Transcript Document

We will start at 5:30 pm Pacific, 6:30 pm Mountain, 7:30 pm
Central and 8:30 pm Eastern
For Audio: You can listen through your computer speakers
and if you have a headset you can ask questions. Or you can
choose the telephone option, but you must enter the “audio”
pin you are given while making this choice.
The manuals are available now
To download manuals or to view videos go to:
www.taxsalelists.com, sign in, and click on “my webinar” on the gray
menu bar at the right top of the page next to “my account”.
If you have any questions, call 800 941-6020 or email
[email protected]
Agenda
Day One
Tax Sale Basics
Day Two
Where to go and Why
Computer Tools and how to use them
Day Three
Due Diligence
Using the computer for Due Diligence
Day Four
Bidding the sale, Post Sale and Servicing
Day Five
Redemption, Getting the Property
Finding Money
Day Six
Over Bid Refund
Tax Sale History
Pure chance – a fellow board member asked me to look at a partnership he
was involved in.
Liked what I found out and took the idea to Kidder Peabody – at that time the
largest investor in real estate related investments in the world.
Set up the operation and staffing for Kidder Peabody
We ended up buying 77,000 tax liens, over $172 million dollars worth.
Average return on investment, non-leveraged, was just over 18%. Leveraged
it was over 80%.
WHAT IS A TAX LIEN?
Blacks Legal Dictionary defines a lien as:
“A claim, encumbrance, or charge on property for payment of
some debt, obligation or duty”.
It goes on to define a Tax Lien as “A lien on real estate in favor
of a state or local government which may be foreclosed for
nonpayment of taxes”. For our purposes a tax lien can be
imposed by the state, county, city or town, water district, school
district, port authority or district, park district, sewer district,
hospital district or any other entity of government authorized by
statute to levy taxes or special assessments.
WHAT IS UNIQUE ABOUT A TAX LIEN?
Again, going back to English common law, the unique thing about a
tax lien is that it is ahead of all other liens. What does this mean? It
means that the tax lien is ahead of a mortgage (either first or second
or third), it is ahead of a mechanic’s lien (a lien placed on property
for work done on the property), and in most jurisdictions it is ahead
of all other liens with the possible exception of some special
assessment liens or Internal Revenue Service liens.
HOW DOES THE TAXING AUTHORITY COLLECT
THE TAXES WHEN THEY PLACE A LIEN ON THE
PROPERTY?
This varies by jurisdiction, but in a number of states they hold a
sale, often called a “Tax Lien Sale”, “Tax Sale”, “Tax Auction”,
“Tax Certificate Sale” or any of a number of other names. The
taxing authorities in these states hold a sale, usually once a year, and
sell their interest in the lien to third party investors. By doing this,
the taxing jurisdiction is able to collect the outstanding delinquent
taxes much more quickly than just waiting for payment from the
delinquent property owner. These sales are usually held in an
auction format, open to the public, and, depending on the auction
method used, the properties are sold to the highest bidder.
WHAT IS THE BUYER AT THE TAX LIEN SALE BUYING?
First and foremost, they are not buying the real estate! The lien
buyer is buying the taxing authorities rights, meaning the lien buyer
now has the right to receive the delinquent taxes and any interests
and/or penalties that accrue. The delinquent taxpayer is given a
period of time, usually called a redemption period, to pay the lien
buyer. Only if this redemption period goes by and the delinquent
taxpayer does not pay the lien buyer does the lien buyer acquire a
right to get the property.
IT IS EXTREMELY IMPORTANT THAT YOU
UNDERSTAND EXACTLY WHAT IS REQUIRED AND THAT
YOU FOLLOW THE REQUIREMENTS PERFECTLY
Courts are very reluctant to take somebody’s real estate without
good cause so they require tax lien buyers to strictly adhere to the
requirements of the law before they will give the lien buyer the real
estate. We recommend that a lien buyer retain knowledgeable legal
counsel, at least for the first transactions in a jurisdiction so that no
mistakes are made.
WHAT IS THE EFFECT OF THE TAX
LIEN ON THE PROPERTY?
In the normal situation, liens are paid off in the order they are recorded, the first
lien recorded is the first to be paid, and then the second lien and so on. A tax lien,
since it is senior to all other liens, goes to the front of the line and becomes
“senior” to other liens, this means that the property owner will have great
difficulty selling the property or borrowing on the property without the tax lien
being paid first. No prudent lender is going to loan money on property and take a
position behind the tax lien, since, as we said above, the lien buyer can extinguish
the lender’s position. The lien attaches to the real estate and not to the owner of the
real estate, which means the property owner can convey their interest in the
property to someone else, but the lien remains in force. Because of this, the lien
buyer is usually the first to be paid. This is one of the reason’s that a tax lien on a
good piece of real estate is a very secure investment. Please keep in mind that we
said “a good piece of real estate” – we will discuss that in detail later.
WHAT ARE THE RIGHTS OF THE DELINQUENT
PROPERTY OWNER
In those states that sell tax liens, the liens are sold with specific rights that
the delinquent property owner has. Those rights vary state to state, but in
almost all cases the delinquent property owner has the right to stay in the
property and the lien buyer has no right to go on the property or to bother
the delinquent property owner.
In all tax lien states the delinquent property owner is given a period of
time, called a redemption period, to pay the delinquent taxes, penalties,
interest and costs. This redemption period varies in length by jurisdiction
but the shortest I am aware of is six months and the longest I am aware of
is four years.
WHAT ARE THE RESPONSIBILITES OF THE LIEN
BUYER?
In most states there are a number of requirements that the lien buyer
must meet. The primary responsibility is usually one of notifying
everyone who has “an interest in the property”. This will usually
require that the lien buyer do a title search so they can identify all
parties who have an interest in the property. These parties usually
have to be notified by certified mail and the form of the notice is
often set by statute. It is absolutely essential that the lien buyer does
exactly what the statute requires and that it is done exactly when
required by the statute. Failure to do so can invalidate the lien and
cause a complete loss of the lien buyer’s investment.
THE REDEMPTION PERIOD HAS EXPIRED,
WHAT NOW?
In most cases the delinquent property owner will redeem the lien
prior to the expiration of the redemption period. The estimate of
redemption rates are all over the place and few statistical studies
have actually been done. We, in the mid 90’s, did redemption
studies on fourteen states and found redemption rates that varied
from 97% to 98% on the high end to 60% to 65% on the low end.
There is a definite tendency for liens on single family residential
property to have a much higher redemption rate that commercial
property or vacant land.
IF THE LIEN HAS NOT REDEEMED
If the lien has not redeemed the lien buyer will have to do one of the
following, again depending on the jurisdiction. In some jurisdictions the
lien buyer will apply for a tax deed and, depending on the jurisdiction, this
will be all they have to do other than provide evidence that they have
notified all parties of interest. In other jurisdictions the application for tax
deed includes a number of other requirements that the lien buyer must
complete as part of the process. Again, it is the lien buyer’s responsibility
to know the requirements and we suggest that knowledgeable counsel be
retained for this process.
GET AN ATTORNEY
It is our suggestion that in those cases where foreclosure is
required that the lien buyer always retain knowledgeable counsel
for this process.
WHAT DO YOU GET?
The title conveyed by the taxing jurisdiction is usually considered
good title but it will not necessarily be “marketable” title. What this
means is that it is unlikely that you can get title insurance on the
property immediately. There are a number of ways to solve this
problem. The easiest is to do a “Quiet Title” action, whereby you
notify everyone with an interest in the property and require them to
establish their claim to the property or to be forever estopped from
asserting it.
DEED SALE
The other type of tax sale is what we will call a deed sale. This is a
sale where you are bidding to buy the property outright rather than
looking to make an interest rate on your investment. The tax deed
sale states are quite numerous and include the following. Arkansas,
Alaska, California, Florida (also a lien state), Idaho, Kansas, Maine,
Michigan, Minnesota, Nevada (also a lien state), New Mexico, New
York (also a lien state), North Carolina, Ohio (also a lien state),
Oregon, Pennsylvania, Utah, Virginia, Washington, and Wisconsin.
