The Sweet and The Sour

     So, to alleviate your fears somewhat about tax lien investing, let me say that the loss you can experience would (should) be small. Each county, in Colorado at least, conducts its sale slightly differently. Some counties may allow you to buy the lien with a premium, generally just a few dollars over the amount of back taxes and fees assessed. Other counties may allow you to purchase the lien “flat”, meaning without any premium.

     The significance of premium vs. no premium relates to whether you earn interest on the premium amount or not. In Jefferson County Colorado you do not earn any interest on the premium, nor does it get paid back to you. Therefore you want to be sure you pay little or no premium.

     Let’s say the interest rate for the year is 12%. That would be 1% per month. And let’s say you purchased a lien that was $1,000.00 and you paid a $60.00 premium (6%, way too high). In essence, you would need to hold this lien for 6 months just to break even and often enough the liens can get redeemed within just a month or two after the sale.

     Let’s say the lien got redeemed in the 4th month, so you earned $40.00 on your $1,000.00 investment. But since you paid $1,060.00 for the lien and will only get back $1,040.00, you’ve lost $20.00 on this investment. I like to keep my premiums under 3% or flat.

     Throughout your tax lien investing career, you’ll end up with a number of liens that you’ll lose some money on, but as long as you don’t shell out too much for premiums, you should be ahead of the game.  And to get you started, The Tax Lien Lady has a course that will get you going in the right direction.

     I should mention just one more way that you could end up losing money with tax liens, but I’ll put that in Part 3.

     You’ve heard of tax lien investing and may have even seen an infomercial on it.  But what is it exactly and how does it benefit me?

     First, I’ll give you a short explanation of how a tax lien is created.  And this will be from the perspective of the state of Colorado which is where I live.  All the counties in the United States collect property taxes on all the improved and unimproved real estate within their boundaries.  When a property owner neglects to pay his property taxes, the county Treasurer will put the property on its tax lien sale list (the sales usually occur in the fall).  And when an investor pays the back taxes that are owed, the county will issue a tax lien certificate which will be for the specified interest rate set by the state’s guidelines.

     This rate is generally much higher than you can earn from your bank.  When I first started investing in tax liens back in the early 1990s the rate was 16%.  Last year, 2010, the rate was 10%, still not too bad.

     Since Colorado is a lien state rather than a deed state, you have to pay the subsequent taxes, called endorsement, for the next three years, after which you are allowed to apply for the deed, if the owner has not come in to pay you off for the taxes you’ve paid plus interest.  I was fortunate enough to acquire a small piece of unimproved property located in Gilpin County which I later sold to my adjoining neighbor who had a cabin and wanted my little piece of land (actually unbuildable, it was too small) to be able to have a spot for her tenant to park his car.  So I truly was fortunate in that regard.  And when all was said and done, I profited about $2000, which made me quite happy.  But mostly what will happen is the owner, or someone else who has an interest in the property, will redeem it and you will just get your money back with interest.

     So, to be quite frank, you have to view this tax lien investing as an interest vehicle only.  I believe it’s quite unusual to acquire a truly valuable piece of property for just the back taxes, at lease here in Colorado.  The Jefferson County Treasurer once said at one of his little seminars he gave that there had never been an improved piece of property deeded in Jefferson County via the tax lien process.  Although, considering the current state of real estate today, that may not be the case any more.

     To get you going in the right direction, The Tax Lien Lady offers a course that will provide you the basics on how to get started.  To dispel one myth about tax liens being a guaranteed no loss investment, stay tuned for part 2, as you definitely CAN lose money.  Happy investing!