Here are some mistakes that can lower your rate of return in your tax lien or tax deed portfolio. These are mistakes that I, or one of my clients, or another investor that I know, has made in the process of investing of tax liens or tax deeds. I’m sharing them with you so that you do not make the same mistakes that we did when we were just beginning to invest in tax lien certificates and/or tax deeds. Hopefully you can learn from our mistakes.
Mistake#1: Doing your due diligence too soon before the tax sale.
New investors are always eager to get started. They frequently want to start researching the tax sale properties right away, as soon as they can get the tax sale list. I also made this mistake when I first started; until I realized that I was wasting my time doing due diligence on properties that were never going to be sold at the tax sale. People can pay their taxes and remove their property from the tax sale list, sometime up until right before the tax sale. In my experience, at least half of the properties that are on the original tax sale list will not be there on the day of the sale. So if you start your due diligence early, many of the properties that you research will not be sold at the tax sale and you’ll be wasting your time. I’ve learned to wait until a few days before the tax sale and get an updated list from the tax collector, so that I’m only doing due diligence on the properties that are still on the list a couple of days before the tax sale. Of course if you’re going to a very large sale, you might need a week to do your due diligence, but you shouldn’t need longer than that.
Mistake #2: Not doing due diligence on tax sale properties.
For tax liens this may be as simple as looking at the assessment information on the property and driving by the property to take a look at it. I myself have made the error of bidding on a tax lien on the assessment information alone and not actually looking at the property. Last time I did this, I wound up with a shack that was falling apart, and it was right next to a stream. It looked like if the stream flooded it would be washed away. Because everything around it was overgrown and it was hard to see from the road, I had a real hard time finding it. But the problem was I didn’t go look at it until after I had bought the lien. I should have looked at it before I bid.
Mistake #3: Not knowing the rules of the tax sale.
Since every state, and in some states each county, has different rules regarding their tax sales, you need to know what they are ahead of time. I got an e-mail from a subscriber who had purchased a tax deed at an “upset” tax sale in Pennsylvania. Later he found out that there was a $200,000 mortgage on the property that he was responsible for. He didn’t do his due diligence on the property, so he didn’t know about the lien. He thought that he was buying a deed to vacant land and he didn’t know that a new home had been built on the property, and that there was a mortgage on it. So his first mistake was not doing the proper due diligence for a tax deed property.
But he also didn’t know that when you purchase a deed in the upset sale you are responsible for any liens or judgments on the property. Many counties in Pennsylvania have two different tax sales. The upset tax sale is held in the fall and the properties in that sale are sold subject to any liens or judgments on the property. Then if a property is not sold in this sale it goes to the judicial sale in the spring. The properties in the judicial sale are sold free and clear of any liens or judgments, so there is a big difference between purchasing a tax deed in the upset sale and purchasing a tax deed in the judicial sale. Know the rules of the tax sale that you are bidding at!
Mistake #4: Not knowing what you are bidding at the sale.
I was at a tax sale in New Jersey where a new investor was bidding on some small utility liens. In NJ the interest rate is bid down and then premium is bid on tax liens. She bid large premium (a few hundred dollars) on a small sewer lien, which she won. When I talked to her after the sale, I realized that she did not understand how premiums in NJ work. You do not get any interest on the premium or on the certificate amount. She was not aware that she was not going to get any interest on the amount that she bid at the sale.
The reason that other investors were bidding big premiums on larger liens is because once they have the lien, they can pay the subsequent taxes and get the maximum rate (18%) on their subs. With small sewer liens, like the one that she got, the subsequent taxes that you get to pay are small, usually no more than $500 per year and you only get 8% on the first $1500. Although she didn’t loose any money, she was going to make very little on this tax lien!
Mistake #5: Not starting foreclosure at the right time.
In some states you are only given a certain time frame where you have to foreclose the lien if it does not redeem, or you loose your investment. If you don’t start the foreclosure proceedings as soon as the redemption period is over, you could loose your lien. But in other states, where you don’t have to foreclose right away, you are better off letting your lien go longer for 2 reasons. The first reason is that 99% of the time, when you start the foreclosure process the lien will redeem. The second reason is that the longer you hold the lien and pay the subsequent taxes, the more money you will make. Of course this only works in states were you could pay the subsequent taxes and get interest on your subs.