The reality of investing in tax lien certificates may be a little shocking to experienced investors. Although this can be a lucrative investment, there are risks that could undermine your financial goals if you are unprepared.
Knowing about these invisible traps and weaknesses allows you to use this knowledge and make better decisions to protect your investments.
Unexpected Issues with Properties
Therefore, they are typically on properties that can have some serious issues. It can also be easy to overlook structural damage, code violations, environmental hazards, or properties in bad areas. As you do not see the property before purchasing the lien certificate , you are buying blind. The risk is that you might pay more when you eventually take possession of that property through foreclosure.
Complicated Legal Processes
Each state has different rules regarding tax lien certificates. These differences can include redemption periods, methods of foreclosure, and regulations regarding bidding. This is all quite complex and can be challenging to untangle. Ignoring local laws could cost you your investment or cause surprise legal issues.
Minimal Auction Oversight
There are also hidden risks in tax lien auctions. A handful of counties or states leave the bidding process largely unregulated, giving you the sense that you’ll be competing with qualified larger companies or that other bidders may be engaging in dirty tricks. Furthermore, some auctions can put low-quality over subpar-quality liens together with high-quality, and to win a sweet deal, you may need to take on risks you do not want to take on.
Restricted Data Access
One of the most significant risks with tax lien certificate purchases is that some counties or municipalities will not disclose complete or accurate property details or the lien. If such information, including on other liens, mortgages for bankruptcies, is not disclosed, you could have an expensive and time-consuming problem.
High Holding Costs
Most investors shy away from the carrying costs of tax lien certificates. If you do end up owning the property through foreclosure, you may be responsible for unpaid utility bills, homeowner association (HOA) dues, property repairs and continuing maintenance costs. These additional fees can add up rapidly, eating into your possible profit.
Extended Delivery Times
In every state, property owners have a specific time frame, called a redemption period, in which they can make good on their debts. These range from a few months to several years. Meanwhile, your money is tied up in the lien and cannot be deployed for other investments. A straight redemption period can derail your finances and eat into returns, especially when interest rates in that segment are low.
The Instability of the Market
Market forces writ large also influence tax lien investing. Declining property values, national economic downturns or local maladies can dampen returns. On the one hand, if property owners don’t repay their loans because they’re not financially viable, you might not receive the high interest rates you anticipate.
Conclusion
Tax lien certificates make for a very high-paying investment with potentially massive returns but could also be risky. There are many ways for risks like surprise repairs on a new property, high holding costs and litigation to eat into your returns.
If you want to invest in real estate, it’s helpful to research properties, understand state laws, and weigh the pros and cons of each acquisition beforehand.
You should buy these tax lien certificates for capital and due diligence. It’s about what you can withstand and what you’ll want to avoid.