DEED SALE SYSTEMS
There are two different systems that exist in tax deed sale states. In
one system, the taxing jurisdiction sells the property for a minimum
bid that includes taxes, penalties, interests and costs, in the other
system, the taxing jurisdiction sells the property for a minimum bid
that relates to a percentage of market value of the property.
DEED SALE MINIMUM BID
Usually, if the sale is a foreclosure sale for taxes, the minimum bid
will be for taxes, penalties, interest and costs. If the taxing
jurisdiction has already foreclosed and now owns the property the
minimum bid is often based on some percentage of market value.
Which is more attractive? Well the minimum bid will usually be
lower in the first type of sale, but the relevant bid is the last bid, not
the opening bid, and that will really depend on the number of
bidders and how they view the value of the property.
YOU OWN IT!
The major thing to keep in mind is that at a tax deed sale, unlike a
tax lien sale, you are buying the real estate and I believe that the
required level of due diligence becomes extremely high. I believe
that the chapter on due diligence will work for both tax deed and tax
lien sales, but it becomes imperative at a tax deed sale that you know
what you are bidding on. The other thing you want to know at a tax
deed sale is if the property is being purchased free of all other liens
and encumbrances. There are a number of states where this is true
and a few where it is not true. The state books will go into detail on
each state.
WHAT IS IT WORTH?
The critical thing to find out ahead of time is the value of the
property you are contemplating bidding on. Unlike a tax lien sale,
you, if successful as a bidder, are going to be the owner of this piece
of land. You should spend a fair amount of time and a least a little
bit of money to find out what the property is worth.
INSPECTIONS ARE POSSIBLE!
One difference between a tax lien sale and a tax deed sale, at least
some tax deed sales, is that you often times are allowed to fully
inspect the property. There are a number of tax deed sales that
actually have showing dates for the property. You want to always
take advantage of these, if available, and I suggest that you have a
real estate professional, either a knowledgeable realtor or even
better, an appraiser with you when you make the inspection. You
want to do anything and everything you can to help you know
what the value of the property is that you are going to bid on.
DON’T FALL IN LOVE
It is also very important that you not fall in love with a property.
This is business – determine ahead of time what your maximum bid
is, and stay with it. More people have lost money in auctions by
deciding that “if somebody else wants to pay that much for the
property, then so do I” than any other thing other than poor due
diligence. You are going to have to kiss a lot of frogs before you
find your prince. There are thousands of properties sold at tax deed
sales in the United States every year. Don’t chase any of them, if
you can’t buy them on your terms then don’t buy them at all.
RISK & REWARD
There are a number of ways to lose money in tax liens.
I call them
• The dumb buy no 1
• The dumb buy no 2
• Administrative (servicing) mistakes
• Invalid sales and sales in error
• Bankruptcy
THE DUMB BUY
NUMBER 1
There are a hundred different ways to do this one but they all can be
summed up with “I never should have bid on that parcel, let alone
buy it”. You were bidding on the wrong property or you did not
know what you were bidding on.
THE DUMB BUY
NUMBER 2
There are a number of states where, based on the rules of the
auction, you can guarantee yourself a loss. I will give you two
examples:
1. Colorado
2. Mississippi
ADMINISTRATION OR SERVICING ERRORS
As much money is lost to these errors as is lost to dumb buys.
Each state has a set procedure of things you have to do to protect
your interest in the property. THESE ARE NOT OPTIONAL!!.
We always suggest you get a good lawyer who understands the tax
sale laws, because if you make one mistake (In Indiana you have to
“notice” every interested party. This noticing has to be done in a
specified window of time – if you are a day early or a day late you
stand a good chance of losing 100% of your investment.
SALES IN ERROR OR INVALID SALES
These are sales where the taxing jurisdiction screwed up. They will
happen and usually you will not lose money on them, you will just
lose opportunity. In most states a sale in error or an invalid sale
will mean you get your money back and in some cases you get a
reduced interest rate on your investment. Don’t fight it, it won’t do
you any good, it is just a fact of life.
BANKRUPTCY
To my knowledge every jurisdiction will remove a parcel from the
tax sale if the owner files bankruptcy prior to the sale date and the
jurisdiction is aware of the filing.. What we will discuss here is if
the owner files after the sale date. Assuming you have bought the
lien and recorded it if needed, you will receive notice of the
bankruptcy filing. DO NOT IGNORE THE NOTICE, FILE
YOUR CLAIM. You are a secured creditor and if you file your
claim you should get your full money, eventually.
REDEMPTION RATES
Everybody likes to talk about the redemption rate in tax liens – how
it is 90%, 95%, 98%, I even saw one write up that said it was
99.9%. All of these numbers have been made up by people, because
nobody has done a complete redemption study including all sales.
We did a study in the late 90’s of 13 states and found the redemption
rate overall varied from 65% to 96%, depending on state, county,
etc.
WHAT ABOUT SUBSEQUENT TAXES?
Learn what to do about subsequent taxes. In some states if you
do not buy the subsequent taxes a new lien will be sold and that
lien can take away your lien. Learn the life of your lien, in almost
every state the lien expires as worthless if you have not applied for
deed or foreclosure within a statutory period of time. Find out if
you can contact the property owner. In some states you can, in
Florida you are prohibited from doing so. Doing so could cost
you your lien.
DO YOU HAVE TO RECORD?
Find out if you have to record your lien or certificate.
If you do, do it –
If you don’t, you lose 100% of your investment.
DON’T BID IF YOU DON’T KNOW
It constantly amazes me to watch people bid on properties at
auctions when they have no clue as to what that property is. If you
bid on properties blind you will lose money. End of report – no
exceptions.
NICE GUYS CAN LOSE!
Don’t make payment plans with the property owner unless your
attorney tells you that it is permissible under the state law. In a
number of states you lose the security of the real estate lien if you
do so.
THE EPA & YOU
If you happen to discover that you have, through error, bought a
piece of property that has an EPA contamination notice – do not go
to deed under any circumstances unless you are qualified to
evaluate the clean up cost. YOU WILL BE LIABLE TO CLEAN
IT UP IF YOU GO TO DEED!
BIDDING AGREEMENTS = JAIL
Do not enter into bid rigging schemes. Any agreement between
bidders as to how they will split up the parcels or what they will bid
is illegal and your purchase can be made invalid, plus you can be
prosecuted criminally. You will meet people at every auction that
want you to enter into such scheme. Listen to what they say if you
want, but never participate. If you listen to what they say you will
know what they are doing and can plan accordingly, but do not
enter in to any agreement on bid rigging. There have been a
number of cases in the past five years on this issue.
REWARDS
OK, we told you about the bad and the ugly, now we will talk briefly
about the rewards. First, a tax deed sale is fairly easy – you own the
property and if you made a good buy, that is the reward. With a tax
lien sale the reward is one of two things. You either make a nice
return on your investment (in Texas it can be a 50% annualized
return) or you bought the property for pennies on the dollar. The
return on your money can vary greatly by state and even within a
state. The lowest I am aware of is about 10% and the highest I know
is 50%. In today’s interest rate environment they are both better
returns that you will get on CDs or bonds.
We will start at 5:30 pm Pacific, 6:30 pm Mountain, 7:30 pm
Central and 8:30 pm Eastern
For Audio: You can listen through your computer speakers
and if you have a headset you can ask questions. Or you can
choose the telephone option, but you must enter the “audio”
pin you are given while making this choice.
The manuals are available now
To download manuals or to view videos go to:
www.taxsalelists.com, sign in, and click on “my webinar” on the gray menu bar at the right
top of the page next to “my account”.
WHERE TO GO AND WHY TO GO THERE
What are your objectives?
Do you want real estate or interest on your money?
