Transcript:
Welcome to the Tax Sale Podcast, where tax sale investing is made easy. My name is Casey Denman, I’m a tax sale veteran, the leading tax sale expert, author of The Tax Sale Playbook, founder of The Tax Sale Academy and I’m your host right here on The Tax Sale Podcast.
Thank you so much for joining me on today’s podcast episode. This is a completely free podcast and is brought to you through and because of The Tax Sale Academy. If you’re looking to learn more about investing in tax defaulted real estate, just head to TaxSaleAcademy.com. Again that’s TaxSaleAcademy.com.
So as I’m scheduling all of my podcasts and analyzing all of the comments and questions that I get asked, I decided I wanted to do a two part series. Not on the success stories or about how incredible this business is, because it is, but I wanted to do a two part series on the pitfalls. I’m not one of those pie in the sky type teachers that tell you nothing will ever go wrong. Instead, I want to teach you want CAN go wrong and how you can avoid those same issues.
Alright, today’s we’re talking about tax lien pitfalls.
So, I’ve got other podcasts about the process but in short you’re investing in properites where the taxes have not been paid on time. In a tax lien state you’re buying a lien against a property. If the owner pays off that lien within the set time period, then you’ll earn interest on your money, if they don’t then you could become the property owner. That’s it in a nutshell.
Now, much of the entire tax sale business revolves around two things: The process and the property. If you thoroughly understand both of these things, then it’s a no lose situation. But the reality is that there is quite a bit involved with each of these. Most of the issues arise when people THINK they know everything possible about both of these, but have inadvertently overlooked something or simply didn’t know what they didn’t know.
The tax liens business is pretty easy from the outside looking in. It’s investing in tax liens that pay you interest, backed by real estate. Now, when people ask me to compare tax liens and tax deeds, here is my response:
Tax liens are typicall easier investments that provide lower returns. You research, you buy and most of the time you will earn your return when you check your mailbox one day. Tax deeds produce higher returns but require more time investment since you need to actually sell the property before you realize your returns and that comes with maintenance, repair, marketing, closing, all that kind of stuff.
But it’s the details that really make the difference. Let’s go over some of the pitfalls to the tax lien business and then discuss how we can avoid these pitfalls.
So when you buy a tax lien, you’re investing in a priority lien with the expectation to either make interest off of your investment OR become the eventual owner of the property. But the problem is that many people don’t understand the competitive aspect of this. In a lot of areas you aren’t able to just walkin, get what you want and sit back to collect interest – there are other people who want to do the same thing, so it’s a competitive sale, some areas more so than others, but there is a bidding process of some sort involved.
And that’s where our first pitfall comes into play. You CAN actually lose money by investing in tax liens. Yes, it’s entirely possible.
If your state pays up to 18%, like Florida for example, it doesn’t necessarily mean you’ll earn 18%. Florida is a bid down state, meaning the person willing to accept the lowest interest rate wins. So you might only make ½ of a percent or 1%. So you still made money on paper, although your time investment certainly wasn’t reimbursed.
Let me show you how you can lose money:
Some states use over bids where the person willing to pay the most amount of money buys the lien. For example, a $100 lien could be sold for $120, with just the $100 face value of the lien earning interest. Investors do this as a calculated risk to win the lien, to earn money and/or to get the property. So at say 10% interest then you are looking at two years before you break even. That means that if the owner of the property pays off your lien anytime between not and 23 months, then you lose money.
That’s a prime example of failing to understand the process behind the product you’re investing in. The solution is to understand the process thoroughly, become a student of the process and know what you’re doing. I’ve seen people blow loads of money that they will never get back thinking that they’re going to earn interest on all of it. And in some places you do, but other places you don’t. So make sure you know how the process works, that you do some calculations and are making a wise investment.
Another issue with tax liens is that new investors over estimate the number of liens that will become foreclosable – in other words, they think that buying the lien will mean that they likely become the owner of the property at some point in the future. Many even approach tax lien investing as the work around to get a property for cheap – they expect the property. While that possibility does exist, statistically less than 5% of tax liens every reach that point. So out of every twenty liens you purchase, you could have ONE that reaches the point of being foreclosable. And odds are, that property likely won’t be the nicest property you have a lien against. When you invest in tax liens, your primary objective SHOULD be to earn interest, NOT to get the property. If you want the property, consider tax deeds instead.
We also have some procedural issues. Every single state varies in what’s required of the tax lien investors. In some states, the tax lien investor needs to have a PhD it seems like in tax lien laws to make sure everyone receives the correct paperwork and everything is done in the correct manner. For example, in SOME STATES, after a set period of time you must provide certified notices to the correct parties. Then you must document and be able to prove that. Then you must go to the courts to submit the required affidavits within the set time periods. Then more work….again, some states are easy, others aren’t. So be sure you know your tax lien laws.
And then of course, if you do reach the point where the lien expires and goes unredeemed, you could become the owner of the property. IN some states this is a very simple process. You just submit the paperwork and that’s it – you’re the new owner. In other states, it’s a full blow foreclosure which can be hindered by your attorney, by the volume of the court’s docket, by bankruptcy and all sort of other fun stuff. And not to mention, this is not free. It’ll cost you some cash to get through these steps. My advice, make sure you’ll have the equity once you reach the other side and become the owner.
So let’s say that all of this is complete. And now you were one of the lucky ones and you acquired a piece of property because someone didn’t pay off their tax lien. What now? Well…now we have to go back to the due diligence you performed a year or two ago. We have to hope you did it correctly. Because whether you invest in tax liens or tax deeds, your actual property research should be the same. Your investment is backed by real estate – so that real estate is pretty darn important, right? When you performed you due diligence you needed to make sure that not only the value is there, but also that you aren’t going to put yourself in a bind down the road. You likely don’t want to purchase a property with contamination issues, a property scheduled for demolition or a property with any sort of major issue. And the only way to make sure that your investment is secure is to do the proper research initially, prior to purchasing your lien and then HOPING that nothing changes drastically while you wait for that lien to mature.
So those are just a few of the pitfalls of investing in tax liens. I will never tell you any of the BAD to scare you from this business. But I tell you these things to help educate you. I tell you thse things to help you understand the importance of knowing what you’re doing and getting the proper training.
I truly hope that this episode has helped you. Stayed tuned for next week’s episode on the pitfalls of tax deed investing and how you can avoid them.
In the mean time, if you’re looking for more information on tax sale investing there are a abunch of links in today’s show notes that will help you get started.
Take care and we’ll see you next time righ here on The Tax Sale Podcast. See ya!