Tax Lien Investing

Last time we discussed short sales.  Briefly, today I want to discuss tax liens with a future discussion regarding tax deeds.

A tax lien is a claim attached to any piece of real or personal property for the satisfaction of some debt or duty.  Pretty confusing huh!  What it means is that someone didn’t pay their property taxes and now the government is after them!  As usual that isn’t a good thing. 

What’s bad for the neglectful tax-payer is good for the tax lien investor.  Here’s why:  These tax lien certificates are sold by the local counties to investors.  What do the real estate investors do with them?  Well, they hold onto them until either one of two things happen.  First thing that can happen is that the negligent homeowner pays the county the back taxes along with fees and interest.  The second thing that can happen is that the homeowner doesn’t pay the back taxes and the owner of the tax lien forecloses and takes the property free and clear.

Did you get that?  Free and clear, meaning that even if there was a mortgage it is now history and you have a house for the price of one year’s worth of back taxes.  As you can probably guess, that doesn’t happen all that often.  As the bank understands this rule they will typically step in if the homeowner doesn’t pay.

That leaves scenario B.  In this case the homeowner pays back taxes, fees and interest.  The interest rate varies from state to state (even county to county) and often the investor has the opportunity to bid on the interest amount that they will receive when purchasing the tax lien.  However, typically, the lien returns a high rate of interest.  In Arizona the rate is 16% (although that rate can be bid down by competing investors).  Meaning that if you know what you are doing – or you hire someone who knows what they are doing, it is pretty easy to return virtual risk free double digit returns on your money through tax liens.  Additionally, the more you participate the more likely it is that you will hit a home run of obtaining a house simply by purchasing a tax lien at your local county auction.

I suppose I should qualify the above statement that the investment is virtually risk free.  It is, of course, not risk free.  There are always risks in any investment.  The big difference in tax lien investing is that, contrary to the stock market, the investor controls the vast majority of the risk by choosing the correct type of property and following the county procedures.  In future posts I will discuss some of the specific ways to avoid risk in this investment niche.

Short Sales

Following up on yesterdays introduction, I'd like to discuss a hot real estate niche going on right now - short sales.

A short sale occurs when a bank agrees to allow a homeowner to sell their house for less than is owed yet still consider the mortgage paid off.  This is a great solution for everybody involved and here's why:  The homeowner gets out of their upside down mortgage and get to start new without the blemish of a foreclosure on their record.  The bank saves itself the hassle and cost of the foreclosure and auction process.  The bank also, importantly, no longer need to carry reserves against the defaulted mortgage - enabling the banks to lend higher amounts of money for the same amount of cash it has on hand.

The community is also a big winner in a short sale.  When a person who can't pay for their mortgage is replaced by someone who can pay for their mortgage the result is a more stable household.  More stable households create more stable neighborhoods.  Stable neighborhoods have less crime and create a higher quality of life for the people in them.  Naturally, potential home-buyers will be willing to pay more for a property in a stable neighborhood than an instable neighborhood.  Related to this is an interesting statistic mentioned in the New York Times that half of all foreclosed homes are ransacked by either former owners or vandals.

Lastly, short sales are very lucrative for the investor.  In a short sale it is possible to create your own market with a seller (the bank) who also happens to be very motivated due to the reasons mentioned above.  Additionally, there is (if done right) no competition from other investors, which means there can't be any bidding war.  The deal is between the bank and the seller and if they agree with your rationale - or even if they  think you aren't too far off they will go for it.

Introduction

Hello everyone, glad to be here!  This blog is aimed at shedding some light on an underappreciated and misunderstood investment class - distressed real estate.  Even with the recent attention due to the housing meltdown and subsequent recession it is amazing how few people take advantage of the opportunity to make outsized returns for much less risk than the stock market.  I believe this is mostly due to lack of education (which I will humbly attempt to remedy) as well as a bad public image of so called "vulture investors".

We'll go into detail why being a vulture investor is a good thing not only because it can be extremely lucrative for you personally (there are worse things in the world) but also beneficial for your business clients and even the community you live in. The following posts will discuss the different ways to get involved in investing in distressed real estate and how this asset class fits in with your overall investment strategy.