There are several options when it comes to buying a house. You can buy one outright, get a mortgage, buy a share of the house, rent to own, or buy tax liens. A tax lien is placed on a property when the owner fails to pay their property taxes, and buying one can be a solid investment. Despite the apparent advantages of buying a tax lien property, there are also some disadvantages that should be considered. Purchasing a tax lien is a bad move for a small investor to make, and there is also the problem that tax lien properties tend to be distressed properties. A distressed property is basically one that is in bad condition. Even if you end up owning the house, you might need to invest even more in fixing it up before you can consider selling it.
What are Tax Liens?
As was briefly explained above, a tax lien is placed on a property by the government when someone fails to pay their property taxes. The government will also have the right to sell the property in order to make back the money owed in taxes. The good news for people who are handed a tax lien is that there is a redemption period in which the amount can be paid back. If the owner fails to pay back the taxes then an outside investor can come in and purchase the tax lien certificate for themselves. What they do with the property then is up to them.
Advantages of Tax Lien Certificates
One of the main advantages of investing in a tax lien is the high potential for interest. If someone does manage to pay back the money during the redemption period, then you stand to gain a sizable amount of interest on your investment. Different states have different tax lien rules, which need to be taken into account when investing. In California, for example, investors can expect their tax lien certificate to earn 18% if they hold a certificate during the redemption period. In California the redemption period on tax lien properties tends to be between two and three years.
Another advantage of purchasing a tax lien property is that the amount of money owed on the tax lien is likely going to be less than the market value of the house. Tax liens are a great way to pick up property at much less than their market value. You also have complete control over the property afterwards. You can choose to fix it up and sell it on, you can rent it out to give yourself a new income stream, or you can just live there yourself.
Disadvantages of Buying Tax Lien Properties
There are a number of disadvantages to purchasing tax lien certificates, no matter which state you purchase them in. A tax lien sale will generally come with a statutory redemption period for the homeowner. When you purchase a tax lien property, you generally get it through a quitclaim deed as well.
Another big disadvantage is that you – the investor – are burdened with paying off any other liens on a property that has a tax lien placed on it. So check to make sure you know how much you’ll be paying in the end. You wouldn’t want to spend $200,000 on a tax lien, only to discover you’ve inherited a debt of another $200,000.
The final main disadvantage of purchasing a tax lien property is the quality of the property itself. You could find yourself bagging what you think is a great deal, only to learn that you’ve been saddled with a property that is in serious need of some repairs. It’s good you can get property for cheap, but it won’t mean much if you end up paying the difference in repairs.
As with any investment, there are advantages and disadvantages to purchasing a tax lien. Whether or not the advantages outweigh the disadvantages is something you have to decide for yourself. They can be a solid investment, but only when you know what you’re doing.