Sales in error or invalid sales, Bankruptcy and Rewards
Sales in error or invalid sales
These are sales where the taxing jurisdiction screwed up. They will happen and usually you will not lose money on them, you will just lose opportunity. In most states a sale in error or an invalid sale will mean you get your money back and in some cases you get a reduced rate on your investment. Don’t fight it, it won’t do you any good, it is just a fact of life.
Bankruptcy
To my knowledge every jurisdiction will remove a parcel from the tax sale if the owner files bankruptcy prior to the sale date and the jurisdiction is aware of the filing. What we will discuss here is if the owner files after the sale date.
Assuming you have bought the lien and recorded it if needed, you will receive notice of the bankruptcy filing. DO NOT IGNORE THE NOTICE, FILE YOUR CLAIM. You are a secured creditor and if you file your claim you should get your full money, eventually. The problem is the “eventually”. The judge (the guy in the black dress) in a bankruptcy court has the power to change the interest rate, the redemption period, or any of a number of things. Usually they do not do this, but it can happen.
File your claim, call your attorney, and live with the results. There is little else you can do. So you will know, we purchased thousands of liens and only had about eight or ten ever end up in a bankruptcy court where the terms were changed.
There are a lot of other risks that are relevant to just one state or another. Part of your due diligence and the reason you hire an attorney is to find out what they are. We have neither the time or the knowledge to tell you about all of them, but your attorney does, that is his job.
Rewards
Ok, we told you about the bad and the ugly, now we will talk briefly about the rewards. First, a tax deed sale is fairly easy – you own the property and if you made a good buy, that is the reward. With a tax lien sale the reward is one of two things.
The return on your money can vary greatly by state and even within a state. The lowest I am aware of is about 10% and the highest I know is 50%. In today’s interest rate environment they are both better returns then you will get on CD’s or bonds.
If you do your homework you have a very secure investment (as long as you didn’t buy a lien on an abandoned battery plant). You are ahead of the mortgage and almost all other liens (the exception would be some state and federal liens) and you have a very high chance that the property will redeem. If you have purchased the right lien then a failure to redeem should make you a very substantial profit.