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Nine Mistakes Investors Make In Tax Lien Investing

Investing in real estate offers numerous opportunities for people to rake in money. They could buy houses in poor condition, repair them and flip them for greater sale. They could wholesale the contract. They could buy property to provide long-term rental income. They can buy several properties to hold and sell at the right time in a market. They could buy a tax lien or tax deed.

Tax Liens -- When investing in tax liens, the local government places a lien on a property if taxes are not paid as required. The government holds an auction. Investors bid on the property lien but not the deed. The investor is then entitled to collect the lien and interest from the property owner before foreclosure proceedings begin. The property owner has time to become current on the taxes and pay off the lien to retain the property. Therefore, an investor who pays $10,000 to win a lien against a property. He or she then charges the property owner $10,000 plus 18 percent to 24 percent interest.

Tax Deeds -- When an investor acquires a deed through a tax deed sale, the investor owns the property outright after the taxes are paid to the local government. The investor is allowed to do what he or she wishes with the property -- whether to fix and flip or to fix and rent. With tax deed sales, some states allow time for the original property owner to reacquire the house if the taxes and interest are paid to the new owner. These are known as redeemable sales.

While both types of investment can bring people a number of profits, they have to understand the risks before proceeding. Here are mistakes investors often make.

  1. Not Understanding the Sale -- Investors often confuse lien and deed sales.

  2. Lack of Homework -- With all real estate transactions, you have to research the process thoroughly.

  3. Property Has No Value -- A property that is in a bad part of town likely went into tax foreclosure because it isn't worth anything. Some are in swamp lands. Some are vacant lots with no development possibility.

  4. Other Liens -- Some properties have outstanding property taxes owed to one department and other taxes or liens owed to another department. This could happen in states where homeowners pay city taxes, county taxes and school district taxes.

  5. Don't Win the Bid -- These properties are sold at auctions. Although some allow online bidding, most don't. Investors could lose the property by other bidders or by not showing up to the auction.

  6. Overbidding on Properties -- The excitement of the auction can make people overbid on properties. Then, they can't recoup their investment.

  7. Don't Know the Redemption Period -- Some investors fail to remember the redemption period. If they don't start foreclosure proceedings after the redemption period is completed, they will lose their investment.

  8. Don't Pay Other Taxes -- Some investors fail to pay the other taxes on the property. Then, they lose the property because others buy it at auction for the other tax payment.

  9. Bankruptcy Proceedings Hurt -- Property owners who file for bankruptcy can disrupt the payment of local taxes. Therefore, investors have to wait before they get paid.