What are Some Risks of Tax Lien Investing? | Topouzis & Associates, P.C.


September 19, 2019

What are Some Risks of Tax Lien Investing?

What are Some Risks of Tax Lien Investing?

Tax lien investing—wherein an investor purchases a tax lien from a municipality that wants to earn the money from unpaid taxes on a property, permitting the investor the right to foreclose on the property if the lien (plus interest) continues to go unpaid—can be a valuable source of income for the seasoned real estate investor. But there are risks inherent in this form of investing that can leave those who are unfamiliar with the process shouldering a certain amount of risk.

For one thing, as these liens are often sold at auction, the investor who manages to purchase the lien is generally the one who is willing to accept the lowest interest rate—which tends to fall between three to seven percent, depending on the state in which one is doing the buying. And this may not pay off immediately. The property owner is generally given a statutory period of time in which to pay off the taxes plus interest before foreclosure can be initiated—often between one and three years. It is most often the case that the taxes plus interest is paid off by the redemption date—which means that the amount of money made on any tax lien purchase is not likely to be a large amount of money.

It’s important to be very familiar with the particular property on which one is purchasing a lien, the neighborhood in which the property is located, the property values of the area, and the amounts involved in recent tax lien sales. Due diligence—ideally done as close to the purchase of the lien as possible to ensure up-to-date information—is key.

Moreover, tax lien purchases come with responsibilities. Many states have notification requirements, and many tax liens have expiration dates—often six months after the redemption date. So you must be on top of those dates and take action or risk your purchase and foreclosure rights expiring.

Another option for engaging in this sort of investing is to invest passively via an institutional investor, preferably one belonging to the National Tax Lien Association. That can reduce risks to an acceptable level (but of course the individual investor’s potential yields will also reduce).

Here at Topouzis & Associates, P.C., we make sure a home buyer—including an investor who has been forced to foreclose on a purchased tax lien—is receiving true and unencumbered title to a home, and we provide title insurance to back our title services. Whether you’re a lender, an investor, or purchasing a new home, the policies we connect you with provide peace of mind that your new property will not bring along any nasty surprises. Whether you live in Providence, Rhode Island; Cambridge, Massachusetts; or Miami, Florida, feel free to contact us for more information.