How much do you want to invest?
What are the geographic considerations?
What you need to determine before the sale is if you want
redemptions and a high rate of return or you want the property.
Almost everyone tells me they want the property, but do you really?
If you really want the property why aren’t you at a deed sale since
the majority of tax liens redeem (notice I said majority, not 93% or
98% or any other such unrealistic redemption rate). Most of the
time in a tax lien sale you will not end up with the property.
MY CRITERIA IS AS FOLLOWS:
•What is the rate of return?
•What is the bidding system? (this will be covered later)
•How many parcels in the sale?
•How many parcels appeared to be improved as opposed to vacant? Sometimes
the only way you could do this is to evaluate the size of the liens. If there are 250
liens that are $57.00 you can usually be pretty sure that these are unimproved
parcels. In my experience most improved parcels have liens above $600.00.
•What are the payment requirements? Certified funds, wire transfer, business
check, cash, etc.
•What is the cost to get there and back?
•How helpful does the court house staff appear to be.
•Do you have to register before sale date?
•Can you have a representative go in your place?
•Is a deposit required prior to the sale? If so, what form of deposit
is required?
•When is final payment required and in what form is it required?
•When do you get your deposit back if you didn’t spend it all?
•What is the procedure to “check out” at the end of the day?
•If there is a disagreement upon check out, how is it handled?
As you can see, you have to develop your investment plan and
match the list to the plan as opposed to doing the opposite. We
always looked at six to ten lists to find one or two sales we wanted
to attend. This is why a subscription makes sense – you aren’t
limited by economics to how many lists you take a look at.
IF YOU WANT REDEMPTION:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Buy occupied, single family residential property in decent neighborhoods.
Buy properties with mortgages.
Buy properties with bigger liens.
Buy owner occupied properties
Buy properties that are not involved in a divorce. (Check the records to see
if a divorce is currently being sought by either party)
Buy properties where the tax bill goes to the property.
Never buy vacant land.
Never buy industrial land.
Never buy single purpose commercial properties.
Never buy a single family residence that is unoccupied.
IF YOU WANT THE LAND:
1. Buy vacant land.
2. Buy industrial land.
3. Buy single purpose commercial land.
4. Buy properties that are “free and clear” (no mortgages or liens)
5. Buy properties where the tax bill goes out of state or out of town.
6. Buy properties where the house is a rental (tax bill doesn’t go to the
house)
7. Buy properties in lower income areas.
8. Buy houses that are boarded up.
9. Buy houses that have visible structural problems.
10. Buy houses that are obviously vacant.
BIDDING STRATEGIES
Periodically I read comments in chat rooms by people who say they have
the best bidding strategy and that 20 minutes into the auction they know
who their competition is and that they then are in control. Damn, I sure
wish those folks had worked for me over the seven or eight years when we
bought over $100 million dollars of tax liens. In my experience, those
who have magical systems are few and far between. People will play all
kinds of games in auctions – not entering the bidding until late, or trying
to bully the other bidders but the reality is very simple. Disconnect your
emotions, ignore the other bidders. You have determined, or you should
have, what you are willing to pay for a property. Enter the bidding fairly
early on and quietly continue in the bidding until you either buy the lien
and/or property or your level is passed.
IS THERE AN EDGE YOU CAN GET?
The one tip I can give the individual investor. Look at the smaller
liens. In a number of jurisdictions the taxing authority will accept
partial payments on taxes. This means that there can be $200,000
houses in the auction that only owes $136.00 in delinquent taxes,
because they have already paid $800 of the tax bill. If you, during
your due diligence, can determine which properties fit this bill, you
will find that the institutional buyers will not be bidding on them.
The institutional buyer will seldom buy a lien below $400.00
because they have a “servicing cost” for each piece of paper they
handle and a lien below $400.00 is not worth it to them. These you
should find and go after.
INTEREST & PENALTIES
WHAT YOU REALLY EARN
Having been a bond trader for about 15 years I am probably more
comfortable in this area than most, but it even confuses me. What
is the difference between a 10% penalty rate and a 10% interest
rate? Indiana is a good place to show this. A 10% interest rate
earns 27.3 cents a day on a $1,000.00, whereas a 10% penalty is
$100.00 on day one and is still a $100.00 on day 365. A 10%
penalty earned on day 30 is a 121% annual interest rate.
WHAT IS THE ACTUAL RATE?
Most states state that their interest rate is x percent per month or
any part thereof. What that means is that you earn the full months
interest if the lien redeems on the 1st of the month or if it redeems
on the 31st of the month. To give you an example of what this
means. Assuming our $1,000.00 lien has a 1.5% monthly interest
rate and the lien redeems on the 1st of the 10th month. The total
earning would be: $15.00 X 10 or $150.00 in 271 days (for this
example I have assumed the months each have 30 days). This is an
annual interest rate of 20.20% instead of the 1.5% or 18% annual
rate that you might think.
Computer Tools you should be aware of
1 www.atfs.com
2 www.zillow.com
3 www.domania.com
4 www.searchsystems.net
5 www.naco.org
6 www.govengine.com
7 www.domania.com
8 www.melissadata.com/lists/ezlists/ezhomeowners.aspx
9 Monarch
10 Iopus
11 Google Earth
5
We will start at 5:30 pm Pacific, 6:30 pm Mountain, 7:30 pm
Central and 8:30 pm Eastern
For Audio: You can listen through your computer speakers
and if you have a headset you can ask questions. Or you can
choose the telephone option, but you must enter the “audio”
pin you are given while making this choice.
The manuals are available now
To download manuals or to view videos go to:
www.taxsalelists.com, sign in, and click on “my webinar” on the gray menu bar at the right
top of the page next to “my account”.
DUE DILIGENCE
DUE DILIGENCE
The most important aspect of your preparation for the purchase
of tax liens and/or tax deeds is the process of due diligence.
WHAT DOES THE DUE DILIGENCE
PROCESS INCLUDE?
The list:
•Courthouse research: - either in person or on
the internet
•Look at the property!! –either in person, by
computer, or through someone else
•The final review:
WHAT YOU WISH WAS ON THE LIST?
•The parcel identification number
•The owner’s name
•The property address
•The property type
•Assessed value for land
•Assessed value for improvements
•Annual tax payment
•Tax owed and/or minimum bid
•The sale sequence number
THE PARCEL IDENTIFICATION NUMBER
This is a number, called by different names in different
jurisdictions (folio number, account number, tax id number,
block/lot, etc) that the taxing jurisdiction uses to identify the
property. It is critical that you get this number if at all possible.
Some jurisdictions do not publish these numbers and you will have
to get them from the assessor’s office or the treasurer’s office
THE OWNER’S NAME
You want to try and see how much real estate the owner has in the
jurisdiction. If it turns out they own 20 properties and this is the
only one that is delinquent – that may be a red flag.
THE PROPERTY ADDRESS
Also known as the situs address – this is where the property can be
located. You want to make sure that the address you get is the situs
address and not the mailing address – quite often you will find the
mailing address has been entered as the situs address in error. This
may be because the property is vacant land and has no assigned
address or it may be the nearest address to the property (some
counties in Indiana do this as an example).
THE PROPERTY TYPE
and/or land-use code: This is either a numeric code or an
acronym assigned by the taxing jurisdiction to show what the
land is used for or authorized to be used for. Examples would
be: SFR for single family residential, Comm for commercial,
Ind for industrial, Vac for vacant and Agri for Agricultural. You
want to know what the land is currently used for and the land use
code will tell you this. Property type and land use code are
usually not on the published list.
ASSESSED VALUE FOR LAND
This is the value the assessor has placed on the property. Please be
aware that this value may be arrived through some sort of formula.
You need to find out from the assessor how the number is arrived
at. Most states require this number to have some relationship to
market value, but not all do. This is critical to know. If the value
has some relationship to market value and you have the formula
you can arrive at a hypothetical market value. This will seldom
correlate very accurately to a true market value, but it should give
you a basis for comparative value between two properties.
