Pros & Cons of Investing in Tax Lien Properties
- Tax lien properties are a secured investment because they are backed by real property. The raw land, home or other improvements on the property will be deeded to the tax lien investor if the tax lien is not repaid within a specified period of time. This makes tax lien certificates almost risk free for the investors who buy them.
- Depending upon the state you choose to purchase tax liens in, the interest earnings potential can be substantially higher than the stock market or other popular types of investing. Arizona tax liens can earn as much as 16 percent annually, for example, while Texas tax liens pay a 25 percent penalty.The rates of return vary based on the state and the bidding system used for winning the tax lien, and a few states offer a minimum interest rate to ensure investor participation.
- In rare cases a tax lien is not repaid during the redemption period. When the tax lien is not repaid, the investor holding the lien can legally take steps to obtain ownership of the property. In some states you must file formal foreclosure proceedings through the court and in others you simply fill out basic deed request paperwork. When this happens, the investor gets full ownership of a piece of property for a tiny fraction of its actual value.
- It's strongly recommended that you investigate each property for which you are interested in purchasing tax liens. Each state has a no-refunds policy, so if you buy a tax lien and later discover the property you invested in doesn't even exist, your investment is lost. Likewise, sometimes changes happen from the time a property is updated on the tax roles and the time of the sale. What was once an attractive three bedroom property could have fire, flood or vandalism damage by the time the tax lien is offered for sale. Fully researching and verifying the condition of each property is the only way to know whether it's a good investment for you.
- Grappling with the differences in state laws is one of the most difficult aspects of tax lien investing for beginners. Each state has differences in the tax lien laws as well as the sale and redemption processes and procedures. Some states sell tax liens on a first come, first served basis while others auction liens off to the highest bidder. Some states auction the deeds themselves and other states award tax liens to the investor who is willing to accept the lowest annual interest rate on the lien.
- The holder of a property tax lien is first in line to get repaid should the property come under foreclosure, says ForeclosureUniversity.com. Generally, property liens are ranked senior to junior based on the time of their recording. But even if the property tax lien is recorded after everything else, it does not matter. Property taxes always get paid first, ForeclosureUniversity.com advises.
