Pros and Cons of Investing in Tax Liens

| April 14, 2015 | 0 Comments

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For anyone who wants to make investments, there are many things you can put your money toward. Some of them are extremely popular while others are much less common things for people to invest in. One of the slightly more unusual types of investments is tax lien certificates. When someone hasn’t paid their taxes, the relevant authority can place a lien on their home. This means they own the property if the taxpayer doesn’t pay the money within a specified time frame. Many authorities then sell these tax liens on so that they have the funds they need. By purchasing a tax lien certificate, you then collect the money owed, plus interest. Here are some pros and cons involved in investing in tax liens.

Pro – Return on Your Investment

When you buy tax liens, the taxpayer has to pay back what they owe with added interest. So you make a return on your investment, provided the money is paid back. The majority of tax liens are paid off within three years of their issue. The taxing authority puts a fixed interest rate on each certificate, so you know how much you will get back.

Pro – Consequences of Non-payment

If the homeowner fails to pay off their debt within the specified time frame, the deed to the property becomes the investor’s. This means that, although you don’t get the money from the tax lien, you will own a property for the price you paid for the certificate. This could be much below the market value of the home if you have done your research.

Pro – No Broker Needed

You don’t need to hire a broker or pay any commission to buy tax liens. There are lots of excellent tax lien courses that will teach you all about how to get started, so you can do it independently. That means you won’t lose any money paying for someone else’s services. Providing the money is paid back, your investment and the interest go to you and not anyone else.

Con – Taxpayer Bankruptcy Risk

There can be some significant risks when you invest in tax liens, and one of them is the homeowner going bankrupt. If this happens, other creditors could have a claim on the property, which could put your investment at risk. Considering someone who has failed to pay their taxes in the past might not have the best financial health, this is a real possibility you must consider.

Con – Title Issues

Another problem you could face is issues with the title of the property. There could be other liens on the property that you need to satisfy before you can get a clear title. To help address this problem, you can perform a title search using a real estate lawyer or title firm.

Just like with any other investment, it’s essential to do your research before investing in tax liens. As well as learning the ins and outs of this type of investment, you should do adequate research for individual certificates before investing.

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