Assessed values are on some lists but not on most.
ASSESSED VALUE FOR IMPROVEMENTS:
This is the value the assessor has placed on the improvements
(usually the buildings) on the property. Again, you need to know
the formula used and want to arrive at a hypothetical market value.
Assessed values are on some lists but not on most.
ANNUAL TAX PAYMENT:
This is what the property tax for the current year are supposed to
be. Usually not on the published list. This can tell you if you are
bidding on several years taxes or just a portion of a year.
TAX OWED AND/OR MINIMUM BID:
This is the amount that the taxing authority wants to receive (at a
minimum) for the lien and/or deed. Depending on the method of
auction this may be the total amount you will have to pay or the
starting bid. This is usually on the published list, but not all of
them.
THE SALE SEQUENCE NUMBER:
Most sales publish their list in the order they will be sold, but some
do not. You must find out from the taxing jurisdiction what order
the properties will be sold in and then, if the taxing jurisdiction has
not assigned a sequence number, you should assign a sequence
number to each parcel so you can keep them in auction order.
WHAT WILL ACTUALLY BE ON THE LIST
If you are lucky it will include a parcel number, owner’s name,
amount owed and maybe an address, but not necessarily the
property address.
The least I have seen is the owner’s name and amount owed.
HOW DO YOU GET THE INFORMATION THAT ISN’T ON
THE LIST?
If we have a data enhanced list – you get it from us. If not, you
have to go to the court house and get the information or go to
another data service and see if they have it. This would be the first
of two trips to the court house and I would just get the parcel
number, property type, assessed values for land and improvements,
and – if available – the last sale price for the property.
SORT YOUR LIST BASED ON YOUR CRITERIA:
The reason we got the information above is so we can eliminate
properties from our consideration. Most lien sales will have far
more properties on the list than you can buy or have time to
evaluate. Your first job in the due diligence process is to reduce
the list to a group of properties that have what you are looking for.
In deed sales the problem of reducing the list is not as critical as
the lists are usually much smaller.
HOW DO I ELIMINATE PROPERTIES?
You should have your investment plan in mind already. This is
where you start to implement that plan. We are going to assume here
that your plan is to go after single family residential property, and
that we have $10,000 to invest.
SORT AND ELIMINATE:
If you have determined you are only interested in single family
residential or, perhaps, vacant land, you can now sort your list
based on land use code and eliminate all the properties from
consideration that are not of the type you are looking for. Copy
those properties that you want to look at to a new spreadsheet, but
don’t throw away the main list.
LOOK FOR ABERRATIONS:
Taking the new spreadsheet sort the properties in minimum bid
order (the tax amount the jurisdiction has published). You want to
do some examination of this group and determine if there are any
things that stand out as different.
ABERRATIONS – NO. 2
One of the things I do is to divide the minimum bid by the total
assessed value (the combined value of assessed value for land and
improvements). This will give you a percentage of hypothetical
market value. Often this number will be between 1.5% and 6.0%
of market value. The actual ratio is not as important as is noting
those properties that vary a great deal from the average. Those
properties could be either very good deals or very bad deals.
ABERRATIONS – NO. 3
If the average minimum bid is 2% of total assessed value and there
are some properties that are 15% of total assessed value – you
want to flag those to be checked very carefully. Conversely, if the
average minimum bid is 2% of total assessed value and there are
some properties that are 1/10th of 1% - you want to flag these to be
checked also.
ASSESSMENTS FOR IMPROVEMENTS:
The second thing we want to look for are properties that are out of
line as to assessed value for improvements. What you are looking
for is property where the assessment for improvements is quite
small or smaller than the assessment for land. It is possible, if the
assessment for improvements is quite small, that these properties
are not really single family residential – or the structure has
problems that have reduced it’s value. Flag them.
BUDGET CONSIDERATIONS:
The third thing we want to do is to eliminate those properties that
are out of our budget. It is usually better to buy 20 $500.00 liens
than 1 $10,000.00 lien. If you can buy 20 liens that meet your
criteria as to property type and lien to value ratios you have the
benefit of some portfolio diversification, which is usually a good
thing.
READY FOR THE COURT HOUSE?
You have now pared down the list. Hopefully you have narrowed
the list down to a manageable number. Sort your list in parcel
number order, print it out, and you are now ready to spend some
more time in the court house.
COURTHOUSE RESEARCH:
In almost all cases you are going to want to go to the assessor’s office. Before you
leave to go there, you want to check on the internet and see if the assessor has a
web site that allows you to look up information on properties. More and more
counties and cities now have such sites – it is a lot more comfortable to do the
work at home.
Call first and find out where the land records are located and what hours they are
available. Depending on what the taxing authority included on the published list,
this may be the first of two or three trips. If you don’t have all the information we
want on our list, our first task is to get the missing information.
WHAT OTHER INFORMATION DO WE WANT?
We want all the information on our list above and we would like to
get as many of the items listed below as possible. Some taxing
authorities won’t have any of it and others will have all of it.
1. Last sale price: If possible we would like to know how much
the property sold for the last time it sold.
2. Last sale date: The information above will have less meaning if
the property last sold in 1943.
3. Mortgage holder: Is there a mortgage on the property? If so,
who has it and what is their address (if you buy the lien you are
going to need this information). Remember that mortgage
companies will want to redeem the property.
4. Mortgage amount: Another possible indication of value and what
the mortgage company’s exposure is.
5. Square footage of structure: Tells us more about the property.
6. Type of construction: Tells us more about the property.
7. Year it was built: Tells us more about the property.
8. Number of bedrooms: Tells us more about the property.
9. Number of bathrooms: Tells us more about the property.
10. Lot size: Tells us more about the property.
11. Any other information you find: Tells us more about the
property.
12. Other liens on the property: See if you can find out if there
are other liens on the property – they could be IRS liens,
Mechanics Liens, Second or Third mortgages.
AFTER THE COURTHOUSE
When you get back from the courthouse you want to update your
list, adding all the information you now have. You now do a final
review and determine if any of the properties on the list do not meet
your criteria. Eliminate those and copy your spreadsheet to your
final drive by inspection list. This list should have about 20 to 40
times as many properties on it as you could buy – you aren’t going
to get all the properties you want.
LOOK AT THE PROPERTY
We believe that it is critical that you look at each property you are
considering. This is an absolute in a deed sale and we feel it is an
absolute in a lien sale also. The nicest property on paper could be a
burned out crack house in reality. People will tell you that 95% of
tax liens redeem – what they don’t tell you is that about ½ of those
that don’t redeem are never taken to deed. The reason they aren’t
taken to deed is that they shouldn’t have been bought in the first
place.
MAPPING THE PROPERTY
We advise that you get a mapping program so you can map the
properties before you go out to inspect them. You can get good
mapping software for under $100.00 and it will save you hours in
the field. The one thing to remember when mapping is that you will
sometimes find the same address exists in two different places in the
taxing jurisdiction. You can resolve these by calling the assessor’s
office or checking by zip code or parcel number so you make sure
you are looking at the correct property.
MAPPING THE PROPERTY,
CONTINUED
We suggest you map everything before you get in the car. Take
some time to study your maps so you have a feel about how you are
going to do the job. This will save you a lot of time in the field. We
have had over 200 field workers do property inspections for us and I
can tell you those who took an hour or so to layout their plan were
much more effective than those who didn’t.
HOW MANY CAN YOU LOOK AT IN A DAY?
You need some idea so you know how much time to allow. My
best people consistently did more than 120 a day. The record was
335 in one day. Since you are new to it, plan on 50 to 70 a day. If
you can get someone to ride with you, you can increase that
number by 20 percent.
Caution!!! Most money that is lost is lost because it is not the
right property!!!
The biggest cause of losses is that people do not correctly identify
the property. Some of the causes can be “nearest property as an
address”, failure to match property types with property you are
looking at, and failure to allow for address problems.
