"Investors" interested in tax liens invariably fall into one of two camps:
1. True Investors: Plain and simple, true investors want to park cash, and earn an above-market rate. True investors don't want to have to actively manage their investment; they want their cash to do the earning for them.
Tax liens ARE a bit of an active investment, however. Research is required before buying them, and a certain amount of work is required to comply with ongoing obligations.
For instance, after holding the lien for some time, it's required to notice the owner and other interested parties that the lien was sold. If the noticing is not performed the tax liens purchased will be in jeopardy.
To sum up, the investor is looking for a low-hassle way to earn above market interest rates. In many cases, the investor represents a large bank or fund, and must keep hundreds of millions of dollars invested at all times.
Savvy investors realize that there is no free lunch. However, it's relatively easy to get a system going with various attorneys and other players so that all obligations are handled without much of the investor's participation.
2. Entrepreneurs Wanting Cheap Real Estate In my experience, this makes up about 97% of the crowd interested in tax liens. However, most are disappointed and never even get started.
Tax liens very rarely convert into profitable properties. Tax liens against quality properties redeem (pay off) over 95% of the time, even in today's economy.
So, the "entrepreneur", like the "investor", typically walks away with only interest if they've purchased a lien against a quality property.
That might not sound so bad (and it's not, certainly better than losing money). Just remember, if only $20,000 can be invested in tax liens (most people in this group have much less), interest may only amount to $2,000 - $3,000 over the course of a year.
When costs of research and ongoing obligations are factored in, tax liens become a "loser" for people with inadequate funds to invest.
More About The Investor and Why Tax Liens Make Sense For Him
A true "investor" in tax liens, by definition, has a few hundred thousand dollars allocated for tax liens. Why? Any less wouldn't make any sense.
Consider an investor who prudently puts $300,000 into tax liens. The expected return could reasonably be estimated at 10%, or $30,000 in many areas.
This doesn't sound so bad, except that buying $300,000 in quality tax liens takes much more effort than most newcomers realize. In addition, there are risks and ongoing obligations and expenses like noticing, discussed earlier.
In reality, a significant portion of the $30,000 earned is due to the investor's efforts, not his money.
The Larger Investor in Tax Liens: Buying Tax Liens in Volume Has Its Price!
By now you can imagine that if you had tens of millions of dollars to invest in tax liens, without having to pay more than 1% for the money, that your return would be huge if you could successfully keep this money earning at 10%.
At this point, you have your hands full. You DO NOT WANT properties. Your goal is to invest perhaps $30 million dollars throughout the country, and get $3 million in return from interest.
Now, foreclosing on occasional properties only bogs you down, and keeping up with all of the obligations of thousands of liens becomes your bottleneck. Making $50,000 on a property foreclosure is peanuts in the big picture.
The focus is on earning the 10% interest, keeping the money parked safely in tax liens, and nothing else.
I hope you can see why the entrepreneur really has no place buying tax liens. He doesn't have enough money to make a significant return from interest like the investor does. So his only hope is to buy a lien that results in a bargain property.
This can take years and with almost all liens paying off, it just makes no sense for the entrepreneur to pretend he's an investor.
How the Small Investor CAN Profit from Tax Liens
In my next post, I'll show you how the entrepreneur and the investor can sometimes come together and make tax liens a perfect investment for both!Sincerely,
Everything You Need to Know to Profit From
Tax Property Before the Sale -
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