what are the disadvantages in investing in tax lien certificates?

Question

this question requires real answers.

Answer 1

The advantage of course is the interest and from time to time property.

The disadvantages are quite large really.

--Erroneous assessments result in interest free forgiveness of the certificate amount, so you have made an interest free loan.

--Non-existent lots are sold from time to time due to mistakes in recording resulting in interest free loans.

--Most jurisdictions have very precise rules. Failure to follow them results in loss of claim.

--Most jurisdictions require payment of subsequent years taxes, attorneys fees and publication fees which can be large multiples of the initial tax due.

--Cash flows are irregular and do not permit easy reinvestment.

--The property is property that "no one wants." It is trivially rare for a property of significant value to pass via a tax lien sale. Although it is common for such a parcel to have a lien sold, it is almost apocryphal to hear of such a parcel actually passing into the hands of the lien buyer. It is common to hear of parcels under a swamp, on the side of a cliff or with chemical waste to be transferred via such a sale. One I know of existed entirely under a river and while that may not seem completely hopeless, it was navigable water and the Army Corp of Engineers would not allow any use. Adverse selection is a serious issue.

--The "Winner's Curse," is operative and most people lack the training to know how to place a correct bid.

--Bankruptcy cancels the lien and the interest.

--Some states have look back periods for extended redemption. One state I know of allows people and their heirs 20 years to redeem the property if it was sold while the person was incapacitated. That is a very long time to have a cloud on the title. You build a house on it and it becomes the heirs' house for nearly free. They still have to pay the tax and the interest on the parcel based on what was sold in the lien certificate.

Answer 2

the fact that most of the states have eliminated the program due to abuse