Tax lien investing is way up in the U.S. More and more investors are getting in on the action, but many of them aren’t retail investors. No, banks, and hedge funds are joining in on the fun and crowding out the small-timers. At the same time, profits haven’t evaporated for people like you. Here’s how to research your best bets in tax lien investing.
If you have bad credit, you can still get a loan to help you make a large purchase.
Shop States With No Online Platform
One of the biggest problems with tax lien investing these days is that it’s a crowded market. Banks and hedge funds can go online, largely dominate the arena, and use online searches to find properties before you can. Then, they can bid the interest rate down or put such a hefty premium on the property that it’s undesirable for you to invest in it.
So, if you want to compete against the big banks, your best strategy is actually to not compete against them. If you don’t live in a state with tax lien sales, hop online and start searching for states that do. Look for states that don’t have an online platform and plan to travel.
Stay Away From States With High Interest Rates
While you’re at it, stay away from states that allow high interest rates. While this might initially seem attractive, it’s not. Why not? Because the high initial rate is never what you get at the end of the auction.
In tax lien sales, investors either bid down the interest rate, or they bid up the premium on the property, making it a less attractive investment for others. Think of it as “cutthroat pricing” for tax liens.
Investors are willing to do this to get the property because they’re willing to accept a lower profit potential through slimmer margins. These slim margins are still enough to make money, but not all investors are willing to accept the offer.
When bidding down the interest rate is undesirable, or not feasible, an individual or institution may bid up the premium on a property. This effectively makes the property more expensive to purchase.
It can price people out of the marketplace, which is good if you know that small-time investors can’t afford to outbid you – it’s a strategy commonly employed by banks and large financial institutions.
You can avoid this by studying these tax deed investing basics and by avoiding tax lien sales in states where 36 percent interest rate caps are common. For example, Arizona tends to have favorable tax lien sales right now, and they’re friendly to investors from out of state.
Search The County Clerk’s Office
Almost all county clerks’ offices contain a wealth of information and the ability to search records online. But, many investors are surprised to learn that the clerk also holds information about tax liens before they come to market.
So, you could use the clerk’s office as a way to study tax liens, trends, and potential future investments. A clerk’s office will tell you about Internal Revenue liens, abstracts of judgment, state liens, hospital liens, child support liens, and mechanic’s and material-man’s liens.
Going To The Secondary Market
One of the risks of investing in tax liens is that you may not be able to recover all of the money before the expiration date of the lien. Many newbie investors don’t realize that tax liens don’t go on into perpetuity. They eventually expire, and it’s your job to collect the money before they do.
If you don’t, you lose all rights to the lien and the ability to collect future payments. Most investors, however, are able to collect and recoup their investment. About 95 percent of investors profit from their investment. And, even if you don’t profit, you may be able to earn the deed of the house through foreclosure.
Of course, if you’re given the deed, you will have to contend with other liens on the house which will make it impossible to transfer and clear the title.
Once you do get the title, the property is yours to do with what you want. At this point, you’ve got two options:
- Rent it or;
- Sell it.
You can choose to become a landlord. Not many people do this, unless they’re really interested in real estate investing. It’s tough work and, unless you’re an experienced landlord, you may want to hire a property management company to help you.
Most investors choose to sell the property. It’s much easier, though it still takes a lot of work to list and advertise it. Ideally, you’ll never get to this stage, but just realize it’s a possibility.
Ted Thomas, an investment consultant, counsels people in the U.S. An avid writer, he likes to share his insights online. Look for his articles on many financial and investment websites.
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