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Is an Tax Lien Certificate too good to be true, or one of the best kept secrets in America?

By: Rick Gossett



I have been told that there is an ‘investment vehicle’ available through counties called a “Tax Lien Certificate,” which supposedly offers a high rate of interest and is ‘safe’ to own. I have further been told that the rate of interest varies from state to state (For example, the rate in Florida is 18% and in Iowa, it is 24%. The duration of these certificates are supposedly relatively short in length (18 months to 48 months, depending on a specific transaction). Is this “too good to be true,” or “one of the best kept secrets” in America?

Answer: You are correct that state laws vary regarding Tax Lien Certificates – interest rate, redemption period, etc. The County Tax Collector/Treasurer is the typical source of Tax Lien Certificate (or Deed) information. Investing in Tax Deeds (or Liens), like other forms of real estate investing, often involves significant financial transactions and risks. Since it is very rare that a property owner gives up a property with significant equity to a tax lien holder, tax lien investing should be looked at as a modest return, lower risk investment, and not a path to quick riches. Due to the state law variations and financial risks, an investor’s first step should be to learn as much as possible about this form of real estate investing. Although you see a lot of advertising about tax liens, options, foreclosures, flipping and other forms of real estate activities, the fact is that real estate investing is a large, competitive industry. To help develop a plan for investing in tax deeds, you can locate industry information and tools through local libraries, bookstores, government agencies, and over the Internet like at the following websites, which explain:
“First you have to understand that tax sales are auctions and in most state those extremely high interest rates are bid down to extremely low rates. Why would investors do that? It’s simple; sometimes there are other penalties that they will get should the lien redeem. In New Jersey, for instance, the penalty is between 2-6% depending on the amount of the lien. In Florida, there is a penalty of 5%. Also, once you own the lien, you can pay the subsequent taxes and get the maximum interest on that.
Secondly, you must understand that there is no guarantee that you will get paid on your lien. Of course if you don’t get paid, you can foreclose once the redemption period is over. But no one guarantees that you will be paid! What these gurus mean when they say that liens are “government-guaranteed” is that the laws are on your side. If you don’t get paid, you can eventually foreclose on the property. The only thing guaranteeing your investment is the property! That’s why I don’t recommend investing in liens through the mail or online. Would you buy property that you didn’t see first!
When you buy a tax certificate, even though you are not purchasing the property, there is always the chance that the lien will not redeem and you will have to foreclose on the property. What if the property is worthless? What if it is an unbuildable piece of land? Then you are stuck with a worthless piece of property that no one will want to buy from you and if you don’t continue to pay the taxes on it, it will eventually revert back to the county that sold it to you.

Yes, there are risks involved in lien investing and no, it is not a sure thing. It is, however, an excellent way to invest your money if you know what you are doing. If you are contemplating buying a program to learn how to invest in lien certificates or tax deeds, beware! Don’t buy an e-book, coaching program, or a course from someone who candy coats the business of investing in lien certificates and tax deeds and makes it sound like you can’t fail and there are no risks. The truth is that you can fail and there are risks to avoid. Instead buy one of these products from someone who tells you what the risks are and how to avoid them. This will give you a better chance for success in buying profitable tax lien certificates and tax deeds”:

While you may be able to invest in tax liens yourself given proper knowledge, experience and a clear understanding of the risks, with real estate transactions it is advisable to have professional support from real estate professionals and lawyers to properly document the transactions and minimize your liability exposure.

Published: May 28, 2014

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Rick Gossett

As COO of Tarkenton Companies for more than 20 years, Rick has been responsible for business software development, unique partnerships, business educational content and consulting, and more. Rick was the originator of Tarkenton Companies’s consulting service and initially handled all of the questions himself. Prior to joining Tarkenton Companies, Rick owned and operated a private practice as a CPA. Prior to that, he was a Senior Manager at Pannell Kerr Forster in tax and audit, as well as Principal in Ernst & Young's small business advisory group.

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