THE LAZY INVESTOR'S ROAD TO RICHES By David A. Chodack CHAPTER ONE: TAX SALE INSTRUMENTS - HIGH RETURN, LOW RISK What if someone promised to guarantee you a return of up to 50% per year on money you invest? Would you be interested? Or, would you suspect that it's some type of scam? After all, when things sound too good to be true, they usually are. What type of legitimate investment will return up to 50% on your money, without risk? It really does sound too good to be true, doesn't it? Today in particular, in light of the Enron and Global Crossing scandals, people are naturally leery of investments offering higher returns. At best, they sound risky, like junk bonds, which offer high interest, but may never pay off. People don't want to take chances. They want investments that are safe and secure. HAVE YOUR RETURN AND SECURITY TOO The good news is that you can have both. You can have security and get a higher rate of return. How? By investing in tax deeds and tax certificates issued by state and local taxing authorities. Yields, terms and conditions vary from state to state and even county to county, but every state has some procedure for penalizing delinquent property tax payers and this procedure can be used to your advantage as an investor. To understand how you can take advantage of tax deeds and tax certificates and make money as an investor, you have to understand how property taxes work and what happens when property owners don't pay their taxes on time. Governments love real estate. That's the first thing you have to understand. Governments love real estate, but they don't want to own it. That's the second thing you have to understand. Governments are like banks in this way. Banks also love real estate. So do other types of lenders. They don't want to own real estate either, but they love it, for the same reasons that governments love real estate, because they can make money from real estate without owning it. Governments and lenders make money from real estate in different ways, but they love real estate for the same reason: because it is there, and will always be there. This makes real estate excellent security, for both loans and taxes. REAL ESTATE IS THE BEST SECURITY Lenders make money by charging interest. They will lose money if the borrowers don't repay the loan. If they loan money to someone to buy a car or boat or airplane, that car, boat, or airplane can be moved. If the borrower does not keep up payments on the loan, the lender has to find that car, plane, or boat, before they can repossess it. If they loan money to someone to buy a piece of real estate, they will always know where to find that real estate if they do need to repossess it. Governments are in the business of raising and spending money. They raise money primarily by taxing their citizens. There are many ways for governments to do this, but one of the easiest, most efficient ways, particularly for local governments, is to tax real property. State and local governments also tax incomes and sales, but it is relatively easy for people to cheat on both these types of taxes. They can hide their income and they can under report their sales. People can't hide their real estate and they can't under value it, because state and local governments have their own appraisers to set the value. They determine what any given piece of real estate is worth and how much is owed in taxes on that piece of real estate. They don't have to rely on the honesty of the taxpayers. Therefore, every state, county and or local government has a tax on real estate and when that tax is not paid; they use financial penalties to punish the delinquent property tax owner. DELINQUENT TAX PAYERS ARE PENALIZED This is important to understand. State and local governments want people to be afraid of the consequences if they don't pay their property taxes on time. They want people to know and understand that it will cost them money. This way, property owners will take their tax obligations seriously and pay their taxes on time. If they don't pay their property taxes on time, states penalize property owners by charging interest and/or penalties on the outstanding property taxes due. The state or local government can also put a lien on their property and eventually take it away and sell it at auction if the property taxes remain unpaid. If the property taxes remain unpaid for a specified period of time, usually anywhere from six months to five years, depending on the state and county, the state or local government will take action against the delinquent property owner. Depending on state law, they will do this in one of two ways: either they will issue a tax certificate - normally bearing interest - and sell this at public auction, or they will sell the property itself. 