The Pitfalls of Tax Lien Investing

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Tax lien investing is thought to be a profitable investment that carries with it little risk. While this type of investing can work for some investors, it is definitely not for everyone. A security may not be liquid and could potentially be worthless. You have to beware of these possibilities when investing in tax liens.

Liquidity

  • One of the potential problems with investing in tax lien certificates is that it is not liquid. With other types of securities like stocks or bonds, you can easily sell them to another investor if you decide that you no longer want to hold onto them. With tax lien certificates, this is not the case. There is not a secondary market for this type of investment. This could force you to hold onto the certificate for an extended period of time before you make any money.

Payment Requirements

  • Another issue that many people have with tax lien certificates is that they have to come up with the money for the purchase very quickly. Typically, you will put down a deposit on the tax lien as soon as you buy it at auction. Then, you will have only 24 hours to come up with the money in most jurisdictions. If you do not come up with the money, you will lose your deposit and you will no longer have access to the tax lien certificate. This can be an easy way to lose your initial investment.

Additional Costs

  • Sometimes, you will have to deal with additional costs in order to get involved with tax lien investing. These costs are often unexpected and they can eat into your returns as an investor. In order to invest in tax liens, you have to be present when the auction takes place. This means that you could have to travel around to other areas in order to participate. You will have to pay for gas, accommodations and food just to be able to have the opportunity to invest. Then, if you are unable to secure a tax lien that you like, the trip will be wasted.

Lack of Information

  • When you invest in tax liens, you sometimes have to make split-second decisions about which liens you will buy. This can lead you to purchasing a lien on a property that is worth nothing. The home may be so old that it has lost all its value. The previous owner may have abandoned the property and is unwilling to ever redeem the tax lien certificate. This leaves it up to the investor to foreclose on the property. When this occurs, the investor has to come up with the money for the foreclosure costs and then they are stuck with a property that they cannot sell.

References

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