Both Tax lien investing and real estate investing have become very popular ever since the stock markets got volatile and banks reduced the interest rates.
Many institutional buyers jumped out of the stock market and started investing in alternative avenues like Tax lien and real estate which can provide excellent rates of return and also carry lower risk.
Most high street banks and hedge funds also jumped into tax lien investing in order to bring greater returns with certain degree of safety that they were not able to make from most other investments. And this made investing in tax liens very competitive.
For the past seven years, the prime rates were close to zero which influenced these banks and hedge funds to invest in tax liens as a safer investment option. But very recently these rates have been increased and will further increase 3 more times in the year ahead.
As per experts, this change in rates will return the banks to other forms of investment (like, lending money) and make the market more accommodative for individual tax lien investors. It will become a great way for individuals to get high returns for their money without risk of markets.
For the first time investors, drawing profits from Tax Lien Investment can be time-consuming and the process can be very complex. But if the following tax lien investing tips are kept in mind there are greater chances of success.
Investigate the Real Estate laws in your county/country
Real estate laws vary between jurisdictions and often keep updating. So it is important to be familiar with the property laws where you plan to invest.
This information is easily available through the county’s government website. And in case you do not understand any particular information or have further questions, then call the concerning department and get the specific details.
Just find out how you can legally and illegally place a lien on a property in your county. What are the legal limits about collecting your money back from the property owner? How many contacts or reminders (letters, phone calls…) are allowed? What time of the day you can contact them?
Find out the foreclosure process to obtain the property in case the owner fails to meet the agreed terms and conditions within the allowed time limit.
Quick tip: If you are not able to find your county laws, try speaking to real estate attorney in your area who has experience in these matters. Just make sure you follow the legal procedure to collect your investment otherwise you could end up losing all your money.
Find out how the lien-certificate sales are conducted in your locality
Usually the tax office or county treasury looks after tax lien sales, so start your search from contacting these departments and learn about what all you must know about the procedure. Ask them about how they conduct the lien certificate sales, whether it is through public auction or handled online and how they connect with the investors. Also inquire about the next auction dates and where is will be held.
Once you have the basic information, you need to know the legal format of the auction. For example, they may ask for bids from investors starting at $1,000 which would rise as more bids come in. Or, alternatively they may ask to bid on the interest rates for the lien starting at 20% which goes down with more bids coming in.
Having this information beforehand would help you develop a strategy for the auction and you can find a really profitable deal.
Quick tip: You must remember always that the property owner would only be liable to pay the actual tax amount along with the interest no matter how much you have paid for the lien. So, plan your bids in a way that you do not get involved in a deal where you end up paying too much.
Investigate the properties on auction – in advance
For a profitable investment it is important to carefully investigate all the properties on the list of lien that you might be interested in. Identify the reasons why the property might not offer a profitable deal.
Firstly, check whether the property has a mortgage or not. If yes, then there are chances of lender stepping in to invest in the tax lien before you could do it. Further the lender may be ready to bid higher for the certificate in order to protect their existing investment in the property. Even if you are able to successfully buy the lien, the lender might legally prevent you from foreclosing on the property.
Check the actual value of the house and the total amount of tax pending. Sometimes the owners have higher taxes amount than the value of the property, which means even if you are able to get hold of the property you will not be able to earn back your investment.
Another example of a bad investment in tax liens is bidding on a dilapidated property in economically depressed neighborhood. These properties usually give out higher interest for your investment but if the owner is unable to payoff the debt (tax amount), there are chances of them defaulting on interest rates as well. And even after foreclosing on the property, you might not be able to collect a significant amount due to lower rates of dilapidated properties in such localities.
Quick tip: it is better to consider properties that do not have a mortgage, and their value is way over your investment. So, that even after 6 months to 3 years of probation period of your investment, the due amount is lower than the actual value of the property.
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