Taking Heloc to invest into Tax Lien Certificates, good bad ????

23 Replies

So is it foolish to take home equity and put it into Tax Lien Certificates????? Let’s say someone has a dozen rental houses paid off collecting rent would it be foolish to take the equity in those houses and make even more money in tax lien certificates????? I would be paying interest on the heloc like 4 percent and shooting for a higher interest rate on the tax lien certificate at like 20-30 percent. Your thoughts are VERY much appreciated and hope everyone is having a great holiday :-) :-) :-) :-) :-)
My opinion is helocs are the worst kind of credit line because it's tied to a property you own. Your best bet would be start a separate llc and take a business line of credit so you don't default in this gamble, because all your doing is gambling no offense.

From what I understand there is close to Zero risk if you stay on top of everything. You either get the principal with interest or you get to foreclose on the property this is where it get a bit tricky but still cut and dry if you stay on top of everything. I have ZERO experience though in Tax liens though lol

@Adam Mazzochi Tom is right. There is a LOT more to tax lien certificates. One member here @David Krulac says tax sale is one of the riskiest ways to invest. 

You have been misled if you think there is no risk. First tax certificates rarely pay 20-30% interest. They are sold at auctions and they auctions can be very competitive. Some auctions have the interest rate literally get bid down to zero. You are often bidding against big money like hedge funds. They have a low cost of capital and can work on very low spreads. 

Next is that your security for the lien is the property itself. You view foreclosing on a property as a good thing. It can be, that is my business model.  However I have certainly lost money on some tax liens.  What do you think happens when there is a fire and a property burns down?  You now have a tax lien on a burnt pile of sticks. There are many hidden risks and hidden costs in tax sale.

@Adam Mazzochi

@Ned Carey is 100% right.  Whoever told you there was zero risk was blowing smoke up your skirt.  

Here's one risk for you:  just talked to an investor this week who had toured a foreclosure house.  The former owner on the way out took a sledge hammer to every piece of granite, marble, and tile in the house.  She also took her sledge to every wall in the house, and poured concrete down every drain in the house.  The investor estimated that the intentional damage would cost an additional $60,000 to repair and replace.

Last year another investor told me he bought a foreclosure house, normally you can't see the inside, and in this case the owner was still living there and had to be ejected.  For some unknown reason the owner while living there had removed all the electric wiring by cutting holes in all the walls and ceiling to retrieve the wiring.

Years ago I went to a foreclosure sale where somebody, nobody knows for sure who, burnt the house to the ground a couple days before the foreclosure sale.  Several people bid on the house without knowing that it no longer existed except for a pile of ashes.

I could go on, hope you get the picture?

I can deal with the damage it’s expected for sure even at that point you still make more money then the interest most of the time. The property burning to the ground now that scares me lol. Is there any insurance for this??? I guess worst case you can sell the land. So you guys are saying Lien certificates are not safe then?!? If so that’s discouraging :-(

So are there any more horror stories besides burnt down houses and property damage ? I still like this idea of buying them to be honest I would be getting land or a damaged house ,....I’m also a contractor and have the resources to do the work or GC it done if needed. Is there a lot of risk to lose the entire investment???

I think the point is you need to KNOW what your doing and its not at all guaranteed income.

you can lend money and make as much as you can on interest on tax liens and do it a lot safer IMHO.

its a business Niche in my mind .. that if your going to do it you need to go large like the other folks that posted.. they do it for a living or did it for a living..

were people get hurt is if they don't have the liquidity to fight through bummers .

@Adam Mazzochi  

Here's a simple one... 

You are the high bidder at the tax sale. Great! That only cost you $10,000. Now you have x years to foreclose on your lien, or perhaps the owner or lender will redeem before you do and you'll earn 18% interest. 

Uh oh. Nobody has paid you off yet. Foreclosing will cost you $10,000 in attorneys fees and you have 6 months left to do it.

@Adam Mazzochi

The point is that it is there are lots of pitfalls and lots of ways to lose money at tax sales.  I've been to tax sales where there are hundreds of eager tax sale bidders, who sometimes bid more than market value for the property. Sometimes there are liens not wiped out by the sale.  I've seen a multi-million dollar IRS iien on a property worth $12,500.  Another time there was a multi-million dollar IRS lien on a property worth $40,000.  I've seen dilapidated house sold at tax sale where the demo costs exceed the value of the property. 

