Like millions of Americans you are probably wondering
how you can attain the highest and safest return on your savings in the
shortest period of time. Finding the right investment vehicle can be
very difficult to say the least. While the stock market can give you
stable long-term appreciation potential if you diversify and hold for a
number of years, one downturn and years of gains can be wiped out
overnight. Unfortunately, most Americans will stop looking for
other ways to obtain higher yields. Most will leave their money in the
stock market with the hope that they will accumulate enough wealth to
retire before another market downturn occurs. These worries do not
end once retirement begins however, since the same investors will have
the added burden of frantically watching and trying to ‘predict’ the
market to make sure their nest egg stays intact.
In my work as a
financial consultant and in my study of Finance, I formed the opinion
that that the greatest obstacle to attaining wealth through the stock
market is the efficient market hypothesis (‘EMH’). This
controversial theory is usually only discussed in academic circles but
it affects each of us everyday. EMH states that it is
impossible to beat the market because prices already incorporate and
reflect all relevant information. Proponents of this
theory state that it is pointless to search for undervalued stocks or
try to predict trends in the market because the market (i.e., buyers)
has already taken into account risk and growth factors, economic trends,
and future income when stocks are traded. While I don’t
completely agree with EMH theory it does present one of the unseen
hurdles, of trying to increase the value of a portfolio of stock
investments. This misunderstanding of market principles have left
millions and millions of investors with the incorrect notion that they
can beat the market thereby finding a way to financial freedom.
This is a very difficult task and practically impossible in the
short-term (i.e., 10 to 15 years).
My
background in corporate finance and real estate law has enabled me to
recognize some alternatives to the nauseating stock market ride we all
despise. I began to look
for investments which provided more security to the investor.
Traditional real estate investing was an attractive possibility,
until the headaches of property management left me wary of buying too
many properties. Even worse, when I factored in maintenance, property
taxes, vacancies, and income taxes the results did not justify the
means. I was burned out on
tenants, vacancies, collecting rent, and endless inventory of ‘We Buy
Houses’ signs I had to post everywhere.
One
day while working as a business consultant at one of the largest tax
collection entities in the United States, I learned that there is a
state-mandated process which allows for a stated non-fluctuating return
on your investment. The
process is called tax lien investing or ‘tax
certificate’ investing.
There Is
Another Way: Tax Lien Instruments
If an owner of real
property does not pay their property taxes the department of revenue or
other appropriate tax collection entity will file a lawsuit to collect
the unpaid taxes, and if such taxes are not paid, the rights to the
property or to the tax lien itself will be sold at a public tax auction.
The
taxation statutes and general laws of almost all states mandate a tax
sale foreclosure process that allows common citizens, just like us, to
purchase tax sale properties. Selling tax lien certificates allows local
governments to collect the lost revenue from unpaid property taxes.
Here's how it works:
At the public
auction a tax lien certificate or the tax deed will be sold with an
opening bid made up of the amount of back taxes owed. This amount will
usually be comprised of:
- Delinquent Property Taxes
- Interest Charges
- Penalty Fees
- Legal Costs
- Administrative Charges and Fees
When a tax lien
certificate or a tax deed is sold, the purchaser acquires the rights
held by the county or taxing unit.
Tax sales may be held annually, semi-annually, quarterly, or
monthly. There are no restrictions for bidding at these sales (i.e., you
do not have to be a real estate agent, attorney, professional investor,
etc.); however you usually must be able to pay the bid amount within a
short period of time.
For a specified
period of time the delinquent taxpayer has the right to buy back or
"redeem" the property. This is called the ‘right
of redemption’. In
many cases this redemption period may be as short as 6 months or as long
as 4 years. If the delinquent owner does not redeem the property during
the specified redemption time period, then the successful bidder is
entitled to the property regardless of the purchase price. Let me say
that again: the successful bidder would be the owner of the
property even if it was bought for $5,000 and it has a market value of
$150,000!
That sounds great,
but what happens if the delinquent owner decides to exercise their right
of redemption? Does the investor lose all of the money invested at the
auction? No, not at all! In that case they (the delinquent property
owner) must pay the investor an interest penalty charge on top of what
was originally paid at the tax sale auction. This interest charge can
range from 16% to 24% (for redemptions occurring during the first year)
or up to 50% (for redemptions occurring during the second year). What
this means is that you will get back the money originally invested plus
the interest penalty charge. This amount can equal a significant rate of return for the
investor.
Here’s What I Learned: There is a way to earn a guaranteed 16% to 50%
per year on your investment dollars if
you use proper techniques. You can purchase high yield
investments designed to protect the investor, but
you have to know which ones to stay away from. You will either obtain rights to tax foreclosed or tax
encumbered property or earn a high rate of return on your money if you follow the right steps in the right order.
