Buy tax links? do this instead
If you are considering buying tax liens as part of an overall investment strategy, or as a full-time business, you may want to consider ditching that idea and buying and selling property directly from its delinquent owners. This is why.
1. Buying tax bonds is risky. The idea when buying tax liens is to get paid and earn interest on your investment. Owners pay a large percentage of the time, but in today’s economy, we’re seeing more and more people who can’t bail out. What this means to you is that you may very well cheat the unhappy owner of a property he didn’t want, which leads directly to point two…
2. You cannot inspect the property on which you are purchasing tax liens. You can do a drive-by, and that’s it. If you end up owning it, you may regret your decision to bid on that auction after all. Which leads directly to point three…
3. The tax bond auction is a nightmare. Inexperienced bidders and large companies that can afford to earn less than you invested will outbid you most of the time, and you will find that any research you have done is a huge waste of time.
If you are considering purchasing tax bonds in the hope that willpower ending up being able to foreclose on the property at some point, that’s even crazier. Here’s what to do instead: Buy tax delinquent properties directly from the owners, but only after the tax sale, just when they are about to lose it for good.
If you don’t want to own a property, you don’t have to in this case. You can always negotiate with the owner to buy your deed for a very, very low amount (read: several hundred dollars) and then sell it for below market value to… guess who? An investor. You walk out of these deals with thousands in your pocket without having to do anything to the property. Desperate owners are looking for solutions, and selling to you for a few hundred dollars with the promise of getting half of what you can sell is a much better alternative to losing it all to the government.
So even if the property is a total dump, you’ll be able to sell it for $10,000-$20,000 or more to a rehabber, and after parting with the owner, you’ll be able to walk away with five figures. It happens to savvy investors every day, and it doesn’t involve buying tax liens and waiting to get paid.
Another interesting angle on fiscal linkages is the surpluses generated by the bidding. Huge overbids are created every day at these auctions: properties with only $5,000 in taxes selling for $50,000, etc. In many states, the government keeps that excess. But in about half of the US states, that money must be returned to the owners. Unfortunately for them, they rarely notice, and after a while, that money is permanently lost to the government as well.
Huge loophole: Since these funds are not subject to state law, they are not subject to the 5-15% finder fee caps that most other unclaimed state funds are. That means you can find owners and match them to your surplus for a 30-50% finder fee.
Combine the two strategies mentioned above and you’ll be rocking and rolling in no time.