WHAT ARE YOU LOOKING FOR?
We used an inspection form that was adopted by a number of the
institutional buyers. It had several things you wanted to note – and
we used a 1 to 5 ranking scale, 1 being worst and 5 best.
We ranked three things: The structure, the neighborhood (actually
the block) and our “confidence” ranking, which 1 to 3.
WHAT YOU NEED TO NOTE
Note any plus items: Well maintained, new paint, etc.
•Write down the photo number and write down some things you see in the
picture so you have a secondary check in case the numbers get screwed up.
The type of thing our people wrote: White house, brown trim, large tree left
side, blue car.
•If possible, pull down the street a little so you aren’t making your notes in
front of the house. If you are approached by someone asking what you are
doing, show them your drive by inspection sheet and tell them you’ve been
hired to do a survey or something similar. At the first sign of any problem,
drive off. It is rare that problems occur but we have had people who were
chased – best thing to do there is go to the nearest police station.
Structure Ranking
Rank from 1 to 5 – 5 being best.
Things you want to consider.
1. Any obvious structural problems?
2. Is maintenance needed? I.E, painting, roof, etc.
3. Is there anything that might be an obvious EPA problem? I.E. 50 gallon
drums in the side yard or it used to be (or still is) a gas station
4. How is the yard maintained? Fairly good hint as to owned or rented.
This is subjective ranking, but you want to have a feel for the structure and
ranking it is the only way you can do that.
Neighborhood Ranking
Things you want to consider.
1. How are the yards maintained?
2. Are there vacant lots from demos?
3. Are there “board ups” in the neighborhood?
4. Is there pride of ownership evident?
This is subjective ranking, but you want to have a feel for that area and
ranking it is the only way you can do that.
Confidence Ranking
How sure are you that you have the correct property?
1. Does the property type match what it should be? SFR and SFR
2. If there is no posted address, does this one seem to fit what it should be?
3. How about assessed values versus what you are looking at?
We used a 1 to 3 ranking and never bought a 1 confidence ranking. You want
to know you are buying the correct property.
When you get home again you want to “marry”
your photos to your list. You can paste the photos
into your spreadsheet – make sure that you put the
correct photo with the proper property.
THE FINAL REVIEW:
You now have all your information from the assessor’s office,
you have photographs of the properties. You now want to go
down the list and eliminate any from consideration that are
obvious problems. Try to remember when doing this, don’t use
your own preconceived ideas to color your judgment. Most tax
lien and tax deed properties are in lower income areas. Your
judgment should be based on the condition of the house, the
condition of the neighborhood, not if you would live there or if
you like the style of architecture. If you end up with the
property can you sell it for a profit – that is the question.
Usually you will find that about 75% of the properties you
have reviewed are legitimate targets at the auction. If you
have done your work properly you should have a fair number
of parcels you want to bid on. Remember, you want to have
between 20 and 40 times as many prospects as you have
money to spend.
Online Auctions and Due Diligence
First you must determine which company is running the
auction. There are now six firms doing online auctions:
1.
2.
3.
4.
5.
6.
Bid for Assets –www.bid4assets.com
Real Auctions –www.realauction.com
Grant Street Group –www.grantstreetgroup.com
SRI –www.sri-sale.info
Update –www.tax-sale.info
D&T Ventures –www.dtventures.net
Preparation for Online Auctions
1.
2.
3.
4.
5.
6.
7.
8.
We provide weekly list of online auctions in our update email.
Contact the county and get full details and name of auction firm.
Contact auction firm and get web site for sale (different site for each county)
Get a list of properties from us, county, or auction company.
Sort the list using methods shown this evening.
Get information on property using private data sources (FARES, LexusNexus, DataQuick or the county assessor’s information if online.
Each auction firm has training sessions before the sale – ATTEND them.
Place your bids.
If you do not have web based data available then use the methods we described
earlier using policemen, firemen, etc.
We will start at 5:30 pm Pacific, 6:30 pm Mountain, 7:30 pm
Central and 8:30 pm Eastern
For Audio: You can listen through your computer speakers
and if you have a headset you can ask questions. Or you can
choose the telephone option, but you must enter the “audio”
pin you are given while making this choice.
To download manuals go to:
To view the videos go to:
taxsalelists.com/webinarmaterials.html
taxsalelists.com/webworkshoparea.html
BIDDING THE SALE
ROUND ROBIN BIDDING
A number of different jurisdictions use “round robin”
bidding. What this means is fairly simple. They go
around the room in a fixed order and each person is given
the opportunity to buy a lien.
LOTTERY SALES
There are a fair number of jurisdictions where they have a
lottery sale. The difference between a lottery sale and a
round robin is that a round robin guarantees you at least a
shot at a number of liens, whereas a lottery depends on
how lucky you are. Statistically, a fairly run lottery should
give you the same chances as a round robin, but it never
will.
BID DOWN THE INTEREST RATE
The way this system works is that bidding starts at a
statutory rate (18% in NJ, IL and FL, 16% in AZ), and the
interested buyers bid a progressively lower interest rate until
nobody is willing to go lower. The lowest bidder is the
winner.
Another thing to remember about “bid down” states. There
are a number of reasons why the rate may be bid down to
levels you find silly. If you see this being done extensively
– there is a reason.
BID DOWN THE PERCENTAGE OF OWNERSHIP
What happens is that the property is sold to the bidder who is
willing to take the smallest portion of ownership in the property.
This means if you bid below 100% you become a tenant in
common with the delinquent taxpayer. This raises a number of
issues, most of which you will find are solved by what actually
happens in the auctions.
WHY BID ¼ OF 1%?
Because you get the rate you bid (1/4 of 1%) or a 5% penalty,
whichever is greater. A 5% penalty on $1,000 is $50 dollars,
even if the lien redeems the first day. If the lien redeems in
90 days you would be making the equivalent of 20% on your
money
PREMIUM BID - PREMIUM LOST
Both Colorado and Mississippi use this system which is an
interesting one. This creates a situation where you can buy a
lien, have it redeem, and lose money. Fairly hard to do in
most jurisdictions, but easy in these two. The lien is sold to
the bidder who is willing to pay the taxes, interest, penalties
and costs and will bid the most money above that amount.
The catch is that the premium you bid above the minimum
bid is gone forever. The county keeps it.
LOST PREMIUMS CAN = LOSS
If you pay a premium for the lien that exceeds one month’s interest
on the lien (that is all you are guaranteed to receive), then you could
actually have a loss if the lien redeem fairly quickly. If what you
paid exceeds the interest you earn then you have a loss.
PREMIUM BID - PREMIUM BACK
BUT NO INTEREST ON THE PREMIUM
This system occurs in a number of states and has certain
characteristics of the system above – the major difference is
that in this system if you buy a lien and it redeems you will
make a profit – it just might not be a big one.
If you earn no interest on the premium you bid it means that the rate you earn
will be reduced from the “statutory” rate since you will be earning the money
on a larger investment.
FIGURE YOUR MINIMUM RETURN
My suggestion is that in sales of this type you should
determine the minimum return you are willing to accept on a
property (or a type of property) and calculate the maximum
premium you can bid to acquire that return on each property
you are going to bid on. The formula for doing this is (lien
amount X statutory rate / by acceptable return on investment
= maximum bid – lien amount = maximum premium bid.)
Example: $1000.00 X 14.00% / 10.00% = $1,400.00 - $1,000
= $400.00 maximum premium bid.
PREMIUM BIDDING
WITH INTEREST ON THE PREMIUM
There are a number of states, Alabama, Indiana, South Carolina,
Missouri, Georgia and Texas to name a few where the lien is sold to
the highest bidder. In all of these states the premium or overbid
(that amount above the taxes and penalties owed and the winning
bid) earns interest.
