What’s Better - Short Sales or Tax Certificates?

Late night guru’s and top selling books both proclaim tax certificates as a sure-fire way to build wealth. While tax certificates and liens can certainly become a profitable part of your investment portfolio, they are not without risk. When it comes time to investing your hard earned dollars into real estate, what is better - short sales or tax certificates? Keep reading to learn the facts behind the façade then decide for yourself which makes the most financial sense.

Fact- Tax Certificates can generate returns as high as 16 to 18 percent. While that certainly beats putting your money into a savings account or even the stock market, it’s still a far cry away from the returns realized by many short sale investors. Consider this, if you were to take $100,000 and invest it entirely into tax certificates each earning an incredible 18 percent, you would generate $18,000 profit (before taxes, transaction fees, losses etc…). On the other hand, that same $100,000 could be used to purchase up to 5 short sale properties at 20 percent down payment…each of which could easily earn $18,000 in much less than one year’s time!

Fact - Tax certificates and raw land rarely generates residual income. Your money is tied up until the redemption period or the property is sold. Short sales can be rented, leased or otherwise used to generate income prior to the actual sale.

Fact - Tax certificates are not always redeemed! Especially during tough economic times, the back taxes plus interest and other fees may cost more than the property is worth leaving tax certificate investors holding the bag. You can petition to have the property sold but back taxes, liens and other expenses often make it a losing proposition. Worse, if you don’t continue to pay the taxes on the property, additional liens could drive up the total cost even more.

Fact - Liens, environmental restrictions and major clean-ups can further reduce the profit potential of a property even should you become the “high bidder” for a non-performing concern. People promoting the benefits of buying tax certificates for investments rarely talk about the cost of taking acquisition should a property fail to be redeemed. The underlying assumption is the value of the underlying land would compensate for the risk - but what happens if the land itself is the risk? Remember, there is a reason certain properties are forfeited…typically because the value of the property has dropped below the back taxes and other liens or because there is a very high assessment, clean-up fee or restriction associated with the parcel.

Fact - Minimum bids on auctioned properties may not ever reach the minimum you have invested into the property. Further compounding the problem, if more than one tax certificate investor has an interest, proceeds are further divided.

Fact - Clouded title is common. Another relatively expensive problem rarely mentioned in association with tax certificates is the issue of a clouded title or lack of proper recording. Remember, tax certificates only earn those great interest rates if they are actually redeemed - otherwise, you could be stuck with a property you never expected to own and which could cost a small fortune to obtain clear title, pay off existing liens, bring the property up to par in order to sell or even “unload” if excessive environmental or other concerns are noted.

Share and Enjoy: