When you win a bid on a tax lien at an auction, one of two scenarios will follow. The first scenario is the simpler one, in which you make some very easy money-the homeowner pays their back taxes and any accrued penalties, and the government writes you a check for your initial investment plus interest. The second scenario can earn you an even greater profit, although it is a bit more complicated: the owner is unable to recompense the government within the allotted redemption period, and the property is taken from the owners and the bank and transferred to you. You thus gain ownership of the real estate for a little over the amount of the back taxes owed. This typically happens in 1 out of 250 tax liens-not frequently, but often enough to make it a viable opportunity for an investor to sell, rent or build upon a property they acquired for a fraction of its market value.

So what's the catch? In scenario two ,there is a possibility, though slight, that the judge will not legally grant you ownership of the property. The judge has the power to bypass the tax lien, sell the property, and pay the original secured creditors-aka the bank that gave the loan to the previous owners in the first place. Research the judges in the area and determine whether they have a history of making this decision. This action is rare, so if a judge had done it once they'll likely do it again.

To avoid this risk altogether, pursue the more expensive tax liens. On an expensive property, it's very probable that oversight or mismanagement rather than actual bankruptcy was the cause of the owner's tax delinquency. Foreclosure is rare in such cases. If you bid on properties in this category you can feel surer of getting a check from the government without the risks of foreclosure. Minimally priced liens are riskier.

Worthless Property

You should always investigate a property to ascertain its worth-drive by and give it a visual inspection, check the county website for appraisal records. Other than that, the best way to avoid getting burdened with a worthless, unmarketable property is to avoid bidding on tax lines that fall in the low hundreds price range. These are usually vacant lots or access ditches that you won't be able to give away. Homes in this price range often have structural problems, lead paint, or asbestos.

Of course, there are exceptions to every rule and you may find a low priced tax lien that is a spectacularly good deal. But if you haven't been able to do absolutely scrupulous research on a property and it falls below $500.00, don't risk walking blindly into a trap.