Housing Slump Creates Boom for Tax Lien Investors, Says BuyTaxLiens.com Owner

Online sales of tax lien properties, also known as tax lien certificates, are taking off says Denny Mitchell, owner of BuyTaxLiens.com. His tax lien auction website specializes in providing a free daily list of tax lien properties resulting from government tax lien foreclosures and has been growing at a break neck pace recently thanks to the distressed housing market fueling a new nationwide boom in online tax lien investing.

West Palm Beach, FL (PRWEB) August 27, 2008 — Denny Mitchell, a commercial real estate developer with an active interest in investing in tax lien certificates, has turned his part time hobby into a wildly successful web community for new tax lien investors. In April of 2008, Mr Mitchell launched BuyTaxLiens.com thinking it would be a simple site for he and his friends to keep tabs on new tax sales online, but to his surprise the site took on a life of its own generating a rapidly growing list of loyal subscribers. This has spurred him to add features like free daily email alerts announcing new tax lien sales and periodic free video tutorials on tax lien investing driven by questions from his email list subscribers.

Although not often discussed in mainstream media, the underground world of investing in tax liens and tax deeds (http://buytaxliens.com) is nothing new. Wealthy family trusts and large institutions have been buying large portfolios of tax certificates across state lines for many years, essentially using them as a safe harbor in volatile economic times.

In 2009, it is projected that at least 29 states will be facing combined budget shortfalls of $48 billion. This in part due to the effect of delinquent property taxes squeezing local governments for cash as the fallout continues from the housing bust according to The Center on Budget and Policy Priorities, a Washington DC think tank. What this means for real estate investors is that for the foreseeable future there will continue to be plenty of tax liens available to purchase on properties throughout the country.

For those unfamiliar with buying tax liens…essentially when a property owner doesn’t pay their property taxes for a given year, the local government must raise the cash another way to keep basic municipal services running like police, fire, and schools, to name a few. In order to do this they have public tax sales to sell notes known as tax lien certificates. Each state varies on how these sales are conducted and what level of return is paid. For example, Florida tax certificates (http://buytaxliens.com/) offer returns as high as 18% per annum with 1st position lien rights even in front of the 1st mortgage of a bank, plus, the tax certificate holder inherits almost government like powers including the right to foreclose on the property in two years if not repaid. Texas offers returns on tax deeds as high as 50%! To learn more about tax lien investing sign up for free email alerts and video tutorials by visiting: http://www.buytaxliens.com

Like most industries, the web has been changing how investors find tax lien certificates online so its no surprise that there have been many paid sites popping up to serve this hot new online investment sector. By using the internet, many investors can now shop for tax deals anywhere in the country and find tax lien certificates on every property type including residential, retail, office, industrial properties and of course raw land. Shopping online also takes the pressure off by allowing more time and tools for due diligence and price comparisons.

“I encourage investors new to tax lien investing to first just watch live sales for a while and study the deals before buying anything – similar to virtual stock trading. Once they are ready to make their first purchase, begin with a very small tax certificate, say under $200-$300. After they do a few small deals successfully and get comfortable with the process, then start increasing the size of their deals along with the number of cities and property types in their portfolio. The best thing about our site is that unlike most sites, visitors can actually watch live auctions for free for as long as they like to get familiar with the process and even watch tutorials without buying anything. We have partnered with a few very well known online players to deliver a list of new tax sales to our subscribers everyday in a secure online shopping environment.” Said Denny Mitchell, owner of BuyTaxLiens.com.

Considering the low cash basis required to get started and steady cash-on-cash returns, coupled with the quasi governmental powers associated with this type of lien ownership, tax liens are the new hot investment of choice.

For additional information on how to invest in tax lien properties (http://buytaxliens.com), visit http://www.buytaxliens.com and sign up for the free daily tax sale alerts and newsletter at the top of the page, or check out their videos on YouTube.

However, I was just informed of a software program that you can purchase to track tax liens, Tax Lien Certificate Portfolio Tracker from www.taxliensoftware.com.  I downloaded a trial version, and I have to say, it is quite impressive.  It takes a little work on the front end to input all the municipalities and data, but once it is input, this software is really great.  You can create a seperate files for each lien including data like, address, parcel #, picture, owner information, municipality, lien purchase date, lien purchase price, stated yield, redemption date, foreclosure deadline, etc… this thing really does everything.  It  even calculates accrued interest automatically.

I am in no way associated with this software, I was just really impressed by it and thought I should share.  For  more information on the product and a free 30 day trial visit www.taxliensoftware.com.

