Debunking the Tax Lien Certificate Myth - Posted by Jimbob


#1

Posted by Redline on December 22, 1998 at 12:09:44:

Sounds like a good deal for an anti-government terrorist faction. Maybe an ad in Soldier of Fortune?

RL

(just kidding - don’t be upset!)


#2

Debunking the Tax Lien Certificate Myth - Posted by Jimbob

Posted by Jimbob on December 21, 1998 at 16:59:55:

Here’s an article I ran across recently, interesting reading:

Tax Lien Certificates Don’t Live Up to Promises

Lured by promises of “guaranteed” interest rates of up to 50%, more and more investors are turning to tax lien certificates as a way to cash in on the current real estate boom. But these certificates, which are issued based on the value of an individual’s delinquent property taxes, are really quite volatile and are sometimes offered fraudulently.

What exactly are tax lien certificates, anyway? When people fall behind in their real estate taxes, the local government puts a lien on the property. The government then sells the liens to investors in the form of certificates. If the property owner eventually resumes tax payments (and most do), then delinquent taxes, penalties and a specified interest rate are forwarded to the investor. If the owner never pays, the certificate holder has the right to foreclose on the property to collect the money.
Sounds like a good deal, right? Of course it does - you haven’t read the fine print yet.

Rates Are Misleading First, the interest rates promoted are far shy of what investors actually get. Why? Because the certificates are sold to the public through auctions and go to the bidder willing to accept the lowest interest rate. So a certificate offering 18% or 24% could be considerably bid down by investors. Last year in Florida, for instance, certificates starting at 18% were eventually bid down to a mere 3%.

And as for the properties, well, horror stories abound. Some counties have been known to auction land on sides of mountains, under water, or in the middle of the road. While a homeowner might resume tax payments to avoid losing his home, it’s less likely that owners of these properties will be so eager to pay. Municipalities also have been known to sell certificates for shabby buildings, but not for the land itself. If the building is later torn down, certificate owners may lose their entire investment.

Investigate the Property
To avoid this, promoters say, you should investigate the property yourself before you go to the auction. But what if the property is hundreds of miles away? Are you willing to spend your Saturdays examining properties you might be interested in purchasing? You can hire tax lien investment firms to investigate for you, but that, too, has its problems.

Most of these firms charge a “consulting” fee of 15% to 25% of the investment. Thus, if you only earn 8% annually, it could take you two to three years just to recover the management fees. The firm takes an even bigger bite if you foreclose on the property; typically, the sales contract will stipulate that the firm gets 50% of any profits from foreclosure.

The Cost of Foreclosure
And if these reasons aren’t enough, consider this: It’s unlikely you’ll make any money at all from foreclosing if the owners don’t pay. You must hire a lawyer just to start the foreclosure process, which will cost you $1,500 or more. Even then, the primary mortgage holder (the bank) can legally step in and pay off the lien to the property. But you could have bigger problems if the bank doesn’t want the property.

Because if the bank lets you foreclose on the property, chances are it knows something about the property’s condition or value that you don’t. Some investors, for example, have foreclosed on properties only to discover they must shell out thousands of dollars for hazardous waste cleanup. If you are offered a chance to invest in these certificates, don’t. There are far too many risks, and you are more likely to lose some, if not all, of your investment.


#3

Re: Debunking the Tax Lien Certificate Myth - Posted by Bud Branstetter

Posted by Bud Branstetter on December 23, 1998 at 10:42:56:

One of my favorite subjects. The article is absolutely correct. You can’t make money in tax sales.

That one I did that rented out for $600/mo and $11000 profit upon redemption was a fluke. And that one that cost $9000 and sold for $42,500 after fixup was also. I just can back from San Antonio where I drove by several that I bought at tax sales and sold owner financed. But they were a shot in the dark and could never happen again. I am reminded each time that the monthly payment comes in that there isn’t a way to make money in tax sales. But then a little knowledge is dangerous. Bidders have bid on land not knowning there was no house. Or a house that had liens of more than the property was worth. Maybe those were the seminar guys that the article spoke of.


#4

Here is the Truth - Posted by Mark R in KCMO

Posted by Mark R in KCMO on December 22, 1998 at 12:16:28:

Jimbob,

Knowledge is the key to this as it is any type of investments. I had the fortune to spend several days with John Beck, and learned many, many stratigies for the tax lein investor.

You can not blindly invest in leins, anymore than you can blindly invest in other real estate.

Tax leins are one area where if you do your home work, and you can either get your money back with interest, OR you can win the jackpot and get the house, or the land.

Your profit is made going into the deal!
Hope this helps
Mark R in KCMO


#5

Re: Debunking the Tax Lien Certificate Myth - Posted by Chris(FL)

Posted by Chris(FL) on December 21, 1998 at 19:54:50:

View investing in a tax lien certificate as investing in the house it represents. Would you buy the house site unseen? Wouldnt you check title first, and comps? Find the value to make sure you are buying at a discount? Tax liens can be placed on any real property that has delinquent taxes on it. In my county in Florida, looking for a good TLC involves sorting out the thousands of worthless ones, including underwater, the land under high-tension wires with utility easements, etc. You can’t just buy a TLC at random and expect to make money at it any more than you can just buy a house at random and expect to make money on it.

