A couple of years ago I picked up a very interesting book from a garage sale titled “Lies My Teacher Told Me.” I forget the name of the author, but he was a history teacher and in this book he exposed how history has been pretty much re-written in the textbooks to suit the government institution that's teaching it. The book exposed some of the truths about history that are covered up because it doesn't show our founding fathers in their best light. Because of all the misinformation that is out about tax lien investing – that book gave me the inspiration for this article – to expose what you might have heard from your tax lien guru, that is not exactly the truth. So let's take a look at some of the myths that are circulating about tax lien investing.
You Can Do This Anywhere in the US
At real estate and wealth building seminars around the world, foreigners are taught that they can make double digit returns on their money by investing in US tax liens, and somehow they are led to believe that they can do this anywhere in the US from their own country by doing everything online. This is simply not true. The fact is that not all states sell tax liens, and less than half of the states that do sell liens have online tax sales. Last I checked only 9 states had online tax sales. Among those 9 states, one has only one county with an online tax sale. That state and 2 others have methods of bidding that are not favorable for investors (bid down percent ownership of the property). Judging from the results of past tax sales, it is unlikely in 2 of the remaining 6 states you will get a return of more than 5%. And in the other states you are lucky to get a return of 10%.
It's “Government Guaranteed”
Some tax lien investing “experts” like to imply that tax liens are “government guaranteed.” The problem with this is that people hear that term and think that they are guaranteed to get paid on their tax lien. But that is not what is meant here. The term is referring to the fact that the interest rate is set by state law, but it is wrong to imply that this is guaranteed by the government, since these state statutes can be changed by state – not federal mandates. And just because the interest rate is determined by state law does not mean that the investor is guaranteed to get paid. The only guarantee is the property. So tax liens are actually real estate guaranteed, not government guaranteed. That is why it's so important to do your due diligence on the property that you are purchasing a lien on.
There's Always Plenty Available
Another misconception about tax liens and tax deeds is that there are more liens and deeds available than there is competition. Yes it is true that in some tax sales there are tens of thousands of liens available. But consider that a percentage of those liens are for worthless properties that nobody wants. Half of the good ones will be paid off and taken out of the tax sale. And competing for the other half of the good liens or deeds are not just investors, but big banks and fund companies who are bidding on thousands of liens. So the supply of good liens and deeds is not inexhaustible and there is some stiff competition for the good stuff.
Left Over Deeds and Liens Are Good Deals
So what some tax lien investing “gurus” recommend is that you forego the tax sale and instead buy the left over (or over the counter) liens or deeds from the county. They say that the tax sales are so competitive that you are not likely to get the best returns bidding, instead, get the maximum interest rate by buying the left over liens or deeds from the county.
There are 2 problems with this strategy. First not all counties sell left over liens or deeds. Some counties will just continue to offer them in tax auctions until the lien or deed is sold or until the redemption period is over – in which case the county will take the property. The other problem is that if tax sales are so competitive, what makes you think that there is anything good left over after the tax sale? Consider that in many of the online tax sales, there will be an initial tax sale and anything that does not sell in that sale will be offered in a second tax sale. Only if a property survives both sales, does it get sold “over the counter.”