Tax Liens - Knowing The Risks Of Buying Tax Liens
Tax foreclosure properties can be a great investment
, if you go about it the right way. If you're looking for a quick return on your investment, you'll want to buy tax properties and flip them. If you're looking to make a nice percentage in interest on your investment over time, tax liens may be for you, but you need to know the risks of buying tax liens before making that decision.First is the competition you'll find at the tax lien sale. You run the risk here of seriously wasting your time when you can't win the bidding, or of getting into a bidding war and bidding way too much for a lien. In most places, you'll earn interest on whatever you bid, but if you bid too much, you run another very real risk: that the owner will fail to redeem the property and pay your interest.
This is the second big risk. If you end up with a property that didn't get redeemed and that you pay too much for, you are going to be in serious trouble. If you bid the property near retail value, you'll make almost no money if you then try to flip it. And you can't inspect these properties before bidding on their liens. It's not at all unlikely that these properties have problems you aren't aware of.
Not only that, but you frequently have to hold liens for several years before any of this will come to light.
Clearly, you can lose a lot of money if you make the wrong move buying tax liens. It's much less risky to just buy the properties outright from their owners toward the end of the redemption period. The ones who can't pay off the taxes understand that it's their last chance to sell their property before losing it to the government. Many have already moved on and decided to just let the property go. You can often buy their deeds for as little as a few hundred dollars.
If you're not interested in owning property but are still lusting after real estate money, a way to make a lot of money from the tax sale process is by connect owners with their overages (the amount bid over the amount of taxes owed). This money is usually due back to the owners, but frequently they don't know about the money and move on, leaving it behind. After a while, if they don't come in to collect it, the government gets to keep this money.
Due to a legal loophole, there is no limit on what percentage of the funds you can collect on contingency (when you successfully are able to get the funds released for the owners). That means you can charge 30-50% of the total recovered funds as payment for your information and assistance. With the current foreclosure rate, this is arguably the best way to make money from tax foreclosure, and without owning property.
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