Chris(FL)


#6

The myth about your myth - Posted by Rob FL

Posted by Rob FL on December 21, 1998 at 19:53:47:

I can only speak for tax liens in FL. When I was 23 years old and knew minimal about RE (compared to now). I bought about $10,000 worth of tax certificates in a 2year period.

They do auction them off to the lowest bidder. However in Orlando, Orange County alone auctions off nearly 15,000 in a 4 days period. The general rule of thumb they use (because of time constraints) is anything under $2,000 goes for 18%. (I don’t want the high priced ones anyway due to higher risk). So I bought about $10,000 worth of $1,000 or less tax certificates. ALL at 18% interest. WOW! I haven’t bought any more since 1994 due to my investing in rentals and rehabs, but I still I have 2 tax ctfs left and they are on the most worthless of all the ones I bought. (But my total principal uncollected now is down to about $400 but the interest due on them makes them worht about $800 now) I have researhced foreclosing on them but have decided not until the last possible moment because they are undesirable properties. But I have made over $1000 in interest off of the ones that were redeemed. (Most got redeemed within a year or 2 of my purchase) And do you know what, I never looked at any of the properties I bought. (You can’t in the auctions here anyway — they have 15,000 properties being sold to 500 investors — far to busy)

As far as Florida goes tax certifictes are an excellent investment.

I bet whoever wrote that article is either making 5% in his CD at the bank or praying ever morning that the stock market doesn’t drop another 100 points today. Oh well.


#7

Re: Debunking the Tax Lien Certificate Myth - Posted by Ben

Posted by Ben on December 22, 1998 at 12:13:06:

I am a large investor of tax lien certificates in NJ and a tax foreclosure attorney. Tax liens in and of themselves are not a rip-off. They have the potential to be a safe, high yielding instrument, if pursued
correctly. What is a rip-off are late-night seminars giving misleading information about (lack of) competition, “government guaranteed” rates of return, etc. If you do your due diligence and invest conservatively, you will do fine. Naturally, if you throw darts at a dartboard of liens you will get killed. Check out the tax lien exhange at www.tle.com,
it is chock full of information and has thousands of
secondary market liens for sale. Tell them Ben Caiola
referred you.
rates


#8

Re: The myth about your myth - Posted by BankRobber

Posted by BankRobber on December 21, 1998 at 22:08:12:

As far as Florida (and every other State) goes tax liens were an excellent investment. Large institutional investors such as Transamerica now bid the first year yields down to about 6% in most counties. Since in FL tax foreclosed properties must be submitted for a public auction which gives no advantage to the former tax lien cert holder I don’t understand why the desirability of the property would affect your decision to foreclose.


#9

Am I missing something here? - Posted by Soapymac

Posted by Soapymac on December 21, 1998 at 20:40:21:

Rob,

Help me to understand your post.

  1. In 1994, you bought $10,000 in tax lein certs.

  2. You have two certs as yet uncollected on.

  3. Simple math means you have received $9,600 of your investment PRINCIPAL.

  4. You have made $1,000 interest from those that WERE redeemed.

  5. Your total receipts, therefore, are $10,600

  6. Subtracting your investment leaves you $600 “profit.”

  7. $600 divided by four years = $150 per year profit

  8. $150 annual profit on a $10,000 investment = 1.5% at simple interest.

  9. If I am correct, a CD over that same time frame, would have made more net after tax income than this.

What am I missing?

Cordially,

Soapymac


#10

Re: The myth about your myth - Posted by Rob FL

Posted by Rob FL on December 22, 1998 at 11:29:27:

Both of the ones I have left are 2 acre or so vacant parcels in the middle of the woods about 3 miles from the nearest road or building. Want to buy them? That is why I haven’t foreclosed yet.


#11

Re: Am I missing something here? - Posted by Rob FL

Posted by Rob FL on December 21, 1998 at 21:24:53:

What you are missing is that most of the ctfs were redeemed years ago.

I bought the tax ctfs at auctions in May 1993 and May 1994. They are at 18% annual interest. However many of them get redeemed within a year or two like I said.
I had a big one come in back in 1996. It was on 2 duplexes. I bought the tax ctf for about $1000 and 3 years later it gets repaid to me for around $1600. (Remember the rule of 72. Divide the interest rate by 72 and that is how many years it takes to double your money. 72/18= 4 years)

In FL if the taxes are delinquent after 2 years they can be foreclosed, so about roughly 70% or so of the time you get paid off within the 2 year period with all your interest.

The 2 ctfs I still have left are the only ones I have owned since 1996.

Hope that clarifies things.


#12

Re: The myth about your myth - Posted by Kenny (FL)

Posted by Kenny (FL) on December 22, 1998 at 16:19:19:

Just curious about what section of “woods” in Orange county? Seminole? or Oseola? and how much you wanted.
I have some relatives in Longwood that might be interested.
Kenny(FL)