Tax Liens Continued III-A

Here are some dangers to consider:

1.  Tax lien certificates are generally issued with a lot number or legal descriptions, but not with a street address. Without checking things out, you have no of knowing whether you have purchased a four-bedroom house or a hillside lot too steep to build on. Physical inspections take time, energy, and sometimes money. This may limit the investor to properties within a limited area.

2.  Although tax liens generally take precedence over other types of liens, they do not precede IRS liens or the action of bankruptcy liquidation.

Here is a case in point on the latter matter:

Mr. I.M. Broke owned property in Texas but failed to pay the property taxes. The state issued a tax lien on Broke’s property and sold it at auction to a Mr. Dee L. Seeker for $35,000 in cash. The tax lien stipulates that if Mr. Broke did not pay his back taxes plus a 25% penalty after 6 months, the property would revert to Mr. Seeker.

Six months later, Mr. Broke defaulted on his property and failed to release the lien from his property. Mr. Seeker attempted to recoup his investment. He had been confident in getting at least $8750 in penalty from Mr. Broke (the 25% penalty), but now he was looking forward to taking title to the property, as mandated by the State of Texas. Unfortunately, he discovered that previous liens attached to the property took priority over his.

Mr. Seeker had neglected to do a background check on the owner of the property before he purchased the lien. Had he done so, he would have discovered that Mr. Broke had declared bankruptcy before the lien was issued, and the IRS and other creditors had already laid first claim to the property. The $35,000 investment is now worthless and cannot be recovered. All property securing this investment has been claimed by other creditors. Mr. Seeker might ask nicely whether the government of the State of Texas would please give him back his $35,000, but he ought not to hold his breath while waiting.

Investors must realize that the government agencies are not going to bother getting credit checks on the property owners. Their mandate is to collect the tax revenue any way they can. If they don’t get it from Mr. Broke, they’ll get it from Mr. Seeker, and don’t expect them to worry about the well being of either gentleman.

In short, tax liens are sold “as is” with no warranty of any kind. Caveat emptor! The burden is on the purchasers to do background research before making the investment.

Always take a look at the property represented by the lien certificate or the deed. Check its background and history. Unless you are a hermit, you may have little use for acreage in the middle of the desert, 100 miles from the nearest store, with no water or electricity. Likewise, environmental problems could come with your acquisition of a property. If your new property housed a service station back in the 1940s and 1950s, and the tanks are still buried underground, it could cost you a small fortune to remove them. But remove them you must — on your own nickel.