What are the dangers of Tax Lien Purchases?

Question

We are reading and studying about buying properties saddled with tax liens... as this sounds promising, I'm sure there are hidden risks.  Any advice or experiences are welcome.  Thank you.

Keith Thompson · Answer

@Stephen Moore You're doing the right thing, Homework...

I'm amazed at all the TV & radio ads claiming "Government Guaranteed Returns" through safe & secure investing in Tax Liens.  It's not as nearly as easy as the sales pitches indicate and losses are possible.

@Jay Hinrichs is exactly right, worthless dirt is sure to come if you do get into lien investing with any gusto.

In addition to the tax lien purchase, there's the potential loss of foreclosure costs, subsequent taxes and other maintenance charges and duties to keep the property.  It's not a matter of if, but when and how much.  If you buy every lien as though you might end up owning it, you can limit your downside, but you will not eliminate it.

All that said, Tax Liens do offer great opportunity, but you have to do your homework...

Ned Carey · Answer

@Stephen Moore there are lots of risks, many not mentioned yet.

• Fire
• IRS tax liens
• bankruptcy
• Building collapse
• Change in the marketplace
• Bidding to high
• Bidding on the wrong property
• Property is not what you think it is
• Property is not worth what you think it is

While most of these are pretty rare they have all happened to me. Some of these are not major problems. Some just stall and delay getting your money - which can affect your return.  The number one risk is bidding to high (or bidding the interest too low)

Despite these risks tax lien investing is a major part of my business.

Account Closed · Answer

Here are two math related risks not usually talked about...

1) Not factoring in transaction fees charged by the jurisdiction.  you buy a $750 lien and you've bid down the interest to 9%...but you've forgotten to factor in the $10 transaction fee charged by the county for the transaction.  Your 9% is now 7.7%  Thing is EVERYONE is buying tax liens these days so lets do the math again...you buy a $750 lien and the interest has been bid down to 2% (I've seen liens bid down to .05%)....Your $15 in interest works out to a $5 gain.  What's your time worth?

2) Not factoring in noticing costs charged by attorneys.  Say you've got that $750 lien you've bid down the interest to 9%.  You've held the lien for 3 years and are eligible to foreclose on it.  You hire an attorney to start the process - he charges you $350 to send out notices.  The property owner pays the lien in order to avoid foreclosure.  Here's the math....

$750.00 principle

$202.50 in interest earned at 9% for 3 years (it is not compounded).

$-350.00 paid to attorney for noticing

$-10 admin fee charged by the jurisdiction

$-157.50 net gain.

Congratulations!  You just lost 21% on your investment!  Generally, attorney fees aren't recoverable until you actually file suit when attempting to obtain the property (in my experience it's about $3,500 to foreclose on a lien).

edited to add...I just noticed you are in Ohio.  I've not bought liens in Ohio (are they a lien state?) but I know some jurisdictions out there have "point of sale" provisions whenever a title is transferred - that's something I would look into prior to bidding.  Your foreclosure on a tax lien burdened property could lead to a $25,000+ construction bill you might have to pay within 6 months of acquiring the property (I wouldn't put it past a town like East Cleveland to do that).

Paul Vincent · Answer

Hey @Stephen Moore:

Tax liens are good tools, but they're tough to buy in Ohio direct from Counties, unless you can buy in big bulk purchases.  My firm handles the litigation for a few big counties in Ohio, so I'd be happy to discuss the process if you'd like.

Emmett R. McCarthy · Answer

One thing to look into is whether the jurisdiction allows for a return of your money in certain situations. Illinois has a "sale in error" statute that allows refunds in many situations that may be considered "horror stories."

Dustin Haviland · Answer

@Stephen Moore I organized and ran the Tax Sale Auction for Marion County, Indiana for a number of years before getting back into the private sector. I have seen countless horror stories unfold.

Story 1: I had a buyer purchase the lien with surplus, during the redemption period the property was demoed by Department of Code Violations. The $50,000 he paid for a house he has now paid for a lot.

Story 2: Tax lien property was incorrectly noticed through Tax Sale, in court for 3 years after the redemption period and ultimately overturned to the bank. Buyer is fortunate enough to get 6% and bid price returned.

Story 3: Buyer purchases numerous liens through the tax sale. No redemption during the (1) year redemption period. Misses the window to file for Issuance of Tax Deed. Lien expires and the properties revert to the original owner because the lien Buyer didn't keep a close enough eye on the timeline. Buyer is out the money, owner of record has his taxes paid up, county keeps your surplus bid.

All of that aside, I love Tax Liens!

Jay Hinrichs · Answer

yes you buy the lien and it never redeems it turns out to be a worthless hunk of dirt and you lost all your money...

Stephen Moore · Answer

Thank you all so much for your insights.  It is a true blessing to associate with people who know the scoop!  Blessings y'all

What are the dangers of Tax Lien Purchases?

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