The TLC Investing Toolkit 1 - Premier Tax Liens · The TLC Investing Toolkit 6 When you purchase a TLC, you purchase the right from a county government to Notes collect delinquent

The TLC Investing Toolkit 1

Notes


Notes

DISCLAIMER AND/OR LEGAL NOTICES:

While all attempts have been made to verify information provided in this publication, neither the

Authors nor the Publisher assumes any responsibility for errors, inaccuracies or omissions. Any

slights of people or organizations are unintentional.

This publication is not intended for use as a source of legal or accounting advice. The Publisher

wants to stress that the information contained herein may be subject to varying state and/or local

laws or regulations. All users are advised to retain competent counsel to determine what state

and/or local laws or regulations may apply to the user’s particular business.

The purchaser or reader of this publication assumes responsibility for the use of these

materials and information. Adherence to all applicable laws and regulations, both federal and

state and local, governing professional licensing, business practices, advertising and all other

aspects of doing business in the United States or any other jurisdiction is the sole responsibility of

the purchaser or reader. The Authors and Publisher assume no responsibility or liability

whatsoever on the behalf of any purchaser or reader of these materials.

PRINTED IN THE UNITED STATES OF AMERICA


NotesTable of ContentsIntroduction ..........................................................................................5

CHAPTER 2 WHAT ARE TAX LIEN CERTIFICATES? ..............................................8

How Tax Lien Certificates Work .....................................................8How They’re Sold ..........................................................................11Redemption Periods .......................................................................13Benefits of TLC Investing ...............................................................13

CHAPTER 3 GETTING STARTED ...........................................................................15

Narrowing Your Search .................................................................15Make Friends on the Inside: ...........................................................18Develop Your Investment Strategy .................................................21

CHAPTER 4CHOOSING PROPERTIES .................................................................22

Types Of Properties .......................................................................23Assessing the Property Assessment .................................................25Record and Track Your Investments ..............................................27

CHAPTER 5THE AUCTION PROCESS ..................................................................36

Arrive Early and Well-Prepared .....................................................36Considerations for Different Bidding Methods ..............................38Redeeming Your Certificates ..........................................................40

CHAPTER 6ONLINE AUCTIONS ............................................................................42

How the Process Works .................................................................43

CHAPTER 7DIRECT PURCHASES OF TLCS .......................................................47

Tips for Buying Direct from the County ........................................48Buying from Other Investors .........................................................48Online Over-the-Counter Sales ......................................................49


NotesCHAPTER 8 FORECLOSING ON TAX LIENS (OR “WINNING THE LOTTERY”) ..........50 Hire a Lawyer ................................................................................51 Notice of Foreclosure ....................................................................52 Taxes .............................................................................................53 Insurance .......................................................................................53

CHAPTER 9 MINIMIZING RISK ...............................................................................55 Avoiding Junk Properties ...............................................................55 Beware Environmental Problems ...................................................58 What if the Owner Files for Bankruptcy? ......................................59

CHAPTER 10 BUYING TLCS WITH A SELF-DIRECTED IRA ..................................62 Establish a Self-Directed IRA in 5 Easy Steps .................................62

CHAPTER 11 TAX DEED STATES ............................................................................65 Making Money on Free and Clear Deeds .......................................65 Getting Started with Tax Deeds .....................................................66 Texas Tax Deeds: A Case Study .....................................................66

RESOURCES ...............................................................................................69

GLOSSARY..................................................................................................70


Notes1: IntroductionThe phrase “conservative investment” has practically become an oxymoron –

not because treasury bills, CDs and money market funds are less secure than

they ever were, but because the returns on these products have plummeted to

such depths that they barely qualify as “investments.” The following are some

typical yields:

5-Year Treasury Note: 0.75

10-Year Treasury Note: 1.84

FINRA/Bloomberg High Yield Corporate Bond Index: 1.01

1-Year Certificate of Deposit: 0.35

5-Year Certificate of Deposit: 1.15

$10k Money Market Account: 0.53

With returns like these, it’s doubtful the average investor would generate enough

income for a comfortable retirement – unless he’s already saved a lot of money.

Of course, there’s always a chance that interest rates will climb in the future,

or that the Dow Jones will reach astronomical heights, but are you willing to

bank on that? Alternatively, you could increase your risk tolerance, especially if

you have a 30- or 40-year career ahead of you. However, though most experts

advise young people to accept higher risk, none advise placing all your eggs

in one, high-risk basket. It’s always wise to create a diversified portfolio that

includes secure investments – products you can rely on for steady growth and

income if the “long shots” don’t pay off.

