Tax liens - what are the risks

[Justin Schaffer]

I am new to the real estate investing market and I hear every salesperson talking about how amazing tax liens are and there's just absolutely ((("NO"))) risk.  Clearly there are risks involved so what's the good, the bad, and ugly associated with tax liens. 

Any information is greatly appreciated. I'm just here to learn so thank you for the advice!!

[Brit Foshee]

@Justin Schaffer @John McCormack

I would say the risks are low but there are certainly some downsides to them.

1) You must know what the underlying asset is. You can't bid blindly on these things. Many times people aren't paying their taxes because the property itself isn't worth the taxes owed. I've seen this many times.

2) There are additional costs involved.You need an affordable lawyer. If the debtor doesn't pay off the lien in the time allotted by the county, you will have the option to foreclose.  In this case you will need a lawyer to help you foreclose.  This costs money  There may be additional liens and other title flaws attached to this property in which case you will need a lawyer to perform a "quiet title".

3) Time.  For me the biggest drawdown is the time. You have little control over the situation.  The lien holder can pay you back immediately yielding you very little return.  Or the lien holder can never pay you back. I like the ability to control my capital, and tax liens leave little flexibility in doing such.  Sure you may make 15% (Many counties are getting bid down much less right now) but you're at the discretion of the debtor as to when you'll get your capital returned. 

It is possible to purchase a tax lien, foreclose on the underlying asset and it produce equity, but this rarely happens.  The homeowner is usually educated enough to not let this happen.