What are the risks of buying tax liens? As with any investment opportunity, risks can always emerge before or after a deal has been made so you need to understand tax liens and how they work.
Let’s talk about some risks associated with buying tax liens, like early redemption or poor property condition, and discuss how you can mitigate them.
Table of Contents:
- The Tax Lien Interest Rate May Not Be As Much As You Thought
- Some Tax Delinquent Properties Are Not Worth Your Time Or Money
- Learn More About How Ted Thomas Can Help with Tax Lien Education
- Read the Video Transcript
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The Tax Lien Interest Rate May Not Be As Much As You Thought
The first risk you can run into when buying tax liens is the circumstance in which the owner of the property pays off the taxes in the same month that you purchased the certificate. By the owners paying the taxes in full, you will get the money you spent back without earning much from interest.
An annual interest rate could be anywhere from 18% up to 36%, which starts to accumulate once you purchase the tax lien certificate.
You will still get that interest rate once the owner pays the taxes. However, in some states, if the owner pays off the taxes in one month, then it will be for one month instead of multiple months or even longer.
For example, on an 18% tax lien certificate in the state of Mississippi, you receive one and half percent in interest each month. If the certificate is redeemed by the property owner in one month, then your return on your investment would only be one and half percent.
This is not the case in every state. There is a state that pays 20% whether the tax lien is redeemed within a month or a year.
Some Tax Delinquent Properties Are Not Worth Your Time Or Money
Another risk is that the property could be worthless. A property could be deemed useless due to several different factors, such as environmental problems, code violations, and more.
In most cases, many property owners stop paying their property taxes because they know their home is useless and not worth their time or money. You want to be able to identify properties that are not worth your time or investment.
Always do your homework before buying tax liens. Thoroughly research the property, including going out to take a look at it. If you can’t go look at the property, have someone do it for you and send you photographs.
Learn More About How Ted Thomas Can Help with Tax Lien Education
While tax lien certificates are profitable and considered among the safest investments, there are still risks to buying tax liens. Buying tax liens is easy, and it’s also easy to learn. However, you must be educated and trained.
Ted Thomas has been teaching individuals about this process for over 25 years. Click here to learn about this opportunity and get a Free Gift that will give you a big head start!
Please browse our website for more information about this fantastic investment opportunity and take advantage of our library of educational videos to start investing today!
Read the Video Transcript:
Are There Risks in Buying Tax Liens?
Randy: Hey welcome there, thanks for joining us. I am here with Ted Thomas who again is the authority on tax lien certificates, tax auctions and investing in real estate. We’ve been talking a lot about the different terminology and such Ted. Let’s hear on the other side though, there’s got to be some risks in buying tax liens. So what are the things people have to look out for? It can’t be that easy.
Ted: Yeah well, first of all it is easy but if they can’t tell you what the negative side of it is, you don’t want to get involved in anything. You want to know both sides whether it’s a prescription or whether tax liens. All right, just the other day in the office, we were talking and we were discussing the state of Mississippi and I’m going to use that state for this simple reason.
Ted (cont’d): In Mississippi if people don’t pay their tax they’re going to issue a tax lien certificate and you remember that’s just a piece of paper. so you can issue that, so anybody can pay the tax on their property. So in Mississippi, if I pay the tax on somebody’s property, I can earn up to 18%, okay? But they pay the 18% over the whole year, so they get a percent and a half in a month. So if those people don’t pay me for the whole year, I’ll earn 18%, that’s a positive.
Ted (cont’d): Alright, now I’ll give you the negative. What if you bought the tax certificate and they paid you off in a month? You’re only going to make make a percent and a half, so there’s the negative. If they pay it off as soon as you did it, like you did all your homework then you only made a percent and a half.
Ted: So the beauty of it is you’re always going to get your money back because it’s a tax certificate or you’re going to get the property. But that’s a negative and some people don’t want to do that. Now there are other states that you could look at and you could buy in that state and you can earn 20% in a month. And we’ll talk about that on another video.
Randy: Wow, that’s pretty neat so. So you want to do your homework obviously before you you get into something and kind of the object is or a goal is you don’t want to necessarily buy a tax lien where you think the guy’s going to pay it off in the next month. Because you’re doing a lot of work to get the tax lien and you’re not making a lot and if they last longer.
Randy: Okay, I got you. And then I know if they, and I know you mentioned if they never pay their taxes, then you can end up with a house. Yeah, now is there any bank, is there any risk of that?
Ted: Without the mortgage, without a mortgage.
Randy: Without a mortgage.
Ted: Don’t forget without the mortgage.
Randy: Well, how does that happen? What happens to the bank?
Ted: Ah, I’m glad you asked that question. Okay. What happens to the banks? You see the law works this way. No tax can get in front of the property tax. The IRS can’t get in front, Bank of America can’t get in front. Doesn’t matter who they are, property tax is number one. So when you pay the property tax and the people don’t pay you’re going to wipe out everybody else. The banks, are wiped out.
Ted (cont’d): Now they don’t just wipe the bank loan, what they simply do is they have a process. The attorney could tell you better than that, now I’m not an attorney. All right, they have a due process. So they send that bank a notice and say, look this property is in tax default, somebody’s got to pay the tax.
Ted (cont’d): Now the local government doesn’t care who pays the tax. Either you pay it because you own the house or they’ll pay it, somebody’s got to pay the tax. If you don’t pay and the bank doesn’t pay, you don’t own that property. That’s the way it is, that’s the law in all the counties in the United States.
Randy: Wow, yeah I didn’t realize the bank had so much skin into the game in terms of losing a house if somebody doesn’t pay property tax.
Ted: Oh it happens every day. For some reason, people think banks are well run, I don’t know why they think that but they’re not.
Randy: Well listen, every time I talk to Ted I learn something a little new. You can too, because we have lots more videos just like this one at his website, that’s tedthomas.com. Come join us because we’re going to talk, we’ve got a lot more things to talk about and you can learn a whole bunch. We’ll see you there.
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Ted Thomas is America’s Leading Authority on Tax Lien Certificates and Tax Deed Auctions, as well as a publisher and author of more than 30 books. His guidebooks on Real Estate have sold in four corners of the world. He has been teaching people just like you for over 30 years how to buy houses in good neighborhoods for pennies on the dollar. He teaches how to create wealth with minimum risk and easy-to-learn methods.