Investing in tax liens

Tax liens can be a relatively safe investment. A good rate of return on your money is also possible. The catch? Everybody knows it now, and bids presses down profitability. 

When we went to the local tax lien sale here in Fremont County, Colorado, we were surprised that a small community as it could have so many investors wanting to buy tax liens. It's good for the county, but not for an investor. 

Tax liens are essentially legal requirements on debt that a homeowner owes late fees. They are handled a little differently in different states, but are generally auctioned to investors. To pay them off and so did not lose their property, owners must pay whatever fees and interest the law specifies. Here in Colorado, which is 15%. We liked the idea of a 15% return on our money. 

Unfortunately it was not as simple as that. While it is true that the owner will pay 15% interest and the county will send the money to you as the lien holder, you do not necessarily have to buy mortgages at face value. It used to be that some investors in a given county would more or less divvy up all these amazing little investment among themselves and that was it. But now there are hundreds of people bid on them, even in small county like this, and they bid more than the face value. 

For example, if the taxes owed on a property is $ 1,000, bidding process starts there. However, as we watched, most of these liens were bid up to around 10% above face value. The premium goes straight to the county, which is why they employ a professional auctioneer to receive these offers higher. This means that if the owner pays his taxes in a year, mortgage holder will have just $ 1,000 plus 15% or another $ 150: $ 1,150 in total. If he paid $ 1,100, that extra $ 50 is an annual return of just 4.5%. 

Wait, there's worse news! If the owner pays his taxes late one month after the tax sale, the investor would just $ 12.50 in interest. In other words, he would lose $ 87.50 because he paid a $ 100 premium, as the owner does not have to repay. It seems that most of those investors thought the late payers would not pay for a couple years (after three losing the property) as a 10% premium was average. 

If we see someone go for face value? Out of several hundred auctioned liens, three or four went at face value. They were $ 30 or $ 40 tax liens on small properties. 

We hear that there are "outstanding" in many counties. These are liens that are not sold at auction and can be purchased at face value over the counter (if you can find the right person). Maybe this is more common, before there were crews of marketers roaming the country selling "get rich with tax liens" seminars and courses. We have just checked in several states, as we have lived in recently, but have not found the remains. 

What if you find a place where you can buy tax liens at face value and they pay a decent rate in this state? What risk did you take? Not much. 

Think of it this way: Unless the tax assessor is inept, the property may not be worth much less than half of what he says. Since taxes even in the worst areas not expected to be more than 5% of this value each year, and the owners lose their properties (perhaps to you) after two or three years depending on the state, you should never need to invest more than 15% of the value of the property, or 30% if the assessor is terrible in his assessments. 

In other words, unless the owner never pays, and when you take the deed to the property, you find out it is filled with toxic waste, you're fine. To avoid this potentially bad scenario, just buy the liens, mortgages, and spread your money among many liens. If you make 15% interest in ten mortgages in two years and you have to throw one away, you still have a better over-all rate of return than the bank. 

Indeed, this strategy only to spread the risk is one that has been used for years by big insurance companies. Some of them buy up these liabilities in their thousands and they are not wasting their time on the research seminar presenters recommend (maybe they just want to scare you into buying the materials will teach you how to do this "research" ?). If ten out of every thousand turned out to be never-to-be-paid mortgages on toxic waste dumps, it will reduce their returns by just 1% and you do not need to take ownership of the property. 

There are a few other things to look for, however. Here in Colorado, for example, if the property owner does not pay the mortgage within the time limit, you have to publish a notice three times before getting title to the property. If it is a small mortgage you could use all the interest you won posting ads in the classified section of the local newspaper, just to have the owner's pay (he does not have to reimburse you for the ads). For this reason and others, we only invest in mortgages of $ 400 or more. 

In some states, offering instead a "premium" buyers bid down interest rates. The rate mandated by law may be 16%, for example, but the bidder who will take the lowest rate allowed to buy mortgages. we presume that the county hold a special interest. 

Bottom line? Investing in tax liens can be profitable in most states if you can buy mortgages at face value and if you understand how it happens. It happens in many different ways. Find county employee know how the whole process works, and explained to you. In my experience, they often do not want to explain it to you, but your taxes pay them, so bug them until they do. 

How about actually getting the property in this way? Far less than 1% of mortgages are auctioned Unpaid until the deadline. You can do research to find the property owners least likely to pay their mortgage, but who would not sell their property before losing it over a few thousand in back taxes? Yes, sometimes someone gets a house for 80 000 USD 2,000 USD in back taxes by buying a tax lien, but do not count on it as part of your plan.