How do tax liens really work? Whats the catch? Nothing seems as easy as they do?

Question

What are the hidden costs or pit falls of buying a tax lien? Do you really get the house if the person doesn’t pay the lien in the grace period?

Ned Carey · Answer

@Chase Waxman You are wise to question them. On paper they sound great. What those promoting them ignore is there is competition. Tax liens for qality properties virtually never go for just the taxes. They are bid up to prices that often don't make economic sense.

Yes you can get the property if the property owner does not eventually redeem the tax bill. However based on the bidding, you may wind up paying to much for a property that is in disrepair. Tax lien investing can be profitable but it is nowhere as easy or risk free as the promotors would have you think.

Yes as mentioned the laws vary greatly from state to state and sometimes county to county. An example of a "Gotcha" is in Baltimore city the tax lien does not include the water bill. If you foreclose in order to record your deed you need to catch up any past due water bills. Normally that wouldn't be  big deal but in baltimore city they don’t turn off the water no matter how far behind someone is on their bill. You could be in for a $10-20,000 water bill surprise.

There is a LOT of good information here on BP about tax liens.

Will Sifert · Answer

@Chase Waxman

Tax liens were first explained to me over 15 years ago as, you either get the property or you get your money back plus interest.  If it was only so easy lol.

My very first tax sale, very first tax lien, I lost over 2k dollars. I almost quit. Thank god I did not. I bought an improvement only (camp) the company that owned the land was a large timber company. The camp owner had a long term lease that expired and the land owner wasn’t renewing leases in this area. I was told if you want the camp come get it and move it.

There are 100s of ways you can lose money buying tax liens. It’s a great investment that most people don’t know about but you have to educate yourself or it will cost you a lot of money. Also, each state is very different.

Chris Seveney · Answer

@Chase Waxman

Potentially but what do you think chances of that happening are?

Tax liens are state by state and large funds buy them up in the thousands and are happy with a 6-8% return on them. So a lot of competition.

Will Sifert · Answer

@Eliott Elias

You mean “clouded”? Never heard the expression “fogged” before.

I’m most cases, most liens are removed. Varies from state to state and the type of lien.

Marietou P. · Answer

I bought a few tax liens properties in Georgia. It was a nightmare of a process. Some of the properties were claimed back and quickly earned 20%. One of the properties didn't amount to anything due to existing easements. The remaining properties looked great. However, I had to pay off existing tax liens, and it took two years to transfer the title with a lawyer hired; in the meantime, paying off all new taxes that came up while in the foreclosure process. The cost, in the end, didn't make sense at all.

If I were to do it all again, I would focus on properties I have high confidence that someone will come and claim. However, those would be competitive and hard to find. The really good properties I spent time checking out were claimed by the owner before the auction date.

It is a lot of work. Lots of research, lots of money spent. I won't do it again.

Bill B. · Answer

In any state with an exemption period a “smarter” investor could go to the the owner’s with equity in danger of losing their home and getting nothing with an offer.  “Hey, how about I pay off that debt and give you $10,000”. Or “I’ll pay it off and give you another year to find somewhere to live, just sign it over to me.” At lest you’d still win the auctions where you’d bid is worth as much or more than the property.

John Underwood · Answer

I got 3 houses last year and 3 the year before that. I received interest back on the ones that redeemed.

Eliott Elias · Answer

The biggest risk is fogged title. You inherit all liens that the property comes with. Do a title search before you purchase the property.

John Underwood · Answer

Not true.

You do not need to do a foreclosure in SC. The deed just shows up in your mailbox.

Some states require a foreclosure but not all.

How do tax liens really work? Whats the catch? Nothing seems as easy as they do?

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