THE SOUTH CAROLINA SYSTEM
South Carolina enacted in 2000 a change to their law which you must be
aware of. What this change amounts to is a cap on the interest that can
be earned on the overbid. In simple language, if the total amount owed at
time of sale is $1,000 then the most interest that can be earned is an
Additional $1,000.00.
For our standard $1,000.00 lien that means $30.00 dollars in the first 90
days, $60 dollars for the next 90 days, $90.00 for the next 90 days and
$120 for the last 90 days. This means the rest of your overbid can only
earn $970 in the first 90 days, $940 in the next 90 days, $910 for the next
90 days and $880 for the last 90 days. Assuming that you want a 12%
return on your overbid for 12 months, your overbid on the $1,000 lien
cannot exceed $7,333.33.
THE GEORGIA SYSTEM
Georgia has the toughest tax sale law in the country. The sale method is
bid up the premium. That is not the problem. The penalty is 20% if it
redeems in the first year and goes to 30% if it redeems after a year. The
reason that it is so tough is that the delinquent property owner has to
come up with all of the money and then “may” get the overbid portion
back within 90 to 180 days.
As an example if the taxes owed are $2,000 and the lien sells for
$100,000 the owner must come up with $120,000 to redeem with in a
year and $130,000 to redeem past one year.
BULK SALES
There are a number of jurisdictions that sell tax liens through what is
known as a bulk sale. These include New York City, several Ohio
Counties and some of the towns in Connecticut, among others. A
bulk sale is not something an individual buyer would be interested in
unless you have a lot of money at your disposal. Bulk sales require
you to bid to buy all the liens in the sale.
POST SALE
Checking out: Spend about two or three minutes per parcel
purchased and make sure you know exactly what you bid
on, and how much you bid. Do this before you go and
make your payments. When you check out with the
treasurer’s, sheriff’s, collector’s and or auditors staff, go
over every purchase and make sure that what you bought is
what they say you bought.
GETTING NAMES:
Now is the time to get the names of the various
jurisdiction staff members that you will be talking to over
the redemption period. Make sure you introduce yourself
and if possible find out how they would like you to check
on redemptions, who handles assignments, and any other
procedural tasks that you are going to have between now
and the time that the redemption period ends.
This is a great time, if you haven’t done it before now, to
ask if they can give you the name of a good lawyer who
handles tax liens and/or real estate related transactions.
The jurisdiction’s staff knows who is good in the area and
if you work at it they may tell you a name or two.
REVIEWING YOUR ACQUISITIONS:
Before you leave the area I think it is a good idea to drive by each parcel
you purchased a lien on and to take another photograph of the property for
your records. First thing you want to do is check these photos against your
due diligence photos of the property. I have had at least two instances
where the property had been a victim of arson between the due diligence
and the day after the sale. Depending on the jurisdiction this might give
you an opportunity for “a sale in error”. You probably won’t get out of the
sale, but you might. Make sure you know what you purchased and make
sure you have a photo of what you purchased – there are going to be a
number of times before the redemption period expires where you are going
to need to look at that photo.
FINANCING YOUR ACQUISITION:
Do not expect to get more than a 50% lending authority. But if you
do manage that, your $100,000 will allow you to purchase $200,000
in liens. The effect of this leverage can be dramatic. Assuming you
bought your lien portfolio at a 10% yield, with $100,000 invested
you would make $10,000 per year. If you can get 50% leverage,
your $200,000 invested would make $20,000 per year, and assuming
you borrow at 6%, you would pay $6,000 in interest, making your
net profit with leverage $14,000 – an increase of 40%. In most
cases, if you do finance your acquisition, you will be required to
deposit your certificates with the lender or set up a trust account with
the lender or their bank.
SERVICING
WHAT DOES SERVICING MEAN?
Servicing is the term that includes all the administrative tasks that
must be completed to successfully hold a tax lien portfolio through
the redemption period and, if necessary, perfect your interest in the
property if there is no redemption.
The first task when you return from the sale is to create a time
schedule of when certain tasks must be performed. If you have
obtained counsel they should be able to give you a list of all the
tasks that need to be completed and when they need to be
completed. If you haven’t then you need to make sure you
understand the statute and have all requirements noted and listed.
CONTACTING THE JURISDICTION:
We advise that you contact the taxing jurisdiction once a week to
check on redemptions. Find out who the individual is who
handles redemptions and ask them what their procedure is. Some
jurisdictions will not notify you, others will. It is my suggestion
that you check with the taxing jurisdiction no less than twice a
month. The delay of two weeks can affect your return on
investment substantially. At the time of your first contact with the
jurisdiction about redemption procedures, make sure you get the
names and addresses, with phone numbers, of all staff members
that you will need to talk with over the next few months about
your lien. Add these names, addresses, and numbers to your
worksheet for the jurisdiction.
WHAT TO DO IF THERE IS A REDEMPTION:
Make sure you know exactly what your duties are when there is a
redemption of a lien. This will vary greatly by jurisdiction. In
some jurisdictions you will be required to return the lien. In others
you may have to execute a quit claim deed on the property. There
are a few jurisdictions where you have to do nothing, but it is your
duty to understand exactly what these requirements are. Not
fulfilling the requirements can cost you to lose your investment.
NOTICES
The United States Constitution has a “due process” clause and one
of the interpretations is that no person shall be deprived of
property without due process of law. This is where notices come
into play. Every state has a requirement that the delinquent
taxpayer be notified that they are at risk of losing their property.
In most states the requirement to give this notice is the
responsibility of the lien buyer. THIS HAS TO BE DONE
EXACTLY RIGHT AND EXACTLY ON TIME.
The types of notices that are often required (sometimes more
than one) are: Notice of expiration of the redemption period,
Notice that a petition will be filed to foreclose the right of
redemption, Notice that a petition has been filed to foreclose the
right of redemption, Notice of foreclosure of the right of
redemption, Notice to appear for the court hearing. Notice of an
application for a tax deed, and so on. Each state will have their
own requirements and we will cover them in the state books, but
right now you need to understand that it is your responsibility to
file these notices and that failure to do so will, more than likely,
cost you 100% of your investment.
HOW DO YOU “NOTICE”
That will depend on the jurisdiction, but in most cases it
will require a title search to determine who is a “party of
interest”, or, in other words, who has a reason to be
notified because they have an interest, in some way or
another, in the real estate involved. It is my suggestion
that you have a professional do the title search. You can
do it yourself, but there is no allowance for errors. If you
miss somebody in your noticing you can lose 100% of
your investment.
FORM OF THE “NOTICE”
Each state, and possibly each jurisdiction within the state may
have their own requirements as to the form of notice that is to be
used. Your attorney should be able to give you the form or you
can talk to the staff at the court house and they will probably be
willing to give you sample forms. Remember that you are now
dealing with legal documents and you are not allowed to vary from
the court approved forms.
Arizona, as an example, requires that you notice the property
owner no less than 30 days prior to the hearing for foreclosure
of right of redemption and no more than six months prior to the
hearing. This description of a window of time for noticing is
not rare and if you notice 29 days before the hearing or seven
months prior to the hearing you have a very high likelihood of
losing your investment. There is a term in the law “time is of
the essence”, this means that proper timing is absolutely
necessary. And in the case of noticing, time is always of the
essence.
The specifics of noticing vary greatly by jurisdiction, but
some of the methods that may be required are: Personal
service by the Sheriff, Certified letter to each party of
interest, A legal advertisement run in a newspaper of
general circulation in the jurisdiction for a specified period
of time, or even posting of a notice on the property itself.
Some jurisdictions may require all of these methods.
WHY DO YOU NOTICE?
Again, in every jurisdiction that I am aware of you have to notice all
parties who have an interest in the property. You should also
determine if any of these parties meet the following descriptions: A
member of the military. A person who is incapable of managing
their own affairs due to physical or mental handicap. A minor child.
The reason you would like to know if any of the interested parties
meet these descriptions is that you may have additional duties to
perform if they are. Again, you must consult your attorney about
this because you cannot afford an error.
