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• Tax Liens Sales Procedures
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• Risk Analysis - Tax Liens
• Tax Liens and Competing Claims
• Tax Liens and Statute of Limitations
• Discharging a Tax Lien
• Tax Liens - From the Tax Lien Purchaser's Perspective
• Tax Liens - From the Government's Perspective
• Tax Liens - From the Tax Payer's Perspective
• Negative Effect of Tax Liens on 3rd Parties
• Pitfalls of Investing in Tax Liens
• Pitfalls of Tax Lien Sales for Taxation Authorities and Local Government

Risk Analysis in Buying A Tax Lien Home Or Properties

Risk analysis is the identification of potential barriers to profit and is an imperative preparation for every interested tax lien investor. Particularly considering the numerous forces and variables that affect the return on a tax lien investment, scrutiny of all the probabilities and possibilities is prudent. This starts with education in regard to the instrument itself, and continues with statutory procedures, law and underlying property markets.

Risk of Not Knowing
Every financial transaction carries risk, and thorough investigation of the background and basis to the transaction is the only protection for the investor,and so addresses the very real and primary risk that the investor is lacking in sound information and knowledge of the subject matter. If an individual is looking for homes with tax liens, much research is needed before action is taken.

The variety of legislative procedures enacted in regard to the administration of tax liens alone, is astounding, as each of the individual States and counties each adopt similar but distinct procedures, which again, may be at odds with those of the Federal jurisdiction.

Reducing risk is crucial to any investment, and this is by definition inherent in tax liens, due to their superior, but not conclusive, legal priority in foreclosure, and the added benefit of any government guarantee that may be provided.

Assuming the appropriate knowledge of the legal procedures that apply, further consideration should be given to the predetermined interest rate received in penalty for the tax debt incurred.
Then the redemption period, within which interest is earned but the debt is able to be satisfied in full, also needs undivided attention.

For example, if the lien was purchased at a premium to the tax debt accrued, this premium would not be recovered if the debt was paid off within the redemption period, unless of course the predetermined interest rate penalty accounted for the shortfall.

The risk the buyer of a lien takes is firstly that of the probability of redemption, and this risk needs to be a carefully factored into the price paid for the lien.

How to Buy Real Estate with a Tax Lien
If redemption doesn’t occur, the holder of the tax lien is able to foreclose on the property and acquire title to it. If this is the case, the investment may be surpassed by the market value of the property however, this necessarily introduces a further risk in the form of property market exposure. Still, if the investor is comfortable with buying tax lien properties, this is a perfect example of how to buy real estate with a tax lien.

In addition to this, the duration and costs of protracted legal proceedings may diminish the luster of the return on a tax lien investment, as often competing creditors of the delinquent taxpayer will vie for assets that are being liquidated.

In the case of falling property market values, and a tax lien premium being a large percentage of the market value, buying a tax lien home may not be the best investment, and the premium itself may struggle to be recovered if the market value of the property drops substantially.

Notably, the profit on a tax lien investment in this instance is not realized until all exposure has been eliminated and the fact that the holder of a tax lien has acquired title, purely indicates that the risk has been dispersed into the property market.

In comparison with the alternative investments at the investor’s disposal, judicious investment in tax liens may prove to earn a far higher rate of return.However, accepting that tax liens have been described as the next best thing to a risk free investment, no investment is risk free, and serious analysis of the variables and risks that attend a tax lien investment needs to be performed by the potential investor.

References:

Gardner, Robert P. & Weirich, Thomas R., Business Investigations: How CFO’s can manage risk through Information 1998 John Wiley & Sons Publishing