25 states, the District of Columbia and the Commonwealth of Puerto Rico sell tax certificates. The other 25 states sell tax deeds giving title to the property itself. Either way, you as a private investor, have a chance to profit. You have a chance to make unusually high returns on your investment, with little or no risk and we're going to talk about how to do this. SOME STATES SELL THE RIGHT TO COLLECT INTEREST When states sell tax certificates, they are selling the right to collect interest on the unpaid property taxes. State law sets the amount of interest. The delinquent property owner is required by law to pay this interest, plus the amount of the original property taxes and any penalties and fees, within a specified period of time, known as the redemption period, or else the holder of the tax certificate gets to take the property instead. In this way, the state and local governments are able to get private investors, people like you and me, to pay the property taxes for the delinquent property owners. This way, the states get their money right away and they don't have to be in the business of owning real estate. We are helping them solve a problem. In return, we are being well paid. This is what smart investing is all about. SMART INVESTORS ARE PROBLEM SOLVERS Smart real estate investing is all about solving problems. Smart investors look for people who have problems with their real estate and they solve those problems for a fee. This can be a consulting fee, or a brokerage commission, or best of all, it can be a profit from buying that real estate at favorable prices and terms. Buying tax certificates works the same way. The state or local government has a problem. They have a property owner who can't or won't pay his taxes. They are owed money and they want to collect. They don't care whether it is the delinquent property owner who pays, or someone else, as long as they get the tax money. By buying the tax certificate, you assume that debt. Normally the minimum bid for the tax certificate will be the amount of the property taxes owed, plus any penalties and fees. You pay this money to the state or local government and they transfer their rights as a creditor, to you. Naturally, no one would want to do this if it didn't pay. Therefore, the states have to make it attractive to the investors. They do this in two ways: HIGHER INTEREST WITH TAX CERTIFICATES First of all, they offer a rate of return that is higher than the interest you would earn by keeping money in the bank, or even CD's or money market funds. For example, in the state of Colorado, the interest rate for tax certificates is set at 9% above the borrowing rate that the Kansas City Federal Reserve Bank charges its member banks to borrow money. This rate is normally about one percent higher than the rate that local banks pay on CD's, so it means that tax certificates automatically pay 10% more interest than CD's, no matter what the interest rate on CDs is at that time. By offering high rates of return like this, states not only make tax certificates attractive to investors, they make them unattractive to delinquent property owners. The more money it is going to cost a property owner to redeem the tax certificate and keep his property from being seized, the more likely a property owner is to pay his taxes on time. If there was little or no penalty for paying property taxes late, then everybody would do it. People would put their other bills first. The very nature of property tax certificates discourages this way of thinking. Once a property tax certificate is issued and sold at auction, it costs the property owner money to redeem it. Not only does the property owner have to make up the property taxes, penalties and fees, but he has to pay interest to the holder of that certificate. For example, Johnson Roberts owns a home. He owes a thousand dollars in unpaid property taxes, plus another $200.00 in penalties and fees. If he pays the bill before the tax certificate auction, it will cost him $1,200.00, $200.00. More than it would have if he had paid his property taxes on time, to cover those penalties and fees. But, once the tax certificate is auctioned off, he will also have to pay 20% interest to the holder of that tax certificate, so this will cost him another $240.00. His original $1,000.00 tax bill will become a $1,440.00 tax bill. If he does not pay this bill within a specified period of time, usually anywhere from six months to three years, depending on the state, then the holder of the tax certificate can have his property seized and/or sold at auction. The chances are that Mr. Roberts' property is worth a lot more than $1,400.00. Therefore, he won't want to lose it. He will pay the $1,440.00 and the investor who bought the tax certificate will make a profit of $240.00 on a $1,200.00 investment in a relatively short period of time. In the event that Mr. Roberts does not pay the $1,440.00 within the redemption. Period, usually six months to three years, the investor can get the property instead and make even more money. The investor can foreclose on the property and take it over free and clear of all liens and encumbrances. Any mortgages or other claims against the property are wiped out. Let's say the property is actually worth $50,000.00 and Mr. Roberts owed $48,000.00, secured by a mortgage on the property. Maybe this is why he didn't care about paying off the tax lien, since he had little equity anyway. Once the tax certificate is sold, that $48,000.00 mortgage is gone. It no longer exists. Mr. Roberts had no equity in the property, but the holder of the tax certificate does. The holder of the tax certificate has a $50,000.00 property free and clear, for only $1,200.00. This is a profit of $48,800.00. HIGH SECURITY WITH TAX CERTIFICATES High interest rates and big profits are great, but as we discussed at the beginning, security is on everyone's mind today. Therefore, the second thing that