RESPONDING TO NOTICES:
During the period of time that you hold the lien you will be a party
of interest yourself. This means that you will, more than likely,
receive some notices yourself. These can be any of a number of
things. Demolition notices, Notices to clear weeds, Nuisance
notices, Bankruptcy notices and almost an infinite listing of other
notices. There is one thing you need to know about these notices,
NEVER IGNORE THEM.
ASSIGNMENTS:
The major disadvantage to purchasing tax liens is lack of liquidity.
What does lack of liquidity mean? It means that it is not easy to
sell the investment and turn it back into cash.
With a tax lien you assign your interest in the tax lien to another
person. This assignment is a document that needs to be recorded
with the taxing jurisdiction. The problem you will have is finding
an individual who wants the tax lien you purchased. I always
suggest that you try to get an idea of who was bidding on the liens
you purchased and get their contact information so you can
approach them if you need to liquidate your portfolio.
In addition there are a number of institutional firms that might be
interested in buying your liens, assuming you can give them an
adequate due diligence package. If you have followed our
suggested due diligence methods and kept your information, you
should be able to prepare an adequate due diligence package for
prospective buyers.
If you are attempting to sell your tax liens you must expect to sell
them at a discount. This does not necessarily mean you will take a
loss, that will depend on how long you have held the liens, but you
will more than likely have to sell them at a discount of some sort.
Why is this? Simple – the prospective buyer is going to incur a
substantial expense in verifying your due diligence and they are
going to want to get that expense back in some sort of discount. In
addition, they may have more stringent criteria as to what they will
purchase and they may well feel that your portfolio has more risk
than they will accept at the return that you purchased the portfolio
for. So expect some sort of discount.
THE FORM OF THE ASSIGNMENT:
The actual document for assignment should be done by competent
counsel or the approved form should be acquired from the taxing
jurisdiction, if they have a form available.
COST OF THE ASSIGNMENT:
Be aware that some jurisdictions have quite high fees for
assignments. Polk County, Iowa is one such jurisdiction. I do not
know what the current cost for an assignment in Polk County, but
at one time it was $100.00 per lien.
SUBSEQUENT TAXES:
The term “subsequent taxes”, or “subs” will be a term you will be
come quite familiar with. The subsequent taxes are the taxes that
become due and payable subsequent, or after, the tax sale is held.
That in itself is not the significance of subsequent taxes. What is
significant is the effect that subsequent taxes have on your position
as a lien holder.
There are a number of jurisdictions where your failure to pay the
subsequent taxes can put your position as a lien holder in jeopardy,
at least as far as getting the property if it does not redeem.
Arizona is an example of where failure to pay the subsequent taxes
can hurt your position. If you fail to pay the subs a new lien will
be sold and the buyer of the new lien will have the right to redeem
you out, meaning they can redeem your lien and take away your
chance to get the property if the lien doesn’t redeem.
The simple fact of the matter is that you want to pay the “subs”
unless you think you made a mistake in buying the original lien.
Why? , because you are going to have to pay them before you can
get the property. Unless you can make a higher return on your
capital elsewhere and failure to pay “subs” doesn’t threaten your
position in any way, you should go ahead and pay the “subs”.
There are also a number of jurisdictions where, by custom, not by
law, the prior owner has the right to buy the subsequent lien. The
benefit of this system (which to my knowledge is not codified
anywhere) is that you have the opportunity to “trade up” your return.
For example, let’s assume you purchase a lien in NJ at a yield of 6%
and the next year you have the prior lien and, by custom, are allowed
to buy the new lien at 18%. The net effect is that you have
substantially raised the yield on your investment. A similar system
operates in a number of states where the bidding is for “percentage of
ownership”. You buy the lien for a 1% ownership interest in year one
and, because you have the “prior”, are allowed to buy the
“subsequent” lien for 100% ownership interest.
It is your responsibility to be aware of what the rules on “subs” are
in the jurisdiction you are buying in. There are several jurisdictions
where you may be required to pay “subs” as part of the original
purchase – you need to know if this is the case. There are a number
of jurisdictions where the “subs” may pay a different rate than the
original lien purchase – you need to know this also.
Final comment on “subs” – if you are buying a tax lien that is
$2,000.00 of back taxes for 1 year and the redemption period is
three years, you will have invested around $8,000.00 by the time
the redemption period ends and you go to deed. I realize it is
obvious, but I will say it anyway – make sure you plan on it so you
have the money. I have seen liens lost because they “forgot” about
subsequent taxes.
LOST CERTIFICATES:
First thing I will say is “Don’t lose your certificates!” Besides the
obvious reasons, there are a number of other reasons why you don’t want
to lose your certificates. One of the main reasons is that a tax lien
certificate is a negotiable instrument and is subject to all the risks that a
negotiable instrument has. It could be forged or sold and redeemed.
In a number of jurisdictions it isn’t a really major hassle if you lose your
certificates, it is only a minor hassle, but in all jurisdictions it will cost
you money to get a replacement and in some jurisdictions you will have
to go to court to get it replaced and, unless it is a fairly large certificate,
the expense of going to court to get it replaced will wipe out any return
you might make. In some other jurisdictions you will be required to
post a bond to get a duplicate certificate. There are some very
progressive jurisdictions that have gone to a “book entry” system and
there are no certificates to lose, maybe someday they will all go this way,
but in the meantime make sure you know where they are, make sure they
are secure, and DON’T LOSE THEM!!
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Tonight we may find some money you are owed, so pay attention please!!
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REDEMPTION
All tax lien states, with the exception of Kentucky, have a stated
redemption period in the statutes. The redemption period is the time
allowed for the property owner, or, in some cases, any “interested
party” to redeem his property by paying the amounts owed on the
tax lien. This time, which varies from a few months to as long as
four years, is stated in the tax sale law of the jurisdiction.
WHO CAN REDEEM?
This varies greatly by jurisdiction. In some jurisdictions anybody
can redeem a tax lien, in others only a person with “an interest in
the property” can redeem the lien. Who are “parties in interest”?
The property owner, his or her heirs, the mortgage company,
anybody with a lien on the property, including, in some cases, a
prior or a subsequent tax lien buyer. Why does it matter? There
may be occasions when you do not want to accept the redemption if
it isn’t from a party who can legally redeem the lien. Make sure
you understand who, under the applicable law, can redeem the lien.
OVERBID ERRORS:
The taxes, interest, penalties and costs for the parcel were
$2,000.00 and you bid $25,000.00 because you thought it was a
three bedroom residential property that was worth at least
$75,000.00, but you made a mistake. It turns out to be the vacant
lot next door to the three bedroom residential property. The vacant
lot is worth $5,000.00 and it isn’t going to redeem because the
property owner gets the $23,000.00 over bid or premium if he
doesn’t redeem and the property goes to deed.
What do you do if only a “party in interest” can redeem? You find
a party in interest other than the property owner and pay them to
redeem the property. It can be a contractor with just a mechanics
lien for $200.00 on the property, it can be the mortgage company
or someone with a second mortgage. It will probably cost you a
few hundred dollars more than what it would cost you if you can
redeem yourself, but it will still save you thousands of dollars.
WHAT DO THEY PAY TO REDEEM?
This depends on the statute for the jurisdiction, but they have to
pay you the statutory interest rate or penalty rate. In most cases
the taxing jurisdiction will calculate this amount for the taxpayer
and you will not be involved. What you want to know is what the
redemption amount should be, because there can be errors made
and you want to know if they have been made.
There are a number of jurisdictions around the country that take
weeks, and in some cases months, to get you your money. In most
cases they will send you a redemption notice. You then have to
send in your certificate or a quit claim deed to the jurisdiction and
only then will they send you your money. Since every day of
delay reduces your return on investment it is very important to
react quickly and to keep on top of the jurisdiction about getting
your payment.
WHEN DO THEY REDEEM?