I saw a property that had a pre-paid 30 year lease to one of the biggest cell phone carriers get sold at tax sale.  The high bidder was bound by the lease for the next almost 30 years, before they could start to collect rent and they can't evict the tenant because they already paid their rent to the former owner.

I saw a property sold at tax sale that was an expired lease for a building already removed from the site.  The land owned by somebody else was not sold at tax sale only the former improvement.

I saw a property sold at tax sale that was at the bottom of a man made lake.

I saw a property sold multiple times at tax sale that was a bombing range for the Army.

I saw a country house sell at tax sale that was a gas station site in the 1930s and still had leaking under ground tanks on the property, and there was an existing lawsuit by a neighbor claiming health damage and birth defects from gasoline tainted wells.

I saw a property sell at tax sale that was five acres with road frontage except the road frontage was a fifty foot cliff.

I saw a property sell at tax sale that was 2 ft wide, residual from a highway expansion project that took the rest of the property.

Properties have sold at tax sale that were no existent due to mapping error, title errors, surveying errors, or some other issue.  At one sale a lease hold cabin was sold, even though the cabin was wiped out by flooding years earlier.  The land owned by somebody else was not tax delinquent and was not part of the tax sale.

Saw at one tax sale that a young couple bought a 1 acre suburban tract of "vacant" land and even got their pictures and a story on the front page of the newspaper.  Only problem was the land was under active railroad tracks, and the remainder was wetlands.

Speaking of which I have seen wetlands, flood plans, land protected by easements, or some other reason that the property can nt be built on, sold at tax sale.

I've seen property sold at tax sale that were toxic waste sites, including Super Fund sites.

I've seen a chrome factory sold at tax sale abandoned by the company because of toxic chemicals in the ground.

I've seen former gas stations, dry cleaners, auto repair garages, and other toxic sites sold at tax sale.

All of the above either have ZERO VALUE or NEGATIVE VALUE, welcome to the wonderful world of Tax Sales.

Jay what are the safer options in your humble opinion?????? Also is 1million large enough???? Hope you’re having a nice holiday :-)

And for everyone in here or reading this do you have any great stories on tax liens????

@Adam Mazzochi

I do have positives to say about tax sales. The former 1930 gas station did not resemble a gas station in any way. An owner had converted it to a cape cod house, the gas pumps and islands were removed, the second story added to the building and the entire house was re-sided. And people lived there for decades as a SFH residence. There was no physical evidence that this ever was a gas station. And in the 1930s during the Great Depression, there were little environmental concerns or legislation. Today its a 180 degree difference. The Federal law today allows any aggrieved party including the government to go after ANY owner of the property, whether they had knowledge or contributed to the toxic situation.

Tax Sales, as I have said many times are the most hazardous way to buy real estate.  There is no Sellers Disclosure, there are no home inspections, there are no home warranty, there is no title insurance, there are no due overs, there is severe limitations to due diligence such as phase 1 & 2, and the Sellers either the government or the former owner are not responsible for any "hidden defects" either physical or title.

I teach an 8 hour course in tax sales and can't go over everything a bidder needs to know in 8 hours.  Its very easy to make a mistake because there is so much you need to know because you don't have the back up of Sellers Disclosure, Home Inspection, a Home Warranty or title insurance.  Its an all cash business and you risk everything and can lose everything.  At one of the last tax sales where we bought properties there were hundreds of people in the room, standing room only, and with 300 properties up for sale, almost everybody left with no more properties than they came with.  We bought 8.

The auctioneer rapidly goes through the properties the 300 property sale is over in 2 hours, you need to pay strict attention or the property you're interested in will be sold or passed over before you know it.  You need to have all your research done before the sale including a hard high bid.  The same sales vary from year to year, who's there?  how much money to they have to spend?   At one sale I bought a house for $7,500, and ended up in a $30,000 lawsuit and lost the house.  At the same same I bought a house on the same block of the same street, identical built by the same builder and the same time, I paid $52,000 for that one but kept it.  It had a bad roof which you could see from the ground and had been empty for 7 years.  The hardwood floors were warped and there were humps in the hardwood 12 inches high.  The water had leaked into the house for who knows how many years?  The house needed a new roof, new hardwood floors, and new windows among other things.  I rented if for 5 years before selling for $122,000.  Made money on that one.  But needed all cash at the sale to buy and cash to rehab.

