Tax Liens: A Good Way to Acquire Cheap Property?

One of the greatest misconceptions in the real estate investing world is that tax liens are a vehicle to acquire delinquent tax properties on an ongoing basis, for pennies on the dollar. Examples are given on late night TV and other sources of properties worth $30,000 - $200,000, being obtained for as little as a few hundred dollars over and over again. Nothing could be further from the truth.

In the real world, tax liens on property provide an above-average return on investment versus traditional guaranteed investments like bank accounts and CD's, when the tax lien investment is properly managed. Tax lien gurus often cite that tax lien investments are "guaranteed by the government". This is also false. Tax liens are guaranteed by the underlying property only, and only if the tax lien buyer follows proper procedure throughout the process.

In exceedingly rare cases, a tax lien may go to maturity and lead to acquisition of the underlying property, where the underlying property is worth many times the investment in the lien.

However, the underlying property may actually be worthless, or worth little more than the investment made in the lien itself and subsequent costs. In order to obtain the underlying property if the taxes are not paid, strict procedures must be followed exactly by the lien buyer.

Therefore, tax lien investing is not a passive investment at all. Significant time must be spent prior to the investment, performing due diligence. Due diligence consists mostly of making sure that any lien purchased is against a property worth at least as much as the investment in the lien and subsequent costs. Many tax lien lists consists of thousands of properties, all of which must be analyzed prior to the sale.

Because several bidders may want the same group of liens at the sale, there is usually a bidding method at the sale: either the cost of the lien is bid up, or the interest rate is bid down. In either case, the investment becomes less attractive as the bidding continues, and not all liens you may desire to purchase will be available for the minimum bid or maximum interest rate.

Tax liens are really only worth getting involved in if you have a large sum (well in excess of 6 figures) to invest, and are willing to take an active role in the management of the investment. An investment of less than 6 figures provides only several percentage points' difference over a federally guaranteed investment, and therefore only a few thousand dollars difference in return. The added risk and due diligence needed to participate in any kind of tax sale is not worth the extra return.

For larger investments, especially in the millions of dollars, the increase in return and efficiency of due diligence (it's the same amount of work whether you are investing $10,000 or $1 million in a sale) can make the effort worth the while.

At every large sale, it's inevitable that several properties, even several dozen properties will be lost by the owners as a result of the sale. However, to have a chance at acquiring all of these properties by buying tax liens, you would have to buy every single lien offered at the sale, which would be impossible.

In order to actually acquire properties for pennies on the dollar, just stay out of the sale and let all of the other investors buy the liens offered. Let them do the due diligence and determine which liens are worth investing in (many times 50% or more of the tax liens offered at a sale don't even sell).

Then, once the redemption period is about to expire, see which liens are still unpaid and simply approach the property owner with a last-minute proposal to buy the property or get it under contract before it is lost.

You'll save 95% of the due diligence time, you won't have to invest any money, you won't have to follow procedures like noticing, and you won't have to get a quiet title on the property. You can just get involved at the last minute, and buy unwanted properties for a token amount or get them under contract and flip.
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