Recently, I heard a radio commercial aimed at people who want to earn huge returns of 20% - 35%, with little or no risk, working part-time hours of only 5 to 10 per week, and with little investment. Believe me when I say that I’d love to know of something like that – who wouldn’t? As the commercial went on, I learned that a traveling show was coming to Jacksonville, offering seminars to interested people on how to invest in tax liens.
Tax liens fall into my category of, “I know enough to be dangerous.”. Most of our readers probably know less than I do about this obscure “opportunity.” Whether you are seasoned or novice, there are things you should know when you are being bombarded with misleading commercials.
In the world of investing, tax liens occupy a small niche in the real estate category. And while they can produce high returns, there is a lot to be aware of, and even more to consider.
Generally, tax liens are created when property owners fail to pay property taxes. The taxing municipality has the right, after it meets certain requirements, to place a lien on the property. Eventually, this can lead to foreclosure, and the property will be sold.
When the municipality has had enough with the unsuccessful collection process, they will sometimes decide to auction foreclosure rights to the highest bidder. When the buyer is in possession of the lien, he or she has the right to collect interest from the property owner, in return for delaying the foreclosure process. The interest rate can vary from about 5% to 36%, depending on state law.
If the property owner eventually repays the past-due tax and interest, the process is cancelled, and the lien buyer gets a nice little paycheck from the interest. If not, the property can be sold. The tax lien holder is then first in line for proceeds from the sale – even ahead of the mortgage holder. Sounds pretty safe, right?
Here are some things you should know before getting involved in the tax lien “industry.”
- Each lien is attached to an individual property, so it is imperative to know something about each property, including:
- What is the neighborhood property value trend?
- Are there structural problems on this property?
- Could there be environmental concerns about the property?
- Are the owners possibly capable of paying the bills, or will you have to foreclose?
- What are your chances of selling the property for a profit vs. a loss?
- Next, you must understand foreclosure rules in your state
- There may be notification requirements for the lien buyer involving considerations to the property owners
- You may need a cash reserve to pay the back taxes while awaiting a resolution
- You may be looking at a property with other liens on it, so you must perform your due diligence
All this leads me to conclude that the seminar commercial is misleading, or worse. Are you the type of person who can look a homeowner in the eye, at a very low point in his or her life, and demand a very high interest rate on his or her back taxes? Or, worse yet, could you look that person in the eye and foreclose on his or her homestead, in which you had absolutely NO interest until you decided to turn their misery into cash for you?” Consider all this seriously before spending any time or money on this “investment opportunity.”
Stocks and bonds are impersonal investments. Someone sold the stock or bond you bought. Who sold, whether at a profit or a loss, is not available to you, not that you would care. But taking someone’s home from them, even if it is inevitable, is not going to feel very good as an investor, nor as a person. If a government needs to foreclose, so be it, but count me out.
Like the bell curve, which is often used to depict risk, there are 2 equal sides; profit and loss. Failure to understand the downside can make an otherwise wary investor blind to the actual risk. The commercials should be regulated, but they are not. Therefore, caveat emptor applies. Let the buyer be wary of the true risks, financial and otherwise.
Van Wie Financial is fee-only, for a reason.
For more information about this topic, please see this interesting article about investing in tax liens.