If it sounds too good to be true, it probably is.
This adage is especially applicable when it comes to tax lien investing. Part of the problem is there are those who make exaggerated claims about the opportunity.
It’s common for people to exploit or embellish the benefits of tax lien investing — but there’s no need! Tax liens are a great investment without the extravagant hype.
So let’s eliminate some of the confusion and address the most common misconceptions of tax lien investing, separating fact from fiction.
Fact or Fiction?
1.Tax liens are backed by the federal government. FICTION. Each state individually establishes the procedures and the processes for recovering delinquent property taxes.
2.Tax liens are guaranteed. FICTION. Unfortunately, I hear this claim quite often. The only guarantee is the rate of return established by the state.
3.You can’t lose your money. FICTION. This sounds too good to be true because it absolutely is. Like any type of investing, if you don’t know what you’re doing, you will lose your money.
Let’s take a brief look at the most common pitfalls of the uneducated:
- Purchasing a tax lien on a worthless piece of property. If the lien is secured by a drainage ditch, retention pond or marshland, it’s more than likely the owner is passing his headache on to an unsuspecting novice investor
- Purchasing a tax lien with a poor ratio. Avoid investing in tax liens with a face value greater than our desired ratio of at least 20:1. Put another way, the value of the property should be at least 20 times greater than the face value of the tax lien. Keep in mind that when you foreclose on a property, you will have to satisfy the other lien holders. This is why a good ratio is so important. The greater the spread, the greater the margin for profit should you receive the deed to the property
- Not following the foreclosure procedure when the property owner is in default. Sometimes you have to nudge the property owner for payment. If you don’t take action during the expiration period, you will lose your money. The expiration period in Florida, for example, is seven years, while in Arizona, it’s 10 years
- Skipping steps when researching tax liens. As time progresses and you become more proficient in selecting tax liens using my 12-step checklist, don’t become complacent (or careless) and skip any of the steps. Trust me — doing so will cost you money. Stay diligent and follow the procedure.
4. In the event of default, you will receive the mortgage AND the deed. FICTION. This is a very common misconception. When the property owner is in default and you choose to foreclose on the property, you must follow the legal process specific to the state where the property is located.
You must send a certified letter to any person or entity that has a recorded legal or financial interest in the property. Then you have to wait 60 days for a response, according to federal law.
If the bank or the mortgage company does not respond within 60 days, the mortgage will be removed and eliminated. Now, this might sound too good to be true, but it’s a FACT.
However, the bank or the mortgage company will rarely let that happen. Instead, they’ll more than likely pay all the delinquent property taxes, fees and dues to protect their investment.
5. The interest earned is simple interest. FACT. Despite the insinuation that the interest received is compound interest, it’s actually simple interest. The interest is earned on the face value of the tax lien.
6. I can sell my tax liens. FACT. Tax liens are negotiable assets and can be sold on the secondary market, where you’ll find buyers of previously owned tax liens.
7. I will receive the interest earned on a yearly basis. FICTION. This is a very common assumption, but it simply isn’t true. Once the property owner redeems, usually within 10 business days, you’ll receive a check from the county for your initial investment and all accumulated interest.
Now that we’ve cleared up several common misconceptions about tax liens, you’ll be able to invest more confidently, knowing you won’t be taken in by the hype.
Make no mistake, tax liens are a great investment. Not only for their high yield, safety and security, but also for their simplicity and the little time required to master the process.
You can’t put a price on the peace of mind from knowing that — regardless of the economy, who is elected to office or the volatility of the stock market — your rate of return is locked in.
Expect the best,