Tax Lien Investing Resource

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Tax Lien Investing Tips And Risks

I've compiled a list of tax lien investing tips and risks to help you get better prepared for investing in tax liens.

Tax lien investing tips

Buy liens at smaller counties. There will be less competition as most institutional bidders will not attend these. Institutional bidders are individuals who are bidding for large companies which invest their money in tax lien certificates. It is not worth it for them to attend tax lien sales at smaller counties as there will be less liens to go around, and the liens themselves will also most likely be smaller.

Buy smaller liens. You will probably get a higher interest rate due to less competition.

Stay during the off times of a sale. Lunch breaks, end of the day, and the last day of a sale are prime examples. Catch people asleep and snag the good liens right out from under their noses. Also, at the end of the day it is important to go up to the clerk and ask if there are any more liens for sale. It happens that investors will buy too many liens and not be able to afford to purchase all of them at the end of the day. The county will not re-auction these and 9 times out of 10 will sell them to you over the counter at the maximum percentage interest.

Set max bid amounts. Be loud and assertive. Don't hesitate. Wait till the bidding has settled and bidders have dropped out, then jump in with a decent sized increase. Know your limits.

Buy from obvious commercial properties, using recognizable company names. These liens will almost definitely redeem.

Tax Lien Investing Risks

There are some risks and disadvantages associated with tax lien investing. It is important to be aware of them.

First of all, your money is tied up. It's not liquid, so you can't get at it like you would be able to with a money market account. Or even like some other forms of investing that charge penalties for early withdrawal. Once your money is invested it is gone until the tax lien certificate is paid, whenever that occurs, and there is nothing you can do about it. This isn't necessarily a bad thing. If you're relatively positive you will get paid off on the lien it may be good to not have the money at your disposal to spend on something else.

Then of course, the property owner may not pay off the lien. You do NOT lose your money in this situation. It just may take longer to get your money, there is some legwork involved. As the lien holder, it is now your responsibility to foreclose on the lien.

There are time and travel expenses associated with tax lien investing. It takes time to learn the ropes. There may be traveling, food expenses, lodging, it adds up. This is of course assuming you are traveling long distances for your auctions, which you may not be doing at all.

There are other risks, for instance, what if the IRS has a lien on the property? What if the property owner goes bankrupt? Both are real risks, though unlikely enough that I won't bother going into detail about them. A big risk worth being concerned about is investing in a worthless property. It may be an odd size and can't be built on, or the property may be a drainage ditch. So if it doesn't redeem and you can't build on it or sell it to anyone you've just completely lost your investment.

I've talked about this scenario before and it can be easily avoided through due diligence before the tax lien auction. An interesting aspect of this last risk is that it can partly be avoided through buying more expensive liens, which are most likely nicer homes or businesses. I understand it may be a contradiction to my earlier tip in which i suggest purchasing smaller liens. The question the investor has to ask him or herself is whether it's more important to secure being paid off, or whether they're willing to gamble on getting a higher percentage rate on a property with less competition.

If you're looking for something more serious than some generic tips and tricks, you might think about investing in a tax lien program. They are pretty cheap, and the help they provide could save you countless hours of research as well as tons of lost money due to inexperience.

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