So in most cases either you purchase real property for cents
on the dollar or gain a high rate of return on the money you used to
purchase the property! You
do need a firm knowledge of the process and some professional help.
In fact, this was articulated in a fairly recent article:
What Effect Can Proper
Investment in Tax Certificates Have?
Quite
simply the effects are astounding. For example, let’s take a
hypothetical investor, Investor A. Investor A places $3,000 in
a retirement plan at age 30 with an average rate of return of 7% per
year for the next 20 years. This investor’s money would
double about once every 10 years. At the end of the investment
term and at age 50 the investment would equal approximately $11,609.05.
In reality, since most banks today are only paying 1.5% to 2.8% per
year, Investor A would have only $5,000 at age 50. Even worse, income
taxes will greatly reduce the compounding effect. As a result, Investor
A will barely keep her money ahead of inflation!
Now let’s
take Investor B, who simply uses a strategy of investing in tax lien
certificates with an average annual return of 20%. At age 30
Investor B starts with $3,000. Investor’s B’s money would
double about once every 3.5 years. As a result by age 50 the
initial $3,000 would have grown to over $115,000. If that
investment was continued for just another 10 years that initial $3,000
would now have grown to well over $700,000! Investor B also
uses a self-directed IRA to administer each tax lien and tax deed
purchase. Investor B’s
funds will grow tax free, thereby allowing a small investment to easily
grow into a million dollar portfolio. NOTE: One scenario missing
from this hypothetical is the effect to your return on investment if the
property backing the certificate becomes yours. A single tax lien
certificate could yield you a profit of $50,000, $60,000, or more if you
sell the property backing the lien. Re-investing this amount would
exponentially increase your returns!
Is This For Me?
As you can
see investing in tax lien certificates allows safe use of the laws of
compounding to increase wealth. A well researched strategy will
allow you to safely bypass the ‘yo-yo’ effect of stock market
investment, since each tax lien certificate has an incorporated ‘safety
net’. This safety net is quite literally the real estate which
backs the certificate. Best of all with proper research techniques
there is no reason that the real estate will not be worth much, much
more than the face value of the certificate itself.
So you either get the stated rate of return set by state law or
you obtain the property. That is a true safety net. Contrast
this to stock market investment: Do companies on the New York Stock
Exchange provide a safety net like local governments provide?
Obviously, they do not.
While some
risks do exist with tax lien investing, these risks can be avoided by
conducting simple research. Proper and systematic research techniques
will award the tax lien investor with numerous benefits and in most
cases very few headaches. In
addition, the low maintenance aspect of tax lien investing makes this a
viable option to many active forms of real estate investment. Investors
who do not wish to become full-time property managers or who desire a
passive, high yield, part-time investment will delight in tax lien
opportunities. Investors with substantial capital can also utilize the tax
lien sale process to quickly increase cash reserves. Full-time investors who desire property ownership can also
take advantage of liens which have expired redemption periods.
These liens are available in every tax lien state.
Proper Information is the First Step!
The first step to conquering any new investment technique is proper
information. I believe in learning not only what can go right with an investment technique but also what can go wrong.
This does not mean focusing
ONLY on the benefits. It DOES mean thoroughly covering what could go
wrong and relentless dedication to risk reduction.
Second, the information you obtain
should be accurate and must cover all risk scenarios. As a licensed
attorney, I have taken a firm stance to produce materials that are
legally precise and fully detailed.
Don’t be fooled by anyone who fails to cover all the risk
aspects of a particular investment.
Frankly, that is a short-sided strategy that will surely lead to
failure. My systems allow
you to obtain the most up-to-date and specific information available
today in the clearest manner
possible! Of course
sometimes being accurate and detailed is worthless, unless the student
can understand, retain, and apply the material presented.
Third, the student must be able to
understand the material and apply it. Forget about ‘legalese’
(i.e., lawyer-speak) and hard to grasp concepts.
I don’t believe in complex language which can slow the
understanding of these concepts. Applying
the techniques in context is very important and is usually missing from
the learning process. This concept is called context based learning. Context based learning ensures that after
you learn a technique or rule you are asked to apply it in a slightly
different context. This reinforces your learning process and
ensures you can perform when it counts.
Learn
The Nuts and Bolts of Tax Sale Investing
If you found this article helpful and interesting then you
may want to consider learning more about this powerful investment
technique. The article you just read was merely a brief sample of the
clear and precise information offered by Texas Attorney, Darius M.
Barazandeh on the subject of tax lien investing.
If you want to learn more about earning a secure
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4 Months of Telephone Support with Author Darius
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charge my law and consulting clients $150 per hour of my time.
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think this is the most important element of any program. It is
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