In Bigger Pockets Podcast #82, I talked about buying a 3 story brick house at tax sale for $50, that had a new roof, new electrical service, and had been gutted in prep for rehab. For a half a Benjamin I bought a free and clear house, listen to the podcast to see how that turned out?

@Adam Mazzochi @David Krulac   I think David will agree that Tax sales are very regional.

you have tax cert sales  and tax deed sales then something in the middle.. its far more complicated out in the upper east than it is say in CA were I cut my teeth.. in CA its tax deed just like buying a foreclosure.

and now a days you bid on line through Bid 4 Assets at most counties.. in the old days you went to the court house and it would be full.. but the bid process was much slower than an east coast tax cert sale.

I have been to tax cert sales in MS for example they will sell 30,000 tax certs in 3 days it goes at lighting speed and there is virtually no way to hone in on one property and buy it..

Maybe in your area it slows down and you can bid on what your aiming for.. I took a few hundred grand to one sale  spent 5k and left.. and I never got my 5k back.. they never paid off I probably bought the slivers and other useless real estate that makes up the majority of tax sales.

Now if you can in deed find the address drive by and see its a HOME and do some due diligence then bid .. but I suspect it moves to fast for that..

so like I said I don't know how it works in NY I have some experience in PA and its so complicated there I don't play...

Sounds like you may want to go to Davids class and get some instruction I know I sure would before I went and spent a bunch of money on tax sales.

In CA when I bought tax sale DEEDS  we did quite well we would buy 100 properties at the sale.. but we were also in the land business and knew how to resell it.. most folks would not have known what to do with vacant land.  and in our area out of 300  or 400 properties going up.. you might have 1 that is a home.. the rest is all bare land..

Now I don't know what its like in the areas your gunning for.. and I suspect there are more homes or improved properties and I would suspect most of those that are let go for tax's are in Ghetto or Hood type locations or simply in areas with limited value..  But yes if you put enough work into it I am sure you can make it work.. but do your diligence up front and just don't go out day one and buy 1 million dollars worth of tax deeds or certs ..

I think you may be confusing like the tax cert sales in FLA  which the interest rates are usually bid down to 4 to 7%  same with PHX Maricopa county.

Good luck with it..

at the end of the day with a million dollars in cash you may want to think about if I did not mention it simply doing some HML were you get title insurance you get due diligence and you make 10% or better collecting payments.. I know it worked for me for years.

Lastly a lot of those that are heavy into tax sales have a marketing arm that is pretty hard to impossible to replicate..

@Adam Mazzochi I will say something positive about tax sales.  My partner and I earn our living doing tax sales. We make decent money.  We make money by foreclosing on properties and reselling them.  

We recently took a property that was a two unit bldg. One unit is rented section 8 for $800 o month and the other one needs only minor cosmetics to be rent-able.  Est price all in after repairs. $25K. Est rent about $19K a year!   

That is $25K for  $19K in rent a year - you can't beat that! ! !

To do that we do a lot of  due diligence. We literally drive by 6,000+ houses a year (actually in a two month period) to inspect them. You CAN be successful with tax liens.  Just don't be fooled that it is easy or foolproof. It is not.

I know a guy that has 3 acres of  land where he keeps his equipment . Its divided into 2 parcels a 1 acre and a 2 acre . The 1 acre is nice and paved has easy road acess and he pays taxes on it . The 2 acre parcel he stores junk , stumps etc .Its has access on a road , but the bridge collapsed , or thru his property .  He hasnt payed taxes on it for 20 years . Someone buys the tax certificate every year and tries to collect , he tells them he wont pay .  Then they say they will foreclose ,he tells them to go ahead , then they will own 10000 tons of debris sitting on the property , the nonconforming use will cease and they will have to rebuild the bridge to access the property to clean it up .   

