the economy
• In case of foreclosure, returns may be even greater
• Possibility to give delinquent tax payer additional time to pay his taxes
• Small capital requirements
Risks of Tax Lien Investments
• Investor's capital is tied up and can not be recovered or returned before the tax lien certificate is paid off, which may be before or at the expiration of the redemption period.
• The property owner may not pay off the lien, in which case investor's capital is not lost but it may take longer to recover because the lien holder will have the responsibility to foreclose on the lien.
• The risk of investing in a property that is worth less than the cost of the tax certificate, in which case it will result in a loss of capital for the investor if the property owner fails to pay off the lien. This risk can be minimized by thorough review of properties before the tax lien auction in order to sort out the worthless cases from the solid cases. Tax lien investment specialists can provide valuable help in terms of this very critical due diligence.
• The risk that IRS has a lien on the property, but this is very unlikely and can be identified through thorough due diligence.
• The investor is required usually to submit the payment at purchase or within a very short time (often no more than 24–72 hours). Failure to pay the full amount will result in the cancellation in all lien certificates purchased by the investor, as well as possible lose of his/her deposit and/or exclusion from future sales.
• In many states, further actions must be taken to protect the lien holder's rights after the purchase of a tax lien. Failure to comply exactly with these requirements may make the lien worthless.
• In some jurisdictions, the investor may incur additional investment costs as he/she must agree to pay subsequent unpaid property taxes during the redemption period in order to protect his/her interest. This will increase the actual investment cost and reduce the net yield of the investment. Furthermore, if the investor does not pay such taxes, a subsequent lienholder can "buy out" the investor's interest in the lien.
• The property serving as security for a tax lien may have environmental problems; in case the investor forecloses and attains ownership of the property he/she will be responsible for mitigating it at additional costs, if required by state law. This risk can again be minimized by proper due diligence of the properties associated with the tax liens auctioned.
• Deeds obtained after tax lien foreclosures are usually quitclaim deeds. These type of deeds do not provide an insurable title making the property unmarketable. In order to cure this deficiency the investor will need to file a quiet title action, which entails additional costs. However, it should be kept in mind that this risk exists only in case the lien is not redeemed. This is rarely the case if the property serving as security is a solid property with value considerably greater than the cost of the tax lien.
• Although this does not happen often, in case that the property owner declares bankruptcy, the bankruptcy court may decrease the interest rate payable to the investor, or may discharge part or all of the lien, in which case the investor will suffer partial or total loss of his investment.
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