Choosing a Tax Lien Exit Strategy

When diving into the world of tax lien investing, it’s important to have an exit strategy in mind as a part of your game plan. Anticipating every possible outcome of your investment and finding a plan of attack will save valuable time and money. A tax lien exit strategy refers to how you intend to realize a profit from your investment. This can range from selling a property, redeeming the certificate, to tax lien foreclosure.

There are several possible exit strategies to choose from, and many of them largely depend on two factors. Determining the property type and evaluating the value and condition of the property are two of the first things an investor should look at. These may dictate what exit strategy is the most appropriate for that specific investment. Doing your due diligence will assist you in choosing which of these exit strategies are the best fit for you.

Possible Exit Strategies

Lien Redemption
This is the most common exit strategy for tax lien investors. This occurs when the property owner has agreed to pay the back taxes and the lien is now been redeemed. This means that the investor will now receive his or her money back plus interest that has accrued during the time period that this lien was active. Most states have guaranteed interest rates according to their local laws and rates may vary.

Quick Flip
If the property is acquired through a tax lien certificate or tax deed, selling to another investor may be a good option for you. To ensure a successful selling process you’ll need to once again evaluate the condition of the property when determining the sale price, especially if the home is in need of renovations. There are many investors that specialize in flipping real estate, so making sure the price is right will help increase your odds of a successful sale. If you have already started to build your network in the real estate world, having a buyer lined up before making the investment would make for an even quicker and painless transaction.

If you’re not opposed to putting in some leg work after acquiring a property or get lucky with a property that requires very little rehabbing, wholesaling is a great option. With this method you are able to sell near retail value, or you can price it a little lower than market value to speed up the selling process. This is a fantastic exit strategy for those that are looking to cash out quickly so that they can move on to their next project.

Fix & Flip
Many tax lien investors are interested in acquiring the property through a tax lien certificate so that they can flip the property and sell it at market value. When assessing this strategy as a possible option, it’s important to check the numbers to ensure that the margins are big enough to make it worth your time. If you acquire a property for $50k that is worth $80k and needs $20k in repairs, this might not be the smartest investment for this particular exit strategy.

Fix & Rent It Out
Building a rental property investment portfolio is a goal of many real estate investors. Rental properties offer a consistent passive income and can ultimately be very lucrative if done correctly. This exit strategy is very similar to fixing and flipping as a lot of the same risks and factors will apply.

In addition to making sure the margins aren’t too small with any necessary rehabilitation’s, knowing what other local renters are paying in the area can help determine a good return on investment (ROI) as well. This will help predict the amount of time it will take for you to make back the money you initially invested.

For example, if you acquire a property for $30k and spend about $20k in repairs, that’s $50k spent in total. What amount of return is required to make that deal worth it? If a similar property in that area rents for about $1000 per month, that will bring in $12,000 annually. This means that it would take about 4 years to break even on your investment and the property would be a source of steady cash flow after that.

When choosing a tax lien exit strategy, it’s critical to anticipate several different outcomes. It is hard to predict if the certificate will be redeemed or if you will acquire a property, so being prepared for every possibility saves you from making missteps when the time comes.