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Risky Business: Tax Lien Risks
Written by: Thomas Needles
When the Law Switches Sides
When a tax lien is bid on and purchased at an auction, one of two scenarios can develop. Scenario one: The homeowner compensates owed property taxes during the redemption period and you, as a first position tax lien holder, are credited monetarily with your initial investment plus interest and penalties. Scenario two: The homeowner fails to pay owed property taxes during the redemption period, and the property is taken from the owners and the bank, thus becoming yours free and clear for the slightly over the amount of back taxes due. While a foreclosure is not a common occurrence, usually 1 out of 250 tax liens, it does happen. The real estate becomes yours to own, sell, rent, demolish or whatever you desire.
Scenario two is where one of the few tax lien risks can occur. In order for the property to become completely yours, it must be legally granted to you by a judge. Remember, with a tax lien, you have become a secured creditor and have authority on the property before the bank that lent the original property owners a loan. It is rare, but a judge can decide against this.
A judge can decide to bypass the tax lien, sell the property and pay the original secured creditors. It may be wise to do research on a particular county and see how a property owner's failure to pay during a redemption period is handled. Again, this is a very rare tax lien risk, but one that does exist and one that you need to be aware of.
It is wise to avoid these occasional risks by bidding on more expensive tax liens. Oversight rather than bankruptcy is the usual the causation for the tax lien to be placed upon an expensive property in the first place. Foreclosure is rare in these instances. Minimally priced tax liens are the where the risks lie.
Tax Liens Risks on Worthless Property
Tax liens that fall in the low hundreds can be burdensome if you become committed to foreclosing the property. Often enough, these liens are for vacant lots that are poorly located or access ditches that are difficult to get rid of for free. Researching the property can alleviate the risk factor by making you aware of structural problems, environmental hazards, asbestos, lead paint or other factors that deplete the value of a property astronomically.
Occasionally, a low priced tax lien will be a very profitable endeavor. These risks are either avoidable or uncommon. However, if you have not done any investigative work, it is best to avoid these tax lien traps and bid on liens $500.00 and above.