Starting out with Tax liens

[Javon Rice]

A person told me a story if how they bought a property through a tax lien for $500 and then say in it for a year and the refinanced it and got $80,000. Is this real or doable?

I'm a beginner and I want to begin somewhere. No cash and no credit but $500 wouldn't be too hard to get, can someone guide me ?

[Jerry K.]

@Adrian Tilley I talk mainly about tax lien investing here on BP. It isn't the best way to generate "cash flow" like a rental. As a matter of fact it's the opposite - and - you have no clue when it will pay off.

I tell people who know fixed income securities that tax liens are the equivalent of a "fixed rate, variable maturity, zero coupon instrument". And sometimes it is a variable rate depending on state statutes. That type of investment should only be a part of an investment portfolio, not the majority.

Most long term tax lien investors that I talk with have found niches that they concentrate on for investing in liens. They create systems and only look for those specific situations in lien investments across many states.

One way to get around the long wait of redemption periods that @Barry M. mentioned is to buy liens in states/counties where they don't have individuals hold liens for separate years. Example - in many AZ counties (outside of Maricopa-Phoenix) if you bought the lien last year and the owner did not pay & you did not pay the next year taxes, the lien goes back into the auction and the new buyer is buying 2 years of taxes. They are that much further into the redemption period since it is based on the date of the first year lien. The original lien holder is paid off and no longer holds any lien interest.

Of course that begs the question why would a lien investor not pay the sub taxes to keep the lien in force. One reason is the property could be have changed (burned, damaged, etc) and the investor wants out. But there are many investors that use liens as short term holdings too. They have no intention of getting the underlying property, so they never pay the sub taxes and when the new investor buys the lien in the next year auction , the old investor is paid off their principal and interest for one year. Similar to a one year CD and how many one year CDs pay 7%-16% or more?

Time spent doing due diligence is the main reason investors stay away from liens. So the long term investors find ways to systematize to cut down the research time, and find their profitable niche.