The State of the Arizona Economy
December 28, 2018
Sarah Kirsch Richardson
Principal/Designated Broker, Tru Realty
Investing in tax liens can be risky business, but with the right information in-hand, it can be a successful addition to your portfolio. January (or sooner!) is a great time to build a base of knowledge on tax lien investments because every one of Arizona’s 15 counties hold tax lien auctions in February.
Starting with the basics, tax lien certificates are sold to investors to recover delinquent property taxes owed by the property owner. Investors are permitted to bid on each tax lien, with a starting bid of 16%. The bidding goes down from there and can potentially go all the way down to 0%. In this case, the lowest bidder is the winning bidder. He or she receives a certificate of purchase for the tax lien and pays the county the back taxes owed on the property. Homeowners then have three years to pay the delinquent amount due plus interest, and any additional county fees, to prevent the investor from foreclosing on the tax lien. If the property owner chooses not to redeem the lien, the investor may begin the process of foreclosing on the lot. From there, if the property is not redeemed following the foreclosure process, the investor is given a treasurer’s deed and granted ownership of the property.
Although this investment seems appealing, there are many common mistakes made amongst those who jump in without a deep understanding of the investment, the requirements involved or what could potentially go wrong. Below is a list of the most common errors made of those new to the world of tax lien investments.
Buying Low-Priced Liens and Neglecting to Budget for Additional Expenses
Generally speaking, low priced liens are placed on low-value properties that are often extremely difficult to sell. These are liens priced less than $750 in annual taxes and properties with a market value assessed at less than $60,000 in most areas. If the property owner does not redeem your tax lien, the foreclosure process means spending additional legal fees ranging from $2,000 to $4,000, as well as paying any subsequent taxes, on top of the investment you’ve already made in purchasing the tax lien.
Not Visiting the Property In-Person
With so many advancements in the digital age, it’s not surprising that tax lien auctions have kept up with the technology and moved online. There are online platforms that allow you to digitally “visit” the property through pictures, videos, and even Google Images. Often the auctions themselves are now conducted online. You may feel you have a good grasp on where this property stands within the market. However, it is imperative that you take a look in person! Not only for the sake of learning what the area surrounding the property looks like, but there’s also no telling what may have occurred to the property after the images were taken.
The Property Research Balance
The tax lien auction list is posted in late-January, early-February, giving you very little time to research your potential investment(s). While you shouldn’t rely solely on property assessments conducted by the county (those assessments are often extremely outdated and many of the properties have never been seen in-person by the assessor), it’s important not to get caught up in analyzing every single property on the auction list. Identify ways, like sticking to your budget and saying no to low-value properties, to whittle down your initial list and look to websites like Trulia, Zillow, or Redfin to help provide a bigger and better picture of what you may be investing in.
Overestimating the Likelihood of Foreclosure
More often than not, a property is redeemed prior to foreclosure, whether by the property owner or, if they have one, their mortgage company. Many investors dream of foreclosing on a property for a large return, when in reality the profit margin is much smaller because the lien is eventually redeemed within the 3-year timeframe.
Unprepared on Auction Day or for the Requirements that Follow
One of the most common mistakes made on auction day by newbies is not understanding the method of payment required and the timeframe in which the money is due. Some counties require the investor to have certified funds the day of the auction, meaning you’ll have to visit your local bank to obtain a cashier’s check, for example. Not understanding what’s required from the investor after winning a tax lien certificate could mean losing the entire investment. Stay informed by visiting the local County Treasurer’s website to more about the specific requirements.
As with everything, knowledge in this industry is key. Although this list shares some of the most common mistakes made, it is not meant to be a comprehensive list of “all you need to know.” Don’t forget to visit the County Treasurer’s website and consult your connections in the industry to ensure you’re making a strong investment.