Fortunately, there is one investment that turns the conventional risk-reward

wisdom on its head: Tax Lien Certificates. A Tax Lien Certificate (TLC) is a

low risk, high-reward investment that is government-issued and secured by real

property. Best of all, its interest rates are guaranteed and fixed, reaching as high

as 36% annually.


NotesWhen you purchase a TLC, you purchase the right from a county government to

collect delinquent property taxes from a property owner, plus accrued interest

and penalties. Counties sell the right to collect the interest and penalties in

exchange for a fast infusion of cash – cash that lets them fund services such as

police departments, fire departments, libraries and road maintenance.

But the benefits of TLCs don’t stop with fixed interest. Depending on how the

interest is calculated, the length of the redemption period, the state you invest

in, and other factors, your ultimate return can be as high as 36 percent. And

that’s just the return on the TLC itself! In the event a property owner fails to

pay the taxes (plus interest and penalties), you have the right to foreclose on that

property, reaping a windfall profit that can exceed your original investment by

many times over. And because TLCs are a superior lien on delinquent property,

you must be repaid before every other creditor, including the bank that holds the

first mortgage.

By purchasing a TLC, you purchase the government’s power to collect taxes.

What could be more safe and secure? And since the maximum interest rate

usually ranges from 16 to 36 percent (depending on the state), the yields are

much higher than comparable financial instruments.

What’s the catch?

The catch – if you can even call it that – is that investing in Tax Lien Certificates

is not for the lazy or the “hands-off” investor. Smart investing requires more

than a few minutes on the phone with your investment broker. You’ll need

to research states, counties and towns; learn the local governments’ rules and

procedures for purchasing TLCs; participate in direct sales and public auctions

(in person or online), and track your investments to ensure that you receive the

biggest return for your buck while minimizing what little risk there is.

In addition, TLCs are relatively “illiquid,” meaning your money may be tied

up for a few months or a few years unless you find a buyer for the TLC on a

secondary market. And, though Tax Lien Certificates are not as popular as

stocks and bonds, you will face competition – sometimes stiff competition – for

liens on premium properties.


NotesThis manual was written to help you manage the minimal risks of TLC investing.

The principles and procedures for investing are simple and straightforward,

but since there are many details that may affect your investment decisions, this

guide provides you with everything you need to get started toward TLC wealth

accumulation –strategies, tactics, tools and advice that will ensure your success

for years to come.

In the TLC arena, it’s easy to reap big rewards with little or no risk. As with

any investment, however, it pays to know what you’re doing. This manual will

ensure that you know exactly how to research, purchase and redeem your TLCs

to achieve maximum returns with the least possible risk.


NotesCHAPTER 2:KDW�$UH�7D[�/LHQ�&HUWL¿FDWHV"Tax Lien Certificates are government-issued investment products paying 16

percent to 36 percent interest annually, depending on the jurisdiction. Better

yet, tens of thousands of TLC go unsold every year. There are literally more

certificates available than there are buyers! Best of all, if a property owner

doesn’t pay the back taxes represented by the TLC, you’ve just won the real

estate lottery! Your investment’s value may grow exponentially!

But what, exactly, are Tax Lien Certificates? And why would state and county

governments want to help you earn such high returns?

TLCs are financial instruments used by county and municipal governments to

expedite the collection of delinquent property taxes, with the other method

being Tax Deed sales. TLCs have existed for over 200 years, but because of

the recent economic downturn, they are receiving more attention than ever.

Local governments across the U.S. were hard hit by the real estate bubble and

subsequent recession. Because local governments depend heavily on property

taxes to fund services such as schools, police and fire departments, a drop in

assessed property values can erase millions of dollars from their treasuries within

a short time. In addition, the lower consumption and higher unemployment that

accompanies recessions often causes an increase in unpaid property taxes, which

further exacerbates governments’ cash-flow problems. In other words, what’s

bad for business is bad for local government.

+RZ�7D[�/LHQ�&HUWL¿FDWHV�:RUNOrdinarily, localities assess high interest and penalties to property owners who

don’t pay taxes, keeping all the money for themselves. During lean times, however,

many of these governments would rather collect the principal in order to quickly

plug budget gaps instead of becoming loan offices to delinquent taxpayers. To

“kill two birds with one stone,” they offer TLCs to investors, giving the private

lienholder (you) the right to collect all the money owed, including interest and

penalties, in exchange for your immediate payment of the principal. Essentially,

the local government lets you become a loan officer, though nobody expects (or

allows) you to make phone calls and knock on doors to collect the money.


NotesYou’re merely the new owner of the debt, not a debt collector. The county

or city will collect the principal, interest and penalties on your behalf. That’s

another great thing about TLC investing: the county does about 90% of the

work for you!

