Using tax liens in Metro Detroit is an attractive yet widely misunderstood investment option that is becoming more popular. Here is a cliff notes guide on how they work. Every city and county collect property taxes on real estate.
When property owners fail to pay the tax bill, the city is more than happy letting you pay someone else’s tax bill. This doesn’t come without risk to the investor.
What do you get for being the kind person paying someone else’s taxes? You earn interest on your money with the property as collateral. The ultimate goal is foreclosing on a property if the owner doesn’t pay the back taxes and interest.
Sounds pretty simple, right?
Don’t be fooled. For every investor making money with tax lien investments, there are a dozen others losing in the process, barely breaking even or losing money because of some unforeseen risk.
Avoid these 5 risks using tax liens in Metro Detroit
Property Has No Intrinsic Value
People often assume that all real property has value. Not always true. There may be a valid reason why the property owner isn’t paying his property tax bill. Maybe it’s in a swamp or covered under a mudslide. Maybe the owner thinks the house is haunted or even overrun by gang members.
Getting any tax payments covering your investment and expected interest in these types of scenarios is difficult. Worse, you might get stuck foreclosing on a property that that original owner couldn’t even unload. If any structures on the property are deemed a nuisance or hazard, you could become liable for additional costs once you take ownership.
The bottom line: visually inspect homes and neighborhoods as best you can, talk to realtors in the area about crime, hazards and other potential supernatural issues, and determine if the owner is abandoning the property for any reason other than financial hardship.
Other Tax Liens in Metro Detroit
Generally, property taxes in Metro Detroit take the first position in a foreclosure process, meaning it can write off an entire mortgage for the cost of a tax lien. While this sounds great, you may find yourself stuck with other taxes that don’t get forgiven in the foreclosure process including potential county, city or public school taxes. Check with the county assessor’s office before tying up your investment funds on properties with other encumbrances.
Not Fully Understanding Purchase
Tax lien sales vary from state to state and even within counties. Tax lien sales are different than tax deed sales. Tax liens are an investment over time where a deed sale gives you ownership immediately. If you’re paying a higher premium for a tax lien mistaking it for a tax deed, you’ll probably overpay for something that you thought gave you ownership of the property.
Paying $10,000 for a tax lien thinking it was a deed means you might have paid $9,000 over for the value of a $1,000 lien. You can see that isn’t a good investment.
Talk to the tax collection office to make sure you understand how deed sales and tax liens in Metro Detroit work, what the process is and how foreclosures in [market state] work. Don’t assume that a good deal in [market state] is the same as another deal anywhere else in the country.
Laws and Politics Vary and Change
Unfortunately, things change in the investment landscape. Bankruptcy laws might delay foreclosures in some areas. A foreclosure judge might not let you throw 98-year old Aunt Mae to the curb for being old and poor.
When you invest in Metro Detroit, make sure you understand and stay abreast of the rules that affect your investment. If you can’t, consider sticking closer to home with your hard-earned money.
Poorly Researched Auction Purchases
Auctions are exciting. This is good for auctioneers and cities. It isn’t good for an investor getting caught up in the emotional feeding frenzy. Don’t be the minnow, be the shark.
Sharks know exactly what properties they want and the max price is for each. They know this because they researched every public detail available on the property and then conducted a visual inspection. Sharks estimate costs associated with fixing it and what the market in Metro Detroit will yield.
Sharks know their profit margins well. Take your time, learn the process and jump in when you know enough details to make smart investment decisions.