In my last article I gave a brief introduction to what tax liens are and talked about how you can earn huge returns by invest ing in tax lien certificates and tax deed sales. But it's one thing to know that investing in tax liens can make you money, and it's a completely other thing to actually invest in them. To help get you started I've put together a general guideline of tips to follow and risks to be aware of. Hopefully these help you on your road to becoming immensely wealthy through real estate investing.

Tax Lien Investing Tips

Buy liens at smaller counties. There will be less competition as most institutional bidders will not attend these. Institutional bidders are individuals who are bidding for large companies which invest their money in tax lien certificates. It is not worth it for them to attend tax lien sales at smaller counties as there will be less liens to go around, and the liens themselves will also most likely be smaller.

Buy smaller liens. You will probably get a higher interest rate due to less competition.

Stay during the off times of a sale. Lunch breaks, end of the day, and the last day of a sale are prime examples. Catch people asleep and snag the good liens right out from under their noses. Also, at the end of the day it is important to go up to the clerk and ask if there are any more liens for sale. It happens that investors will buy too many liens and not be able to afford to purchase all of them at the end of the day. The county will not re-auction these and 9 times out of 10 will sell them to you over the counter at the maximum percentage interest.

Set max bid amounts. Be loud and assertive. Don't hesitate. Wait till the bidding has settled and bidders have dropped out, then jump in with a decent sized increase. Know your limits. Buy from obvious commercial properties, using recognizable company names. These liens will almost definitely redeem.

Tax Lien Investing Risks

There are also some negatives associated with tax lien investing. As with everything in life, tax lien investing is not without its dangers. It's extremely important to come to a tax lien auction well prepared and aware of the pitfalls that many people succumb to.

Inaccessible Funds Your money is NOT liquid. This isn't like a savings account or even stocks or mutual funds that you can sell at will. Your money is tied up until the tax lien is paid off. This can be a week, a month, a year, or possibly never if the owner doesn't redeem. Do NOT use money you need to pay bills to invest in tax liens!

When a property owner doesn't pay off their lien, this doesn't mean you are SOL, you just may have to do a little more legwork to recoup your investment. As the lien holder it may now be your responsibility to foreclose on the lien. Or in certain states you may be lucky enough to be the new property owner!

Time and Travel Depending on where you are attending lien auctions you may have to take into account travel time, lodging, food, gas, etc...It may not seem like a lot, but it adds up. An easy way to avoid this is to only buy liens in your county or the immediate area. This will save on expenses, but will also limit the amount of liens you can purchase each year.

Losing Your Investment There are instances that can occur that may result in you losing your investment. Some can be avoided easily, and others aren't so easy to avoid. For instance, what if the IRS has a lien on the property? What if the property owner goes bankrupt? These are both real possibilities and risks, but in all honesty, are extremely unlikely. A bigger risk in my opinion is investing in a worthless property. The property may be an odd size and can't be built on. Or it might be a drainage ditch. Or it might be completely run down. If you invest in a property that doesn't redeem, and then subsequently cannot be sold, you're now stuck with a worthless property and have lost your investment.

These last examples can be avoided in two ways:

Buy more expensive liens. Expensive liens are usually nicer homes and businesses which are more likely to be redeemed.

Prepare for the auction. These scenarios can easily be avoided through due diligence. Which is basically a way of saying, "Do your homework."

Conclusion

Investing in tax liens can be a great way to earn extremely high percentage yields from real estate investing, but you must come prepared. Do research on the properties being auctioned before the day of the sale. Become familiar with the auction process and your county's specific bidding systems used. The more prepared you are coming in to the auction, the better able you'll be to bid efficiently and effectively.

About the author:

Gregory Nirshberg owns and operates Tax Lien Investing Resource. A website dedicated to providing free quality information about tax lien certificates and the tax lien investing process.