The Perfect Investment

Perfect? You be the judge. If you could make a guaranteed return of at least 2-3% higher than the rate at which you borrow money; If you could make an investment that required virtually no management; If your investment was guaranteed never to lose money (tell that to investors in the stock market); If you could make an investment that has the potential to return many hundreds of times your original investment: If you could make an investment that has no overhead; If you could get all of these for as little as a few hundred dollars, would you be interested? Well, please allow me to introduce you to property tax certificates.

If you ever stumble upon late-night infomercials on TV you have probably seen John Beck; He sells a program that helps people to acquire tax certificates. His program is around $50 and probably worth the price but his customer service rating is rather dubious. [Click here;^http://www.infomercialscams.com/scams/john_becks_tax_lien] to see what I mean. He calls his system “Free and Clear.” I am neither endorsing him nor criticizing him. I am merely pointing him out because he is fairly well known. My focus is on the process and the concept itself, not on Mr. Beck or his particular program. The bottom line is I know that buying certificates works because I have bought some myself.

Here is how it works. Some property owners (do not restrict your thinking to residential properties, because it apples to vacant land, shopping centers and all other property) do not pay their property taxes when they are due. This can be because they have no loan so there is no monthly tax payment; or they might have a loan but pay their taxes separately. Or the property might be abandoned.

Enter the County Assessor. This government official is charged with the duty of collecting property taxes for the benefit of the related government. So, if the taxes remain unpaid for a few months, the assessor sends out notices to the appropriate owners but sometimes they still fail to respond. Eventually, the assessor schedules a time to sell the tax debt to an investor. They publish the sale details in local newspapers and on their websites. These sales are frequently held in the fall. Sometimes hundreds of buyers show up and on other occasions there might only be a handful of interested parties.

The various assessors do not all handle the details the same way, but their objective is always the same: To collect unpaid taxes. Sometimes the sale itself is carried out by a different government agency such as the Public Trustee’s Office. Potential certificate buyers register and get a bidding number, then the program begins.

At one such sale I attended, we were assigned seats. There were about 400 certificates up for grabs and about 250 registered investors. The assessor produced a list of the properties then randomly picked one investor as a starting point. The person in that seat was offered the first property on the list for the exact amount the taxpayer owed, including all fees and penalties to date. The investor could either decline or accept. If he accepted, he would not get another one until everybody in the room had purchased one certificate. If the investor passed, the assessor offered the certificate to the person in the next seat until somebody accepted it, which was usually very quickly. Once everybody had a certificate, the people who declined were granted a second and final chance to accept one. Then some people got a second certificate. The only variation was when they came across a certificate for a small lot or a commercial property. In the case of the land, they randomly assigned a certificate to an investor, but nobody got more than one of those. When the certificates for commercial properties came up, there was actually a bidding process to see who would pay the largest premium for the certificate. They went for about 5% over the total amount due. Before we left, I got a nice certificate for a middle class home. It cost me about $900. I also got one of the certificates for a lot. It was about $120. They both paid me 10% when it cost me about 7% to borrow from my bank.

At another such sale I attended, there were nearly one thousand bidders and most of the certificates were sold via a bidding process. Once again, they went for 5% over the amount that was due. I did not buy any.

After the sale, the tax payer owes the investor the amount he paid for the certificate plus interest to date. The owner and investor never actually meet each other because the government agency attends the details. If the taxes remain unpaid the next year, the certificate holder automatically gets to pay that tax for the property owner again, although he is not obligated to do so. In some cases the investor pays the taxes for three consecutive years. About that time, it becomes apparent that the property owner has no intent to pay the taxes, so the next phase kicks in.

The investor notifies the same government agency that the tax payer has never paid back the investor his money. At that point, the government makes a final effort to reach the tax payer to inform them of the impending loss of their property. They make a very sincere effort to make sure that innocent people do not lose their homes. But, sometimes they simply cannot find the owner, his heirs or anybody who has a legal right to the property. If all of that fails, they execute a deed transfering the property to the investor. In that event the investor owns the property free and clear of all debt and fulfills Mr. Beck’s promises.

One knowledgeable official told me that approximately one certificate results in a deed being transferred to the investor. All of the rest of them get paid off by the tax payer; but even in those cases the investors who hold those certificates still make a nice return on their money.

In some of the out-of-the-way counties, where it is difficult for masses to attend the sales, there are more certificates than bidders. If you are willing to do some homework, you can contact the appropriate agencies and buy the certificates that remain unsold. Sometimes you can complete the entire transaction right from your own computer, even if you live in another state and never do visit the property.

I think this is an incredible investment vehicle for certain people. You must have the time to do research and then be able to buy enough certificates to justify your time. But the rate of return is always good and occasionally it is awesome. Any investor who has lost money in the stock market or watched their property values drop would love those odds.

COMMENTS?

SEE MY OTHER BLOG.