I have found that taxpayers usually pay when it costs them the least
amount of money. What does this mean – it doesn’t mean they pay
at the first opportunity, what it means is that if the statute gives them
a reason to pay at a certain time they will pay at that time
As an example, Indiana has a change in the penalty rate at six
months. It goes from 10% to 15% at six months and one day.
Because of that you will find a large percentage of liens will
redeem at five months and 20 days. In most states you get a rate
for any part of a month that the lien is outstanding. In those states
there will be more redemptions in the last week of the month than
in the first week of the month.
There is one state, Illinois, that allows you, as the lien holder, to
extend the redemption period. In the other states you want to avoid
making deals directly with the property owner that are not covered
directly by the procedures stated in the statutes. The reason is that
these deals can invalidate your lien and leave you with an
enforceable contract with the property owner, but no security in the
form of real estate. Make sure you discuss these issues with your
attorney prior to making any agreement that is not specifically
covered by the statutes.
EARLY VERSUS LATE REDEMPTION:
Which is better? There are pros and cons to both. An early
redemption usually means a higher annualized return on your
investment.
If you are going to get a 12% penalty on a $1,000.00 investment
you are going to make $120.00 if the lien redeems in the first week
or last week of the year, so a quick redemption in a penalty state is
a plus. It can be a plus in a jurisdiction where you get paid a set
rate each month, if you have a place to reinvest the money right
away. Another benefit of an early redemption is that it will usually
save some of the expenses of title searches or other expenses
related to noticing the “interested parties” on the lien.
A late redemption has the benefit of making a good return on your
money for a longer period of time but it usually means that you
will incur additional expenses that are required to meet the
noticing requirements to perfect your interest in the property. It is
not unusual for a lien to remain outstanding for the full redemption
period and to redeem at the last possible moment. You do make
additional income because of the longer holding period, but often
times you may incur expenses that may or may not be reimbursed
because of the longer holding period and the need to prepare to go
to deed.
EXPENSES AND REDEMPTIONS:
A number of states allow you to add expenses that are incurred to
the amount the property owner has to pay for redemption. The type
of expenses that may be chargeable are title searches, cost of
noticing or advertisements, and legal fees. This can be substantial
and, if possible, you want to get them back. Make sure you know
if that is the case in the states you are buying in and always, I
repeat, always file those expenses immediately. If you don’t the
lien could redeem and you will be out the expense money.
GETTING THE PROPERTY
DO YOU WANT TO?
The first question you need to ask before you spend one more cent
on notices or attorneys or anything else is “Do you want this
property?”
What are the reasons you don’t want the property?
•shouldn’t have bought the lien in the first place
•The house may have burned down
•the commercial property may have had an environmental incident (I
love that term – they spilled 2,000 gallons of PCBs on the property
and it is an “incident”)
•The taxing jurisdiction might have demolished the structure in the
ensuing time period
•That cute little bungalow you bought the lien on two years ago is
the local gathering place for the merchandising of “controlled
substances”
•The local chapter of the “Hells Angels” now use the house for their
headquarters (go ahead – you evict them, me – I’ll pass).
My suggestion is that you pull out your chapter on due diligence
and do it all over again – at least the part about looking at the
property
I would suggest spending a little money and make sure there are no
environmental problems. The reason is very simple, once you
become part of the “chain of title” by going to deed, you are
responsible for the clean up cost.
WHEN DO YOU DO ALL OF THIS?
The answer will vary by jurisdiction, but I do it before I start
spending money on title searches, attorneys, or noticing. If, under
the statutes you are working under, this is six months or so before
the end of the redemption period, you are going to want another
quick drive by before you actually file for deed.
HOW DO YOU GO TO DEED?
That will depend on the jurisdiction, but the basic procedure is as
follows: First you have to notify everybody who has an interest in
the property (see the chapter on Notices). Secondly, you are either
going to apply for a tax deed, or your are going to foreclose on the
tax lien, or you are going to foreclose on the “right of redemption” .
This is when you really do need a lawyer. All of these actions will
take place in a court of law, or they will have to go through a court
hearing, and there is zero tolerance of mistakes
TYPES OF DEEDS:
There are a couple of different types of deeds (although there are
probably twenty different names for them). The best is a judicial
deed, where there has been a hearing and the court has directed the
Treasurer or the appropriate official to deliver a deed to the lien
buyer. A judicial deed will usually give you “marketable title”.
ADMINISTRATIVE DEED:
The other type of deed is often referred to an “Administrative
deed”. In the case of this type of deed you will have to file a
“quiet title” action. This is not a major problem, since you have
already done the work needed. In a quiet title you notify the
parties in interest (sound familiar?) and tell them to appear if they
want to claim they have an interest in the property. Since you
have already notified these folks prior to applying for the deed,
you should have no trouble with a quiet title action.
TREASURER’S DEED:
Please be aware that I have done a lot of transactions where I got a
Treasurer’s deed and did not get quiet title and was able to sell the
property using a quit claim deed. This will really depend on the
sophistication of the buyer and whether they intend to resell the
property in a short period of time or hold the property for a
number of years.
LAWYERS:
I want to take a moment or two to discuss the subject of lawyers.
Much maligned in our society, they do, in fact, provide some
valuable services. If you are going to be active in tax sales,
especially tax lien sales, you want to have a good lawyer.
How do you find a good one? When we were starting up the tax
lien operation at Kidder-Peabody in the early 90s we found them
from the folks at the court house who dealt with them each day.
When you meet with the lawyer – negotiate with him and try and
get a flat quote per case that he will handle. If you know it is
going to cost you $400.00 per case then you can adjust your
bidding accordingly. The costs vary greatly by state, and in some
states you can add the legal costs to the amount owed on the lien.
ONCE YOU GET YOUR DEED:
The first thing you should do is insure the property. Up until this
point in time you have not had an insurable interest in the property
(you had what is known as an inchoate interest – meaning a future
interest). Now you do, get some insurance so if something happens
you don’t lose your investment. You want, if possible, to get
insurance for the replacement cost – otherwise they may try to limit
your recovery to what you paid for the lien, and that would not
make you happy.
If you are planning on selling the property, you need to decide
what type of sale you want to do.
•A conventional sale where the buyer goes and gets their own
mortgage is very clean, but may be more difficult with a tax lien
property. Most of the properties you get in a tax sale are in lower
income neighborhoods and although, red lining is not supposed to
exist, you may find your buyers have difficulties getting financing
because of the area or because the property has come from a tax
sale.
•There is a ready solution for you that you should be able to do and
make a substantial additional amount of income – provide financing
for the buyer yourself. Since you bought the property for probably
less than 20% of market value, you can ask the buyer for a small
down payment and set up a mortgage for them yourself. The
benefit of this is that you can determine who you sell to and what
rate you receive. The disadvantage is that you now are in the
mortgage business, which may not be what you desire.
A third method is the “rent to own” program where you rent the
property to someone with a portion of the rent going toward a down
payment – after a period of time you have received your down
payment and now you carry the paper for the buyer. You have
more than gotten your money out of the property through rent and
the down payment and you still have an interest in the property.
Another prospective method of disposing of the property is to donate
the property. You need to talk with your accountant about this, but it
would seem to me that you can probably get credit for the market
value of the property when making a donation
In my experience, a very large percentage of the single family
residential properties that we took deed to were rental properties.
Right after you insure it you inform the tenant that the rent check
will now be made out to you, and you ask them if they are interested
in buying the house if the terms are right. We sold a number of
houses to the tenants on “contract sales” or where we carried the
paper.
We will start at 5:30 pm Pacific, 6:30 pm Mountain, 7:30 pm
Central and 8:30 pm Eastern
Tonight we will show you other ways to profit from tax sales
The manuals are available now
To download manuals or to view videos go to:
www.taxsalelists.com, sign in, and click on “my webinar” on the gray menu bar at the right top of the
page next to “my account”.