Why Shouldn't I Buy A Tax Lien/Deed

Question

I really enjoy being here on BiggerPockets.com, being that with out this site I wouldn't be able to get such a good education in the Real estate industry.

my plea to you the reader, please share with me where you lost money while buying Tax Liens/Deeds and if possible to detail the most possible what you would have done differently now after your experience ?

thanks in advance,

Roy Oliphant · Answer

@Chaim K.

I can tell you of one that I nearly lost on:  I had checked the property on Google Maps and was familiar with the neighborhood and general area.  House looked ok on the pics but I ran out of time before actually viewing the property.  Went to the auction and it was the nearly the last one on the list.  No one was bidding and I'm thinking $4500 for a 3-1 in a college town?!?  Still, stuck to our rule that we don't bid if we haven't seen the house.  After the auction, I drove by to see that an addition for the third bedroom had been destroyed by someone stealing the aluminum siding and the rest of the house was destroyed by copper thieves and a tree that had fallen on the front.

Lesson learned:  Know what you are bidding on or don't bid!

Regards,

Roy

txtaxsales.com

Jonathan Taylor Smith · Answer

I do not know about other states, but in North Carolina (a Tax Deed State) they have a "10-Day Upbid Period" where anyone can increase the bid by at least 5% even if they did not attend the original auction and then the 10 day clock starts again. The end result is that several weeks or even months pass before someone gets the property and the resulting price is often far too high for a property that you do not even know what to expect inside.

David Wurzel · Answer

@Chaim K.

First, you need to do much more research on what it is you are asking.  The question is way too broad.

A tax LIEN is essentially an IOU that you are buying from the government.  You are essentially loaning them money and they are giving you a lien.  You get that return back in either one of two ways.  Either another person comes in and pays the back taxes (lien) and the proceeds are turned over to you in the form of a return of your money plus interest, or the property goes to auction and you will outright be given the property if no one wishes to purchase it.  If someone does purchase it for the back taxes then the proceeds of the sale go to you to pay off the lien that you are holding.

The property goes to auction when you, as the lienholder,  apply for a tax DEED.  Applying for a tax deed doesn't mean that you get the property.  It just means you have held a lien for the proper time and now you want to get your money back, with interest.  The deed application triggers the property going to auction.  If the property sells for the back taxes, you get your money plus interest.  If it doesn't sell then you get the property.

This is the basics of liens and deeds.  Each state has a few different rules on this and you would need to research your state's rules.

Josh Carr · Answer

@CHaim K. Tax liens and tax deeds are, as mentioned by Logan, different in every state and in some states every county is different.  The basic concept is the same but it is important that one knows and understands how the state they are investing in works.  For instance, as mentioned above- Florida has a 7 year state statute or life of a lien.  That life of a lien starts when the lien is issued.  A foreclosure can not be initiated until the redemption period is passed which also begins when the lien is issued.  It is difficult because some people who have invested have lost their money simply because they did not pay attention to the timeline of their investment.  It does happen and although tax liens can be a passive investment it is good to learn the rules of the state so it doesn't sneak up on you causing you to lose everything.  Tax liens can yield properties and if not you can gain your money back plus interest.  There are rarely variation hang ups or things that go wrong. Tax lien investing can be  a great way to acquire properties for a cheaper price.  It is VERY IMPORTANT to learn the rules of YOUR investment.  Know when it is time to act on your investment so you do not lose any money by letting your liens expire.  Do not leave YOUR investment for others to take care of.  Once you have learned the ins and outs of Florida specific you can invest accordingly.  The rules and state statutes are there and online for everyone to learn and understand.  There is a learning curve but if you have invested money, invest some time too and learn how they work.  If on the 7th year of your investment in Florida, and you have not received a redemption check yet, you need to do the tax deed application- the foreclosure process in Florida- so you do not lose your investment by letting your lien(s) expire!!!  If you do enough foreclosure in Florida you will acquire properties and take ownership to the deeds.  Another suggestion would be to take the time to look at your investment and know what you are investing in so if you do get the property you are okay with it.

Logan Turner · Answer

Each state is very different. So i recommend looking into the state you are interested in and see how the laws apply. Or ask about a specific state. Only reason being, advice from nevada won't correlate to Texas. Like anything though, if you overestimate the ARV and underestimate either the cost of repair or length of time to repair, you hurt your profit or may even go negative. There are also some potential legal hang ups.

