Posted by John Corey on May 27, 2006 at 07:33:24:
FI,
Problems? Many are possible depending on the specifics.
The cash flow forum will have more tax lien investors so you might get a better answer there.
Tax liens are sold many different ways by the various states or counties. For the most part you can break the types into 4 large buckets.
In some sales the process works in such a way that an early pay off will result in an actual loss to the investor who bought the lien. That is when you overbid to get the lien.
Another issue is the security. There are auctions where you are bidding down the percentage of the property that will provide the security for the lien. You could become a co-owner with the person who owns the property as they still retain a percentage of the property.
There are states where you will be bidding down the interest rate or you will be buying a lien that can expire without ever getting the property unless you pay to foreclose. Then there are states where you can never covert a lien into the title. All you can do is force the county to run an auction to cash you out (lien holder has the county run a tax deed sale).
None of the above is the real risk.
You might be bidding on swamp, a parcel that has not access (surrounded by other property with no connection to a road and no easement), a property that has environmental issues, etc. Hence you need to invest time and maybe money into due diligence. That is a cost that you do not get to add on to the lien. You may do a lot of work and then find you do not successfully buy a lien as you were out bid. Hence you have up front costs (time and money) with no guarantee that you will ever win a lien. The property could be junk but hopefully you eliminated those properties.
People do make money in tax liens. Some promoters of training materials make it sound like you can not lose. You can.
There was a recent post on this forum from someone who effectively purchased a property for 2 cents on the dollar as the junior lien holders forgot to act before the tax lien was foreclosed. You can win big every now and then.
It is rumored that 99.5% of all tax liens on improved property are paid off so the lien holder collects interest and no more. If you focus on improved property and the property is not junk then you stand a reasonable chance of making a good return if all you want is simple interest.
Not there is one more issue. You can not tell when the lien will be paid. Hence you might have cash sitting around waiting for the next opportunity between deals. This effectively lowers your return so focus on the average over time and not the headline interest rate on one specific lien.
John Corey