There are many reasons why investing in a tax lien can be very profitable and there are reasons why tax liens may not be a good investment
. The sale of a tax lien is usually done by state and local governments in order to acquire default taxes on property. A tax lien sale is one of the two options that are used to resolve delinquent taxes that are owed. The other type of process is a tax deed sale which is a forced sale of the property to a buyer.
Tax lien sales are usually known as a win-win situation however you think about it. The benefits of a tax lien include a high rate of return on your investment. While each state differs from others, some can offer a lien holder a return of 18% for their investment. For example, Florida offers a rate of 1.5% per month while Iowa guarantees 2% a month or a 24% return yearly. The loss on the investment is very small since most liens are redeemed before the foreclosure proceedings.
The downsides to tax liens usually outweigh the benefits. First, tax liens are illiquid. The sales can not be resold and are held by the investor till the full amount is acquired or until the property is foreclosed. Payment for this type of purchase is usually required right away or in a very short period after the lien is bought. If the owner files for bankruptcy (which is always a possibility), the bankruptcy court has the authority to lower the interest rate on the lien or even get rid of it which can leave the holder with nothing in the end.
If you choose to purchase a lien at an auction, it may not be as easy a sale. Most investors come prepared and go after the best properties that can provide the highest return on investment. However you make your decision in this type of investment, the most important step is doing your own comprehensive research before you start to bid ontax liens. Anybody can make an offer, but the person that wins is the one that makes the offer on the right property.