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Tax Liens vs. Foreclosure Investments

In a recent blog, we talked about foreclosure property investing and offered some tips for purchasing foreclosed properties. One of the keys to investing in foreclosures is the ability to act on decisions immediately, which is why a checkbook IRA or Solo 401(k) is ideal for the strategy. This kind of immediate flexibility is critical with tax lien investing as well. So, with your self-directed plan, you are in a great position to pursue non-traditional investment strategies like foreclosures and tax liens. But how do you know which strategy will best fit your financial goals? In this blog, we have broken down the pros and cons of both strategies to help give you a clearer idea of what both have to offer and how well each will accommodate your investment needs.

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Tax Liens Pros

  • Your money could earn a high interest rate upon redemption of the property. The rate varies by state but is generally between 12 and 36 percent per annum. For example, in California and Connecticut, the rate is 18 percent, and in Iowa it is 24 percent.
  • Tax liens require less cash, so you can invest with a smaller capital.
  • Buying a tax lien property means you may be able to secure a property for well under market value.
  • Tax liens are backed by the government, so even in the event that the homeowner does pay off the outstanding balance, you will get back your full bid amount plus interest.

Tax Liens Cons

  • That cash will have to be up front
  • Tax lien properties are most often sold with quit-claim deeds, which offer no warranty on the status of the property title, meaning you will have no legal recourse to recover potential losses.
  • A tax lien property may require extensive repairs in order to meet local codes, and you can’t negotiate a lower price based on condition.
  • If you require monthly cash flow, tax liens are not the investment for you. The principal and earned interest will be paid to you in a lump sum upon redemption. Tax liens are also subject to the statutory homeowner redemption period required by your state, which can be several years.

 

Foreclosure Pros

  • IRA and Solo 401k investors who can purchase properties with all cash have an advantage in the foreclosure realm, because one cannot purchase foreclosures with a typical bank mortgage.
  • Foreclosures are a particularly good investment because you can buy below market in a desirable area and then add value yourself, thus increasing your return potential even more.
  • The sale process is relatively quick compared to other property purchases, since banks usually want to get rid of their foreclosed properties right away.
  • Foreclosed homes are usually priced below market value. This means you may be able to use foreclosure status to your advantage and purchase a larger property or one in a better neighborhood than you could afford normally.
  • Foreclosure investments can yield very high returns.

Foreclosure Cons

  • Since foreclosures are such good investment opportunities, they attract stiff competition when it comes to potential purchasers. If you are unaccustomed to researching foreclosed homes or haven’t done your homework regarding local property values, you may have a hard time competing with seasoned investors.
  • Homes that have progressed to the auction or REO stage of foreclosure do not have to include a seller disclosure. This may leave you open to additional problems that would not be revealed by a typical inspection.
  • Foreclosures are sold as-is, which means that you cannot ask for any repairs as a contingency of the sale.
  • Foreclosure investing can be complex and requires a thorough understanding of local law. As such, this may not be the best strategy for real estate investing novices.

So, which strategy is best fit for your self-directed retirement plan?

Photo by Colleen Lane via CC license