Charles Worth · Answer

@Chaim K.

I have built a portfolio of liens in the past. Here are the issues:

1) If you don't do DD you can end up with a property that needs more work on it than you should be doing and that you will wish they had taken from you. For instance, an environmental issue or one that burnt down.

2) The county does not care what the property is or looks like. It could just be a piece of land in between two properties that is 100% useless.

3) Many areas are have bid down yields at auction. This means you may not get 16% - 18% you may get 8% or even less. In some areas I have seen prices go to 0%.

4) You need to keep buying the liens every year. From what I remember where I was buying after 3 years you could take the property. If you don't do so there will be additional liens you would have to deal with.

For tax deeds the owner can still normally redeem the property for a certain period of time and it can be tough to finance them for a year at least where I am looking.

Dave Van Horn · Answer

@CHaim K.

Although I haven't personally lost money on tax liens, some things I learned about them compared to notes over the years, generally speaking:

- tax liens are safer lien position (i'll give 'em that)

- tax liens are slower to reward than notes, with virtually no cashflow

- i found it harder to deploy large amounts of capital with tax liens vs. notes. Notes always seemed more scale-able to me.

- tax lien deals are shorter terms (with 2 or 3 year terms at most), generally speaking a mortgage note could be much longer (with 20 to 30 year mortgages - with cashflow)

Doesn't mean they're not worthwhile though! I'd recommend connecting with experts in the space. Joanne Musa is definitely one of those people and worth seeking out. Hope this helps!

Best,

Dave

Carolyn Morales · Answer

PIt is my understanding

Tom Yung · Answer

@Chaim K.

It is very interesting on your topic.

There is no such thing as why you shouldn't invest in anything; if you do & know what you are doing, you will make money anyways.

Look at McDonald; he is only flipping burgers. With the right market & targets. He has been #1 quick service restaurant for many years world wide. Now he's facing stiff competition from the other outlets, because he cannot keep up with the trends & demands of his customers.. As a matter of fact he has been losing market shares  for the last 2 quarters.

@Logan Turnerundefined said, tax lien & deed is very state specific. Read the statue & understand the sale procedure.

pick the state that you want to invest on, be it lien, deed or redeemable deed. Do you due diligence on each lien or deed that you purchase. know your exit strategy; know your real estate basics like rehab, land lording, wholesaling &  I even see a new trend of selling portion liens in 2 investments clubs. There are also secondary liens(make sure you know your timing)  . Do not get carry away; just trying to win. Know your maximum allowable bid amount.

Be patient & save up enough money to bid at the auction, after all, it is a money game.

The only people that lost money on anything are the ones that are not prepared what is ahead of them.

@Sharon Mihalyak

All tax lien has a shelf lien, meaning after certain time as specified by the state statue, If you do not foreclose on the lien. the certificate will be void & have no enforcement value.

Hope this helps.

Mark Elliott · Answer

hi chaim. i have not bought any houses at a tax sale. i have however, bought a few after the tax sale. here in erie county new york, if you buy from a tax sale, it can be a great deal. however, whatever was left on the past due taxes, you now owe. hence, you just bought yourself a liability. i don;t know about anyone else here, but i can manage to create my own bills myself without buying anyone else's tax liability. so, watch out for that issue. it may just be a new york thing, but maybe not. one of our local municipalities here has their own tax sale auctions aside from the county. that one, if you buy from them, you get a clean slate, no past due taxes left. however, they like to start the bidding out at what was owed to them, so, there would be no " leftover" anyway. by the way, they sell very few of them. lol. i usually go back to them after the sale and offer to buy some of the " left over" properties, usually for pennies on the dollar and i get them. you think they would figure out to start the bidding low if they are gonna sell them cheap later on anyway. but, regardless, even after i buy them dirt cheap, i still get them with no left over taxes owed. also, you need to know if your state is a " redemption" state. i. e., can the owner come back later and redeem their house by paying the taxes? most states are!!! but, they do not owe the tax to the county anymore, they owe it to you, and you can and should charge them intrest on the money. usually they have a year to redeem the house, after that, its yours. the issue there is that you can't do a damn thing to it for a year. these issues are what we mean when we say, " do your homework". tax sales can be a great source, but you still have to know what you are getting into before you get into it.

Why Shouldn't I Buy A Tax Lien/Deed

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