Tax Lien Sale - Pitfalls of Tax Lien Investing

Pitfalls of Tax Lien Investing

• Payment is usually required at purchase or within a very short time afterward (often no more than 24–72 hours). Failure to pay the full amount results in all lien certificates purchased by the investor being cancelled, and may result in the investor losing his/her deposit and/or being barred from future sales.
• In many states, further actions must be taken to protect the lien holder's rights after purchase of a lien, and generally within a certain period of time; failure to comply exactly with such requirements may make the lien worthless.
• In "bid down the interest" jurisdictions, valuable properties are usually bid to the lowest rate possible greater than zero percent. (For example, Florida permits the interest rate to be bid down to a minuscule 0.25% – though it guarantees a minimum 5% return – while Arizona allows the bid to be as low as 1%.) Similarly, in "premium" states, valuable properties are bid up above the means of an average investor.
• Unlike a certificate of deposit, tax liens are illiquid. They cannot be "cashed in" (resold to the taxing authority), but must be held until either they are repaid or the holder takes action to foreclose. (It is possible, however, to assign one's interest in a tax lien to another party.)
• Tax Lien properties sold in non-Judicial Foreclosure states are conveyed to the highest bidder via a tax deed. The holder of the tax deed would then have to file a quiet title action, in the county where the property is situated, to clear of title defects. Although properties sold on tax deeds can be transferred, all financial institutions require a marketable title on property they will be financing.
• Tax Liens that you hold on properties may become worthless due to municipal liens and assessments on the property. These liens and assessments (and their related interest) can increase the monies owed to a point that the property is deemed worthless.