What are the Pros and Cons of Purchasing Tax Lien Homes?

Mary McMahon

Purchasing tax lien homes can be a useful real estate investment if people make buying decisions wisely and do their research beforehand. There are also some risks, some of which can be significant. People interested in purchases of this nature can check upcoming tax sales in their region to see what kinds of homes are available, and they may also want to discuss the situation with a real estate agent or attorney who specializes in real estate law.

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Businessman giving a thumbs-up

People involved in purchasing tax lien homes do not actually buy the homes, they buy an interest in the tax debt associated with the homes. The government collects property taxes on a regular basis, and when people fail to pay, they receive a warning. The government can sell the debt if they do not get current on their taxes. The buyer pays the outstanding tax debt and receives the right to collect payments on the debt, along with interest. If the homeowner does not repay the debt, the buyer can take control of the home's deed, becoming the owner of the property.

One of the benefits to purchasing tax lien homes is access to high interest loans, backed by real estate. Tax authorities may charge as much as 25% in late penalties, and the buyer of the tax lien gets all of this money in addition to the principal. In addition, if the homeowner fails to make good on the debt, it may be possible to sell the home to recoup the expense of the debt and make a profit, as sometimes tax debt is much lower than the actual value of the home.

The most critical risk is the presence of existing liens on a property. If someone buys a tax lien and the homeowner goes bankrupt, it's possible that other creditors may step in to recover their losses first. The Internal Revenue Service, for example, can seize the home. People interested in purchasing tax lien homes should investigate the title of a home before they buy to see if anyone else has a lien, as this could become a problem in the event of a foreclosure, where the buyer of the tax lien tries to gain title to the home.

Another issue can be low home value. People who have not paid their property taxes may also not have kept up on maintenance, and the home might not be worth as much as the tax debt. If the buyer does end up taking over the title, it may be necessary to invest more money in cleaning up and fixing the home before sale, and it is possible to take a loss after purchasing tax lien homes. Homeowners may be willing to walk away from the tax debt if the home has experienced a significant decline in value, leaving the person who bought the lien with a worthless asset.

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