@Adam Mazzochi

I've been to both Tax Deed Sales and Tax Lien Sales, its a different strategy whether its a Deed or Lien State.  We've made money in both, but there is some stiff competition.  At one sale I went to there was another bidder who spent $1.7 million at that one sale.  We went head to head on some properties and we prevailed in some and lost some.  The prices that we paid were pushing our hard high bid limit, and the ones we lost exceeded our limit.  On one property we prevailed and bought 18 acres for $41,000.  For a lot of reasons it was not practical for subdivision.  We got a passing perk test and a survey done and were able to sell for $95,000 and it took almost 3 years to sell.  We made money, but it was an all cash deal and took 3 years to get our profit.

The good properties get bid up at the sales, everybody wants to buy a good deal so there is a lot of competition.  Not so much in 2008, 2009, etc when people were scared off real estate and there was less competition.

Whoever told you tax sales were easy to do, fast cash, and government guaranteed, they lied to you.  Its not easy, its not fast, and there are no government guarantees.  When the hucksters say there are the government guarantees, they are saying that the interest rates is determined by the law and regulation of the state.  What there are no saying is that you actually get that, because that's a lie.  AS @Jay Hinrichs said you only get the interest is the property is redeemed, no redemption, no interest paid you get no interest.  In the state where we went for tax liens we never did get a property because all our bid were redeemed, but we did make a nice interest return, but its not a guarantee, some pay, some do not.  And depending on the state, subsequent liens on the same property can be sold before or after your purchase and you general have to foreclose to get the deed.

In Florida the tax lien interest rates are bid down, and some times sell for ZERO INTEREST, so if redeemed  you get ZERO INTEREST and no thanks for lending the dead beat tax payer an interest free loan for several years.  If that is your business strategy, I'd be glad to borrow money from you at ZERO INTEREST for the next several years and I WOULD say Thank you.

Don't listen to the Hucksters and if you do buy at Tax Sale, be careful, know what your doing, and remember that you can lose everything at Tax Sales, but where there is risk there is reward if you do the work.

I have heard of worse ideas. However, like most things if you don't buy it right you can't make it right. If you don't understand what you are doing at the auction you can buy yourself into some low returns with significant risk. 

@Matthew Paul agree, there are many similar stories, where people buy stuff at tax sale that is others peoples junk either literally or figuratively.  If you can't sell a property for ANY REASON, all you have to do is not pay the taxes and eventually it will be sold for delinquent taxes.  So TAX SALES are often people's garage disposal of garbage properties.

@Jimmy Dudley agree, its what you make of it, BUT its very technical, there are a million things to consider, that you don't have to consider when buying from other sources.  Its the wild, wild, west, and to succeed you need lots of knowledge and lots of tools.  The laws vary from state to state, so what may be true in one state is not true in another.

@Adam Mazzochi In every case of tax lien investing if you do not get a redemption then you will do a foreclosure or you will lose your investment according to the state statute of the state  you are investing in.  You will want to make sure at the end of the day that the investment, if you have to foreclose will yield you a profit.  If you have to wait three years then that's the wait as long as you are gaining a profit.  Once you learn the ins and outs of the process in the state of your choice then the tax certificate sales are not difficult.  If you have learned how they work it is an easy process.  It can take time and money so be prepared for that.  You will have to do your "due-diligence", so you don't get taken by surprise on something you were unaware of and then upset because you didn't know about it.  That's what due diligence is all about.  Call the county, call the code enforcement department, call the Appraiser or Assessor, do some comps on the tax liens you want to invest in.  Most of this can be done without too much leg work.  Once you feel comfortable then go for it.  One thing that might make it easier is that you can purchase "over the counter" which eliminates the competition.  Many people say that what is left over is not any good but often times a county will only have so much time for the auction and will not be able to sell them all.  Hence the due diligence.  If you like what you are getting then you should be okay with property acquisition also.  Let us know what you do and how it works for you. 

@Adam Mazzochi A HELOC is okay to use. It's the type of investment that will hold you up. If you are working with tax deeds or real estate that will afford you to move quickly then you can make some real money doing this. New York is great if you are the winning bidder. Is that where you want to work? If you are in the City then there are some rules and regulations that make it a little more difficult but there is much to choose from. You can go to www.mtagproperties.com and they will have things listed there in downtown New York, Brooklyn, and in Queens. There are some counties such as Orange county that has "over the counter", or properties not sold at the auction that you can still purchase. There were some pretty decent deals last time I checked. Nassau county, Long Island is a good place and has much to offer but without the cash you can't invest. Let us know how it turns out for you.