Some Pitfalls of Tax Deed and Tax Lien Investing

Some Pitfalls of Tax Deed and Tax Lien Investing

Tax Lien and Tax Deed investments are a extremely safe form of obtaining huge returns on your money. Sometimes these returns are as high as 16 to 36% in the Tax lien area and can exceed this Massively if the investor forecloses on the property or gets a good deal in a Tax Deed auction.

Counties and Municipalities need money to pay for their infrastructure, schools… and therefore they need to collect the Property taxes. If someone is not willing to pay these taxes, the State takes some measures to ensure they get paid. One of these measures is to sell the property taxes to investors in exchange for them receiving a high interest rate and the right to eventually foreclose on that lien. . The other one is to after a statutory waiting period (2-5 years) sell the property itself at auction.

For much more details about how Tax Liens and Tax Deeds work please visit the webpage

However, there can also be some problems with Tax Liens and Tax Deeds which most of the self-proclaimed “Gurus” do not mention. They can easily be mediated with a little research and due diligence but they do exist.

Problem #1: Usability of the property:

Nothing replaces going out and looking at the actual property you are about to purchase a Tax lien on, or bid on during a Tax Deed sale. Although a high percentage of the properties coming up for Tax Lien sale have NOTHING wrong with them, there are properties you rather do not want to own. Property could be in the middle of a wash. Or it could be a “measuring mistake” and that ½ acre property in the middle of the city, is really 10 feet wide and 2,178 feet long, making it impossible to every put anything on it.

Or it could be so steep that you will never get an building permit. Etc.

This is easy to notice if you do a few steps:

  1. Get an official county Plat map of the lot. If it is such a small but long strip of land you will see it right there.
  2. Go to the land and look at it. If you need a helicopter to get to it, or if it is soo steep that you need Mountain climbing gear to walk it, it is probably not such a good property to own.
  3. Call the Flood Control District or the County Planning and Zoning department and ask them if the property is in a registered Flood Plain.

Problem #2: the outstanding Taxes are more than the value of the property:

This is something that usually happens only in lower value properties and in states where it takes many years for a property to come up for Tax Lien or Tax Deed sale. Each year, the county does not only assess the taxes for the property, but it also slaps hefty Fees and Penalties on all properties with Delinquent taxes from prior years. This along with the Interest accrued over several years can add up to MUCH more than just the simple initial tax lien amounts. A property with an annual property tax bill of as little as $200.00 can have outstanding back taxes of easily $5,000 or even more after a few years, due to all the fees and penalties.

So make sure that when you invest in Tax Deeds or Tax liens you get a good estimate of the value of the subject property.

Problem #3; Environmental Problems.

This is the problems most people fear most, particularly in vacant land Transactions, however if you have any concerns about this, there are some easy steps to minimize the risk of buying a contaminated property.

Here is what you can do:

Many townships and cities have lists of condemned properties.

Visit the property and look around. Of course you might not be able to do this if the property is an occupied single family residence, but you can do it if it is a vacant piece of land.

Call the State’s Environmental Agency ( like for example in Arizona the “Arizona Department of Environmental Quality”). They can tell you if the subject property is on any of their lists.

Check the recorded documents and see if anything concerning Environmental issues was recorded against this property.

If you do all or at least a few of these things you should be quite sure that your investment is safe

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