state local governments do to attract investors is to make tax certificates a secure investment. Buyers are guaranteed that they will either get their money with interest and expenses, or they will get the property. There's really no way they can lose money on the deal. They have the power of the state or local government and the courts to back them up. In Mr. Roberts' state, the state or local government wants to get its tax money up front as soon as possible. Therefore, they sell the tax certificate to a private investor and let this private investor collect interest during the redemption period, before Mr. Roberts' property can actually be sold at auction. TAX CERTIFICATES VERSUS TAX DEEDS In other states, they do things differently. They let the interest and penalties against delinquent property owners pile up until the end of the redemption period and then auction off the deed to the property. In tax deed states, investors don't get interest on their money unless the deed is subject to a right of redemption. They just bid to get the property itself. This requires a different strategy, a different outlook and a different way of bidding, as well as a different way of evaluating the property. We are going to talk about the states, the District of Columbia and the Commonwealth of Puerto Rico, which issue tax certificates. We're also going to talk about the other states which issue tax deeds instead, as well as the states whose state laws allow them to function like certificate states, even though they technically sell tax deeds. We're going to show you various creative ways that you can make money in both types of states and why tax deeds and tax certificates are such a great investment. Now, let's quickly go over the sequence involved in tax sales. PROPERTY TAX SALE PROCEDURES First of all every property owner has an obligation to pay property taxes. Once or twice a year, they will get a property tax bill. If they don't pay this bill, their taxes are delinquent and they are subject to penalties, however, the state will not immediately seize their property. THE GRACE AND REDEMPTION PERIODS There will be a grace period, when they can pay their taxes without penalty. When this grace period expires, there will be a Redemption Period, of anywhere from six months to five years or more, before the property is seized. But, during this Redemption Period, interest and penalties will continue to accumulate. All the unpaid taxes, plus these accumulated penalties and interest must be paid before the redemption period expires, or the property will be seized and the delinquent property owner - as well as any lien holders - will lose out. Some states take no action until the redemption period expires. They just let the penalties and interest pile up and then when the redemption period expires, they take the property and sell it at public auction. The minimum bid is usually the unpaid taxes, interest and penalties. Other states are more impatient, they don't want to wait until the end of the redemption period to get the tax money that is due. Therefore they sell tax certificates, which allow private investors to collect interest on the outstanding tax bill while waiting for the redemption period to expire. NOTICE OF TAXES DUE In either case, the delinquent property owner will first be sent a Notice of Taxes Due. The owner will be sent a notice that the taxes are delinquent. Finally, the property owner will be sent a notice stating that either the tax certificate, or the property itself, will be put up at public auction and sold to the highest bidder, unless the delinquent taxes, penalties and interest are paid. Once the delinquent property owner receives this notice, he will have a specified period of time known as the Redemption Period, in which to pay off the debt and keep their property. If the property is located in a tax certificate state, then you can make money at this stage of the process, by buying the tax certificate and collecting interest. If the property is located in a tax deed state, then you will have to wait until after the redemption period expires and buy the property. Once the redemption period expires, the delinquent property owner can lose the property and any equity they may have built up. Any mortgages and liens will be wiped out. You have a chance to pick up this equity for free. These are just two of the simple ways that you can profit from buying at tax sales. We're going to explore several other creative methods of making money with tax sale properties and tax certificates and in my live boot camps we go through in detail and then practice them at actual auctions, but for now, I want you to remember these key points. KEY POINTS TO REMEMBER 1.States love real estate 2.States don't want to own real estate 3.Property owners all have an obligation to pay property taxes 4.States want to make property taxes a serious obligation 5.Delinquent property taxes accumulate interest and penalties 6.Delinquent property owners gave grace. period before either tax certificate or at deed is sold 7.Delinquent property owners get a redemption period when they can buy back the property 8.Tax certificates ay guaranteed interest 9.Tax deeds get title to the property 10.Property tax foreclosures wipe out most existing liens and encumbrances and all the owners equity BACK TO BOOKS PAGE HOME PAGE |