Tax lien investing is a great way to invest safely for high returns without putting your money at risk, as in the stock market, or other speculative investments. I use tax lien investing as a way to invest my money both for the near future – a few months to 2 years down the road, and for retirement. There are plenty of reasons that I see for investing in tax liens in today’s market like:
• Where else can you get an 8- 36% return on your money without a lot of risk?
• A tax lien is in first position and comes before all other liens except for other government liens
• There are no brokerage fees – you can buy tax lien certificates directly from the government
• Unlike other real estate investments, you don’t need a small fortune to invest, you can start with only a few hundred dollars
• You don’t need good credit
• You don’t even have to live in the US or be a US citizen to invest in most counties tax sales
• You can do it from your computer
• You can do it with money from you self-directed IRA and avoid paying taxes on your profit
• Thanks to our slow economy there are more tax liens available now than in years past
But still, some people who try it just aren’t successful, and I don’t want you to be one of them, so here are some reasons why people fail at tax lien investing and how you can avoid these mistakes:
Reason #1: Not investing in the right place
Not all states have laws that are favorable to investors. And even in the same state different counties may have different rules and procedures; one county may not be as good as another. Most tax liens will redeem so it’s very unlikely that you will be able to foreclose on a property from a tax lien, and even if you do get that rare opportunity it could take you years to get the property. So tax lien investing is not a way to get property. If you want to own or flip real estate, than you need to look at the states that have tax deed sales or redeemable deed sales – not tax liens. And you will need more money for this than for tax lien investing.
It’s important that you pick the right place to invest, not just the state that has the highest interest rate. Also some states just don’t have much available and the competition for few liens they do have is intense. As you’ll see it’s important to know the rules in the state and county or counties that you’re investing in before you purchase a tax lien.
Reason #2: Not researching the tax sale properties
Some people are under the impression that you are guaranteed to get paid on a tax lien, so you can just go out and buy any old tax lien and get paid. That’s not how it works. The interest rate on your lien is “government guaranteed,” but you’re not guaranteed to get paid. You’re guarantee is the property, so you better make sure that the property is valuable before you purchase a lien on it. Otherwise you might be able to foreclose on the property, but if you can’t do anything with it and you can’t sell it how will you profit?
Reason #3: Not knowing the rules
The terms of the tax sale are very important. They indicate how and when you need to register for the tax sale, what the bidding procedure is, and how and when you need to pay for any successful bids. If you don’t have the proper information, you won’t be allowed to register for the tax sale. And if you don’t register by the deadline you won’t be allowed to bid. You also need the correct method of payment. Many tax collectors will only accept a bank check (or ACH debit if it’s an online tax sale) and payment usually has to made immediately after the tax sale. If you don’t pay on time with the correct form of payment you could be fined, lose any successful bids, and be barred from participating in any future tax sales.
Reason #4: Not understanding the bidding process
I have seen this work both ways – people losing out on bids because they bid 2 high an interest rate or would not bid a high enough premium - and people not making any profit because they bid too high a premium or to low an interest rate. There are so many different bidding procedures that you really need to know what you are bidding at any particular tax sale. You need to know what is being bid, is it the interest rate, ownership interest in the property, or premium. And what happens to the premium if premium is bid at the sale. Do you get interest on your premium? Do you even get your premium back if the lien redeems? This could make a big difference in your profit.
Reason #5: Not having someone to help you avoid the traps
I made quite a few mistakes when I started tax lien investing back in 2002, fortunately they were small ones and I didn’t lose a lot of money. There was not much available back then for me to learn from and nobody was talking about tax liens back then. So I learned by going to tax sales and purchasing liens, and yes, making mistakes. I wish I had a mentor to take me under his or her wing and show me the ropes. It would have saved me a lot of time and money!
Joanne Musa works with people who want to build an extremely profitable portfolio of tax lien certificates or tax deeds FAST. For more information about how you can build your own profitable tax lien or tax deed portfolio, go to http://www.taxlienlady.com/ProfitablePortfolio.html