In the event that more than one investor seeks the same lien, depending on state law the winner will be determined by one of five methods:

1. Bid Down the Interest. Under this method, the stated rate of return offered by the government is the maximum rate of return allowed. However, investors can accept lower rates of return, including zero percent in some cases (though this is rare in practice). The investor accepting the lowest rate of return is the winner. In the event more than one investor will accept the same lower rate, a random or rotational method (see below) will be used to break ties. (Florida and Arizona use this method)
2. Premium. Under this method, the investor willing to pay the highest “premium” (or excess above the lien amount) will be the winner. The premium may or may not earn interest, and may or may not be paid back to the investor upon redemption of the lien. (Colorado uses this method)
3. Random Selection. Under this method, a bidder will be randomly selected from those offering a bid. Usually a computer is used to make the selection, but in smaller jurisdictions more rudimentary methods may be used (Larry Loftis, a professional tax lien investor from Orlando, Florida and an author on the subject, mentions in his book of an Iowa county whose random selection method consisted of drawing numbered ping-pong balls from a fried chicken bucket).
4. Rotational Selection. Under this method, the first lien offered for sale will be offered to the investor holding bidder number one, who has the right of first refusal. If bidder number one refuses the lien, bidder number two may then bid. However, bidder number one will not be offered another lien until his number comes up again in the rotation. The next lien will go to the next number in line. Under this method, the investor has virtually no control over which liens s/he will obtain in the bidding, except to take or refuse what is offered.
5. Bid Down the Ownership. Used only in Iowa, the investor willing to purchase the lien for the lowest percent of encumbrance on the property will be awarded the lien. For example, a bidder may agree to take a lien on only 95% of the property. If the lien is redeemed, the investor would only receive 95% of the proceeds. In practice, few investors will bid on liens for less than full right to the property or sale proceeds. Therefore, with multiple owners bidding on 100% encumbrance, the process then generally reverts to the random selection.

Liens not sold at auction are considered “struck” (or sold) to the entity (usually the county) conducting the auction. Some states allow “over the counter” purchases of liens not sold at auction. However, in most instances the unsold liens are on marginal or worthless properties, the liens on better properties having been purchased at auction.

[edit] Redemption process

The investor must wait a specified period of time (referred to as the “redemption period”), during which time the property owner (or someone with an interest in the property) may repay the lien with interest. Usually the lien holder is not permitted during this period to contact the property owner (or anyone else having an interest in the property, such as the mortgage holder) to demand payment or threaten foreclosure, or else the certificate can be forfeit.

In some jurisdictions, the lienholder must agree to pay subsequent unpaid property taxes during the redemption period in order to protect his/her interest. If the lienholder does not pay such taxes, a subsequent lienholder would “buy out” the prior lienholder’s interest.

Once the redemption period is over, the lien holder may initiate foreclosure proceedings. The proceedings (the costs of which must be paid by the lien holder, though a redeeming property owner may be required to pay them as part of redemption) may result in either acquiring title to the property (normally this will be a quitclaim deed and not insurable title), or a tax deed sale of the property where the lien holder has the right of first bid (and may participate by making additional bids if s/he so chooses). During the period between the initiation of proceedings and actual foreclosure, the property owner still has the opportunity to repay the lien with interest plus the costs incurred to foreclose.

If the lien holder does not act within a specified period of time as defined by state law, the lien is forfeit and the holder loses his investment. Also, a lien issued in error of state law is repaid, but usually at a far less interest rate than had the lien been valid.

[edit] Hazards of tax lien sales

The rates of return can be highly attractive. For example, Florida (a popular tax lien state due to its growth and investor-friendly rules) is a “bid down the interest” state with a maximum rate of 18% (1.5% per month). However, Florida law guarantees a 5% minimum return regardless of the rate bid (except if the bid is zero percent) or when the lien is redeemed. Thus, if a certificate is purchased one day at 0.25% (the lowest possible rate greater than zero percent) and redeemed the next day, the investor will earn 5% over the certificate price for one day’s holding, or a mind-boggling 1,825% return! (Loftis, the author mentioned above, in his book tells another story where he went to pay for a lien, only to find a redemption check waiting for him on the lien he bought; thus, he actually obtained a return rate of infinity, or, mathematically speaking, it has no meaning since it involved division by zero) Iowa, another tax lien state, offers a guaranteed 2% return per month (or 24% return per year). And, in practice, most liens are redeemed before the property is foreclosed.

