Tax Lien Sales – The Opportunity

 

Tax lien sales offer opportunities for the right investor that are truly difficult to match elsewhere, in terms of return vs. safety.

It’s well known that tax liens offer above-market interest rates, and can result in super-bargain properties.

However, these benefits are really only enjoyed in the real world by investors with sufficient capital, of at least 6 figures, and ideally much more.

Opportunity 1 – Above-Market Interest

Most investments which have above-market interest rate potential, also come with very uncertain outcomes.  Stocks go up and down, and bonds or other lending instruments depend on the borrower to pay back the investment with interest.

These unknowns are almost completely outside the influence of the investor – in other words, very little can be done by the investor to increase the chances of a favorable outcome and not all useful information is publicly available.  Large market forces can also emerge unexpectedly, and affect the entire class of investments.

Tax liens also provide above-market interest, assuming they redeem – and almost all properly-purchased tax liens do, in fact redeem.  They are also very well secured by real property, again assuming they are properly selected for purchase.  Usually, the underlying asset (property) is worth at least 5 times the investment being made, and often 20-50 times the investment being made.

Therefore, one does not have to rely on current redemption rates of 95%+ to make their investment viable – in fact, if these rates drop, much more profit is likely to result.  Buying a properly-selected tax lien is a win-win situation for the investor – provided that due diligence and other fixed costs do not outweigh the incremental benefits of higher interest and possible property profits.

The reason this opportunity exists, is that tax lien investing is not passive.  Each and every investment requires due diligence to be performed, and some degree of upfront education is needed before starting.  If a passive investment is required, tax lien investing is not suitable unless some kind of partnership is involved where other partners perform the significant obligations needed to make a tax lien purchase successful.

Opportunity 2 – Bargain Property Acquisition

When a truthful example of a bargain tax sale purchase is cited, it is almost always the result of a tax lien purchase.  This is because bidding is not usually a part of tax lien purchases, so in many areas the only investment required to get started is to pay the current taxes owed.  From there, legal costs and subsequent taxes may also be a necessary part of the investment, but the overall investment remains a tiny percentage of value of the underlying property.

Because so little is owed against the property, it stands to reason that the overwhelming majority of tax liens redeem.  And indeed they do.  This, however, leaves a handful of liens sold at each sale that DON’T eventually redeem, and result in a windfall for the tax lien investor.  The investor now obtains the property free and clear with an investment of less that 20% of the property’s value.

This can be a real profit center in tax lien investing – but usually only  with a very high investment volume.  Because of high redemption rates, it could take years and years for the small investor to obtain even one property.

Property acquisition, because it’s largely outside the investor’s control (though it can be increased – see this article), should be considered a possible bonus to an already worthwhile strategy to earn interest.

The Small Investor Will Likely Participate in Neither Benefit!

Unfortunately, the small investor, using his own capital, will likely participate in neither opportunity.

• Low investment volume results in due diligence costing more than interest earned
• Low investment volume results in no property acquisition
• “Shoestring” budgets can get crunched when ongoing investment (such as legal and subsequent taxes) is required

Small investor?  Take a shortcut!  Approach the owners of properties that are about to be lost, with a lowball offer.  Learn how with my Insider’s Guide and Newsletter.  Sign up on the right.