Risks to Investing in Tax Liens or Tax Deeds

IIII. Risks to Investing in Tax Liens or Tax Deeds

1. Investing in tax liens and tax deeds is relatively free from risks, and that is one of the calling cards of these investments; yet, they are not without some issues that you must be aware of.
2. Accumulated Tax Debt
   • There are certain situations in which tax debt will accumulate on a property which you can get caught up in. This is common with owners who repeatedly let their property go into tax default, never resolve, and which keeps accumulating tax debt.
   • Here’s an example. A not-so-great building lot worth $4,000 has gone into tax foreclosure for 6 years, accumulating $600 in back taxes each year. So, there is $3,600 in accumulated tax debt on a parcel valued at $4,000. Why bother? If you didn’t do your research and mistakenly bid another $600 (or more) on that lot, you can’t profit from the situation. What’s likely is that your $600 will be tied up in the lien indefinitely.
3. Junk Property
   • If you don’t adequately research the property you are bidding on, you may end up with something that has no value and you don’t really want. That equates to not being able to get your money back out.
   • Here’s an extreme example: you invest in a tax lien for what was at one time a junkyard. The owners never redeem, so you never earn any interest. When it comes time to foreclose, you realize what you are dealing with and that there’s no real likelihood you’ll ever be able to resell that parcel even if you acquire it for the amount of back taxes that your winning bid represents. Since it’s undesirable, it may be you never sell the property. In fact, that may be the reason why it ended up in tax default to begin with!
4. Bankruptcies
   • Bankruptcies are the one legal loophole that can cause all kinds of trouble for tax sale real estate investors. In short, a bankruptcy can halt any kind of collection efforts, whether it’s for interest & penalties or for foreclosing on a complete default. The good news is, tax liens and tax deeds are priority claims, so as the bankruptcy is resolved, you are among the first in line to get paid. Of course, as a bankruptcy, you never know how much that amount will be.