On the surface, investing in tax liens and tax certificates seems pretty simple and low risk-great rates, low LTVs and your ahead of all mortgages. But, tax lien investing has gotten even the most savvy real estate player in trouble. Why? Because they didn't follow the one cardinal rule of tax lien investing:
Don't Buy Junk Properties!
This is the most common mistake of new investors buying tax liens and certificates. These new investors are either pushed out by the bigger investors into junk properties, or they see the high yields compared to better quality properties, or they simply only want to invest a small amount initially. This is completely the wrong approach.
What are junk properties?
These are all those properties that you think you just need to invest a small amount--$100, $500, maybe $1000 of your investment dollar to acquire the lien. You think to yourself, this is such a small investment, how can it go wrong? Or, they are liens that haven't been bid down by the deep-pocket investors and you can earn a great 18% interest rate on your funds. But, what you're probably buying is a low-assessed value property that could make your investment completely worthless.
Why are properties with low assessments so dangerous?
Simply put, properties with delinquent taxes on them are not the best property on the block. Seem intuitive. So, these properties usually have a lot of work that needs to go into them. Or, they've been fire or water damaged. Sometimes, these damaged properties are tough to identify just from looking from the outside. So, that house that is assessed at $50,000 might have a true market value of $40,000 (assessors are never low, are they?). Then, if the property ends up needing a new roof and a complete interior renovation, the true value of the property is probably closer to zero. So, if the taxpayer can't pay his taxes, he sure can't pay for the renovation. Thus, you'll never get redeemed and you will be forced to foreclose on a house with no value. Nice.
Focus on properties that have a lot of equity and assume the worse. You may have to invest a bit more at the auction, but you'll definitely reduce your risk substantially.