5 Dangers of Tax Lien Investing

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Tax lien investing can be a profitable addition to your real estate investment portfolio. Nevertheless, it is not with out risks. Most web sites, books and advertising on the subject tends to neglect discussing the risks related with delinquent house tax liens and tax certificates. Tax lien investing functions just like any other market or investment-higher returns usually correlate with greater dangers. Here are 5 of the top risks to take into consideration prior to using a stage into tax liens:

1. Underlying Real Estate Risk. Just like any real estate investment, a tax lien is only as great as the underlying asset. You may have won at the Florida auction a tax certificate earning eighteen%. Not poor! But, wait around. The tax lien is on an unbuildable parcel in the swamps of Lee county (just to choose on my preferred county). And, the owner of the house has completely no interest in having to pay taxes on this parcel because he understands it’s worthless and he only inherited it from a crazy uncle. So, here you wait around thinking you’re earning eighteen% for two years but when you go to file for foreclosure (TDA), no one buys it at clerk sale and you are now stuck with this swampland accountable for insurance, taxes and its upkeep.

2. Municipal Fines, Condemnation and Demolition. This is my absolute nemesis. As an investor, you have small or no control of what your pleasant code enforcement officer will determine to do to that land parcel or building you have a tax certificate on. And, do not anticipate the proprietor of the house to consider treatment of any problems. With municipalities strapped for cash these days, it is not unheard of to have $500 fines every time the town arrives out to cut the grass on a little parcel. To make issues worse, the federal government is giving out grants for cities to demolish whole blocks of older properties. What you thought was a good, older house to have a tax lien on could be on the condemnation checklist and demolished in much less than a yr. And, you have extremely few treatments to quit it.

3. Government Mistakes. Who could picture that the authorities could make an error? Government mistakes with your investment are most common in states whose county officials deal with noticing taxpayers of their delinquency. But, mistakes can also happen by the county assessor, the courts, and even the pc systems handling taxes. If an error is discovered, the county will always aspect in opposition to the tax lien investor. They will declare your tax certificate a “sale in error” and return your investment with small interest beside a reduced statutory price. Whilst this might not appear so poor (you got your investment back, correct?), picture your shock when you a had a substantial, nicely-secured tax lien that you believed had earned two many years of curiosity at eighteen% is suddenly sent back again to you with only .5% interest simply because of a clerical error.

4. Legislative Modifications and Court Rulings. Changes are produced to tax legislation fairly often depending on the state or municipality. All it requires is one information story about an elderly couple “thrown” out on the road by an intense and unscrupulous tax lien investor and the legislation changes that puts your tax lien in jeopardy. These not-so-pleasant to the investor modifications will become much more and much more of an issue as the foreclosure mess is dealt with by the courts and lawyer generals searching to make a name for on their own (Connecticut!). As well as, we’re viewing an incredible slowdown with the court system with judges taking their time in reviewing foreclosures.

5. Personal bankruptcy. This was not a lot of an issue until recently. Usually, if a delinquent taxpayer submitted for personal bankruptcy protection, your tax lien would still earn curiosity and be a higher priority more than just about each creditor. However, spurred on by the mortgage foreclosure debacle, bankruptcy courts are now using an energetic role by reducing the priority of tax liens held by traders or even decreasing the price of curiosity on a lien.