Tax lien investors have to make predictions. It is the only way for you to figure out what tax liens and tax deeds will be worth purchasing. Every aspect of the business is tied to your ability to create and evaluate the profitability of different scenarios and figure out which scenarios are most likely to yield the best results for you. In order to make predictions, you have to make assumptions. Below are a few assumptions that you will likely be making on a regular basis as a tax lien investor. Remember, when you make assumptions you must assume both worst- and best-case as well as some degrees in between in order to make a truly informed decision about what you should do.

1.    Assume that the lien will be redeemed
Many tax lien investors work off the assumption that the lien will not be redeemed and they will get to foreclose. While this is a scenario you should explore, make sure that you will not lose money if the lien is redeemed. If you cannot afford to simply collect your interest and fees and walk away, you might want to reconsider the purchase.

2.    Assume you will be paying more taxes
More property taxes will likely come due on the property during the redemption period in which the owner can pay off the lien and you cannot take control of the property. Assume that you will have to pay these.

3.    Assume worst-case scenario expenses
Figure out what the worst things that could happen would be, then figure out how to benefit from or avoid these issues. For example, many tax lien properties are in bad shape. Will you have to deal with a government condemnation of the property? What if it burns down? Are you insured? These may not be factors that will dissuade you from investing, but you need to assume the worst at least long enough to weigh your decision carefully and plan for the worst where appropriate.

What assumptions do you make when you invest in tax liens?

In other articles, we have discussed the different ways that you may be required to bid on tax liens, and how those methods can and should impact your tax lien investing strategy. Today, we will focus specifically on interest rate bids, which is a form of bidding in which all potential buyers essentially “bid down” the interest rate on the loan instead of bidding up the price that they are willing to pay for the lien. This type of bidding is good for the property owners because the eventual winner of their lien is the bidder who will accept the lowest interest rate.

When you are preparing for an auction that will be utilizing interest rate bids, you will need to determine just how much – or little – return you can afford to make on your investment. Figure this out ahead of time so that when you are bidding you will know the point at which the interest rate has gone too low for you to make a profit. Your decision will hinge partly on what you want to do with the property. If you want to make money by collecting interest and fees on the lien, then you will probably want to stick at a relatively higher interest rate – unless, of course, the state in question has mandatory fees that investors can collect or assesses some other form of interest in order to keep liens attractive to investors. If your goal is to take control of the property and sell it, then you may be less interested in the interest you earn on the lien. However, you will need to determine what the odds of your being able to foreclose on the property will be. After all, if you bid the interest rate way down and then are not able to foreclose, you will make little or no money on the deal!

Do you bid in interest rate bid auctions? Why or why not?

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Many tax lien investors purchase tax liens in areas that are not geographically near to them. This is because some states and cities have more advantageous laws and rules governing their tax lien laws than others. It makes sense for a tax lien investor to buy in an area that meets their tax lien investing strategy’s requirements.

Buying out of your area does require a shift in the way you evaluate properties, however. Depending on your inclination, flexibility and means, you may want to travel to the locations where you are buying to view the properties yourself. However, there will likely be some cases in which this is not an option. Here are 3 ways to help you evaluate properties that you cannot physically visit before you buy:

1. Contact the locals
Get in touch with a local real estate agent and possibly some contractors who can look at the property and tell you how much they would expect it to cost you before you were able to sell it. Most of these people will be happy to provide this service for free in exchange for the potential business should you acquire the property.

2. Evaluate online
You can view current pictures – or reasonably current in most cases – of many properties using zillow.com, google earth and many other systems online that help you map or view areas far away from you. Use these tools to get a good look at the property from every angle possible. Remember to check the dates, however. A picture that is two years old will not be much good to you!

3. Set some limits for yourself
Many tax lien investors will not bid on properties that have liens for less than $100. This is because these properties tend to be unusable, oddly shaped, and may even be drainage ditches or alleyways that cannot be developed. Setting a lower limit on what you will bid on can help you limit the amount of risk that you take when you buy a property sight unseen.

What is your favorite strategy for buying tax liens on properties you have not visited?

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When you purchase a tax lien at auction, you are essentially paying off the city for the owner of the property. Only if the owner fails to repay you in a timely fashion – as determined by state and local laws – are you able to foreclose on the property and take control of it. As a result of this, some tax lien investors actually prefer to deal directly with the owners of the property rather than buying the lien through the city.

This method has some advantages and disadvantages. It removes you and your negotiations from the auction setting, which often means that whatever interest rate you would like, you can negotiate – though be aware of usury laws! – rather than having to deal with situations where the interest rate is “bid down.” Additionally, you can set terms that are more beneficial to you and the borrower. For example, you might loan the borrower 15,000 dollars to be paid back over a period of 12 months rather than the borrower only having a state-required 6 to get the money together. Of course, remember that every state and sometimes every city has slightly different laws for how they handle tax lien repayment anyway.

On the negative side, you will have a lot more legwork to do, and probably far less security. You will need to contact the homeowner, draw up the paperwork and do all the necessary legal work to get a legal, binding note permanently in place. Do this part wrong, and if they fail to pay you back you may not have the option of foreclosing, or you could face a messy legal battle. Furthermore, it’s unlikely that you’ll have the advantage of being able to easily repossess the property free of all encumbrances (such as is the case when purchasing a real tax lien certificate) in the event that the seller defaults.  Also, always consult a legal professional before you approach homeowners about their debts. There may be local privacy laws that prohibit you from confronting them without proper paperwork or if you do not go through proper channels.

I think this is a questionable strategy.  Do you prefer working directly with the homeowner, or going through the tax lien system?

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In Richmond, California, the city government hopes to control “nuisance properties” through levying tax liens, due to be formally served August 6, 2010 . The liens, which can be levied for anything from overgrown yards and too much trash to vacant, abandoned or damaged properties, are designed not only to help fund the city’s recovery efforts on “blighted” homes that have been abandoned and left to loiterers, squatters and often criminal and drug dealers, but also to force the owners of these properties to either take responsibility for them or hand over the reins to someone who will.

Lien values range from $250 to $60,000, and the city council has approved measures that will allow the city to “more aggressively” pursue repayment for these liens and fines.

Do you think this is a reasonable way to deal with “blighted” properties?

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With the tax credit now off limits to anyone who did not manage to at least slide some paperwork in before the June 30 deadline, real estate brokers and agents are looking for other ways to attract buyers. One option that appears to be gaining in popularity is the buyer’s rebate.  Buyer’s rebates can be offered by anyone, but frequently are offered by the agent or the brokerage to lure buyers.

The rebate usually takes the form of a small percentage of the total cost – for example, a 1% rebate on the purchase of a $250,000 house would equal a credit of $2500. While a buyer might be able to get this in cash, it is more likely that this money would be applied toward closing costs or other fees.

Have you encountered this practice, and has it helped you in any deals? Do you offer something similar to your sellers?

Thank you for reading! Your comments and questions are welcomed below.