[edit] Pitfalls of tax lien investing

• Payment is usually required at purchase or within a very short time afterward (often no more than 24-72 hours). Failure to pay the full amount results in all lien certificates purchased by the investor being cancelled, and may result in the investor being barred from future sales.
• In many states further actions must be taken to protect the lien holder’s rights after purchase of a lien. Failure to comply exactly with these requirements may make the lien worthless.
• Tax liens on “choice” properties are quickly purchased by major institutional investors having sufficient time and resources to research valuable properties vs. worthless ones and who can afford the occasional poor choice; smaller liens usually involve properties that are generally worthless (such as odd strips of land). (In addition, Florida does not allow auctions or sales of tax liens of less than $100 on homesteads.) In “random” and “rotational” jurisdictions, investors have even less control over which liens they purchase.
• In “bid down the interest” jurisdictions, valuable properties are usually bid to the lowest rate possible greater than zero percent. (For example, Florida permits the interest rate to be bid down to a minuscule 0.25% – though it guarantees a minimum 5% return – while Arizona allows the bid to be as low as 1%.) Similarly, in “premium” states, valuable properties are bid up above the means of an average investor.
• Unlike a certificate of deposit, tax liens are illiquid. They cannot be “cashed in” (resold to the taxing authority), but must be held until either they are repaid or the holder takes action to foreclose. (It is possible, however, to assign one’s interest in a tax lien to another party.)

What is a tax lien certificate? A tax lien certificate is issued by a county government when a tax payer is delinquent in paying his/her yearly property tax. The county records a first priority tax lien on title and sells the lien to an investor. Major Banks, insurance companies and Wall Street financial institutions have been investing billions in tax liens for over 100 years.

What is a first priority lien? A tax lien has priority over all other liens secured by the property including the first mortgage. Some exceptions apply to federal and state income tax liens.

How long is the Fund’s capital invested in liens? Most of the 25 lien states allow the property owner, their heirs, the lenders and the mechanic lien holders a redemption period of 6 months to 4 years to redeem (repay) the lien (back taxes) and the interest and/or penalty. During this time, the county assesses a high interest rate and or penalty and county fees. Historically most liens are redeemed (repaid) within one year, but may take up to four years. If the lien is not redeemed, foreclosure proceedings may take anywhere from 3 months to two years to finalize.

How long will I be invested in this managed lien fund? The fund will begin liquidating assets in the 5^th year. Most of the remaining liens will be redeemed and all of the properties acquired through foreclosure will be sold.

Where is the risk? Risk occurs from purchasing bad liens on poor properties. Every lien has the potential to not be redeemed. That is where Lien Baron’s experience and expertise helps minimize risk for the investor. Fund management must decide 1) which liens to purchase and 2) which unredeemed liens to foreclose on. Due diligence and use of industry specific custom software help mitigate the risk of purchasing bad liens on poor properties. The fund will retain outside legal assistance in the processing of liens and foreclosure to ensure minimal risk to investments.

What kind of return can I expect? Each state and county sets a rate of interest that must be paid by the party who wants to redeem (repay) the lien. Interest rates range from 8% to 50% per year depending on the state/county. When the Fund is able to foreclose on a property, returns can be from 100% to over 1,000% with the sale of the property. See the “Sample Property” page for an example of a portfolio of properties purchased at one tax sale by the fund manager. The Funds target return is 25% to 30% per year.

How often will I receive a check from the Fund? Annually. The fund will pay out net redemption proceeds received and accrued interest earned every year. Investors will receive a financial report that includes a list of all liens purchased and redeemed each quarter, listed by county.

How is the fund structured? The fund is structured as a Delaware LLC. Investors will purchase an interest, or membership in the LLC. The managing member is Lien Baron, LLC. As an LLC, investors are not expected to assume any additional risk of loss or liability beyond their original capital investment.

What is the minimum amount that I must invest in the Fund? The Fund will offer units at $25,000 per unit, with a one unit minimum. The maximum invested capital will be capped at $5,000,000.

Who can invest? The fund will be open only to accredited investors who meet the eligibility requirements set forth by the SEC, and a certain number of non-accredited investors.

How does the Management get paid? Management charges a 2.5% fee for assets under management. This pays for overhead expenses and salaries. Management also receives 20% of the profits of the fund, so the manager only makes money when the fund makes money. Investors will receive 80% of the profits of the fund.

What kind of income taxes will I have to pay? The fund will generate interest and penalty income, both received and accrued from liens along with short-term and long-term capital gains from acquired property sales. The fund will issue a Schedule K-1 at the end of each calendar year reflecting each investor’s allocable share of taxable income. Investors may be able to invest in the fund through a tax free or tax deferred IRA. Please contact your tax advisor for advice on how investing in the Fund will affect your personal tax situation.

How experienced is the management team? Stephen Jonas has purchased hundreds of thousands of dollars worth of tax liens. Mr. Jonas brings years of real estate and investment banking experience to the Fund. Previously, Mr. Jonas was senior investment analyst for a private commercial real estate investment bank and provided financial and investment analysis on over $1 Billion in commercial real estate deals. Prior to working for the investment bank, Mr. Jonas was founder and president of a private residential real estate company which purchased and renovated single and multi-family houses. Over the last 5 years, Mr. Jonas has been directly involved in over $50 Million in commercial and residential real estate transactions.