Tax liens - how possible is it to make money?
Tuesday, March 9th, 2010 at
8:42 pm
Can some please share their success stories with investing in tax liens. I want to hear bad as well as good, but I would like to some input only from the people that did tax lien investing for at least a year or more.
Thanks
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I want to make it simple for you instead of a novel. The other post was rather unnecessary. So here’s how you make money with tax liens:
GOOD
1. Tax lien states like FL offer 18% interest per year. The more you hold the lien, the more money it makes. If the owner pays it back, you get your principal plus the interest.
2. Tax lien states like CO offer market prices based on Treasury interest rates. Last year it was 15%, Like FL, your interest compounds but unlike FL, if the owner doesn’t pay, you can foreclose on the property and own it. Do NOT believe people telling you "it must be worthless" because the owner didn’t pay for it. Deaths occur, foreign nationals don’t get notices, etc. I’ve personally bought several acres worth of tax liens turned into my own properties.
BAD
1. If you don’t know what you’re doing, you might be buying a tax lien on a ditch. No one will pay for a ditch. So your money is wasted. Due diligence is required (like any other investment).
2. Be careful of bankruptcies, your tax lien may not be paid. This is one of those due diligence issues again.
RECOMMENDATION
I have 40% stock market and 40% tax lien in my investment portfolio, the 20% is in market accounts. I spend about the same amount of time on both types of investments for due diligence. In other words, tax lien investing isn’t as hard as others make you think. But you need to know how to do it properly and don’t pay for $4,000 real estate programs. Just buy a book. The best one I’ve read on it can be found below.
From the accrual of interest primarily. In most jurisdictions the only property you can actually buy are properties no one really wants, likely including you. A few states, like Vermont actually transfer the property at sale, but most give very extended redemption periods. At least one state give 20 years if the person was incapacitated and could not act on their own behalf. To get property you probably have to buy at least 100 liens at a time in most jurisdictions. It is very rare that someone does not pay taxes on property that has some residual value if they are not incapacitated by the final redemption date. Under a binomial distribution, which is what this is, you pretty much will have to buy properties equal in frequency to the default rate. So if one in one hundred actually truly default, then you need to buy about one hundred to actually get one property. Depending upon the jurisdiction you may have a very nice yield indeed.
So, the good, if you have the resources to purchase hundreds of liens and you are very stringent in the maximum bid you will make, then you can return above stock market rates of return, but not way above stock market rates of return.
Now the down side. All are governed by statutes, most have very rigid requirements that he buyer must meet or they lose their lien status. All I have encountered provide a fixed fee for attorney’s services. This is important because if the fee is below what your attorney will accept for the work, then you may find yourself shelling out your own money to protect your interests. All sell by auction. You must first have a good idea of the underlying value of each property and the amount of interest you would be entitled to in order calculate a bid as a present value of the future streams. Find out the jurisdictions actual true default rate and assume you will end up with a smaller property. It is trivially rare for a $350,000 house to transfer this way but a $5,000 vacant lot, covered with trees and without utilities connected is much more likely. If you paid $50 for the property then the added costs will not be so bad, but if you happen to own it for $5000 it will probably not seem worth the bother.
So assume at the end you will receive a smaller property as additional cash flow. This assumes you bid on hundreds of properties. Otherwise, assume you only get your cash back with interest. Cash tends to be returned at an exponentially declining rate, essentially if you get 10% in the first month, you should expect to get 10% of the remaining in the second month or 9% and 10% in the third month or around 8.1% and so on. Christmas and tax season tend to muck this up. People who get money for Christmas pay their taxes and people who get refunds pay their taxes. So it is exponential with lumps.
Further, remember if you borrow funds to do this and someone comes into the jurisdiction and pays by check, they will make sure the check clears before they mail you your check so allow several weeks of not earning interest on your money between check clearing, mailing and you actually getting to the bank. Likewise, if you need to pay down the line of credit you borrowed against you will want the bank to have a way to accept credit payments from you as you get the money. As some of these checks are large you can also expect your bank to put holds on them till they clear as well.
Some jurisdictions, like Florida, require you to additionally file to quiet the claim on the property. Other jurisdictions automatically transfer the property to you, but of course if someone is on it, you are going to have to convince them to leave. Once you acquire the property you will need to buy insurance and if someone is injured on it, it is now your responsibility.
Also, if you attend a widely attended auction prices will go high and you may very well walk away without any properties at all. If the prices exceed the marginal benefit you expect, you are losing money on every bid. So expect to walk away with nothing. I have attended auctions that had a natural resource company attending and their bidder was instructed to pay any cost without limit to receive certain classess of property. Assets valued at most at a few thousand dollars went for $50,000 until it was made clear to the room that she would pay anything to win so there was no point in bidding against her. Another auction I was at was attended by a major US bank. They bid almost down to the CD rate so if you beat them, you would have been better off buying a cd and that assumes you actually got property.
It is a lot of grief, but if you are very careful, understand how to calculate present value and have a lot of time on your hands, you can earn above stock market rates of return. Do not over bid, understand the rules, make sure you do not run out of cash, have your legal relationships set up front, read the jurisdictions legal code and understand it, and have insurance.