Currently, over 2,000 counties in 30 states and the District of Columbia issue Tax

Lien Certificates. This helps them solve the problem of maintaining adequate

cash flow while providing you with a secure, high-income investment. Nineteen

states issue TLCs; 11 states and the District of Columbia issue TLCs and Tax

Deeds (conducting public auctions of foreclosed properties). The remaining

states sell only Tax Deeds. (More about Tax Deed states in Chapter 11.)

When a property owner fails to pay his property taxes, the unpaid taxes become

a lien on the property. The tax is recorded in the government’s records, and

the lien remains in effect until they are paid. If they aren’t paid before the

redemption date (the grace period) occurs – anywhere from a few months to

five years, depending on the locality – the owner loses the property. In the

meantime, an annual penalty ranging from 8% to 50% is added to the lien

amount. Nobody can purchase the property until the lien (plus interest and

penalties) is paid in full.

Because property tax liens are first position liens, they are superior to all other

liens (except for those levied by the state or federal government), including first

mortgages on the property. This is why Tax Lien Certificates are considered one

of the safest investments you can invest in. Delinquent property owners must

pay you the full amount of the lien - plus interest and penalties - or risk losing

their property, and nobody can purchase the real estate without first paying off

the lien.


NotesA State-By-State Overview of Tax Liens and DeedsState Type Interest Penalty RedemptionAlabama Tax Lien 12% NA 3 yearsAlaska Tax Deed NA NA NAArizona Tax Lien 16% NA 3 yearsArkansas Tax Deed NA NA NACalifornia Tax Deed NA NA NAColorado Tax Lien +9% NA 3 yearsConnecticut Hybrid Tax Deed 18% NA 6 monthsDelaware Hybrid Tax Deed NA 15% 60 daysFlorida Tax Lien & Deed 18% NA 2 yearsGeorgia Hybrid Tax Deed NA 20% 1 yearHawaii Hybrid Tax Deed 12% NA 1 yearIdaho Tax Deed NA NA NAIllinois Tax Lien NA 18% 2-3 yearsIndiana Tax Lien 10% 10-25% 1 yearIowa Tax Lien 24% NA 2 yearsKansas Tax Deed NA NA NAKentucky Tax Lien 12% NA 1 yearLouisiana Hybrid Tax Deed 12% 5% 3 yearsMaine Tax Deed NA NA NAMaryland Tax Lien 6% to 24% NA 6 monthsMassachusetts Hybrid Tax Deed 16% NA 6 monthsMichigan Tax Deed NA NA NAMinnesota Tax Deed NA NA NAMississippi Tax Lien 18% NA 2 yearsMissouri Tax Lien 10% NA 1 yearMontana Tax Lien 10% 2% 3 yearsNebraska Tax Lien 14% NA 3 yearsNevada Tax Deed NA NA NANew Hampshire Tax Deed NA NA NANew Jersey Tax Lien 18% 4% to 6% 2 yearsNew Mexico Tax Deed NA NA NANew York Tax Deed & Lien 10%-18% NA 2 years (Lien)North Carolina Tax Deed NA NA NANorth Dakota Tax Deed NA NA NAOhio Tax Deed & Lien 18% (Lien) NA 1 year (Lien)Oklahoma Tax Deed & Lien 8% (Lien) NA 2 years (Lien)Oregon Tax Deed NA NA NAPennsylvania Tax Deed NA NA NARhode Island Hybrid Tax Deed 10 to 16% NA 1 yearSouth Carolina Tax Lien NA 3% to 12% 1 yearSouth Dakota Tax Lien 10% NA 3 or 4 yearsTennessee Hybrid Tax Deed 10% NA 1 yearTexas Hybrid Tax Deed NA 25% 6 months or 2 yearsUtah Tax Deed NA NA NAVermont Tax Lien 12% NA 1 yearVirginia Tax Deed NA NA NAWashington Tax Deed NA NA NAWest Virginia Tax Lien 12% NA 18 monthsWisconsin Tax Deed NA NA NAWyoming Tax Lien 15% 3% 4 years


NotesHow They’re SoldTLCs are sold in one of three ways: at public auctions (live or online), over

the counter, or by mail. In most instances, local governments first offer

properties at public auctions, and then offer the unsold certificates (“leftovers”)

over the counter or by mail. Most auctions are still physical events, but web-

based auctions are rapidly gaining popularity – mostly because they encourage

participation from people outside the jurisdiction and don’t require bidders to sit

at their computers during the auction (the bids can be placed in advance). The

downside to an auction (for the investor) is that the very purpose of bidding is to

drive down the prices. So while many states offer attractive maximum interest

rates for TLCs, the auction process may lead you to pay more for the lien, or

accept a lower interest rate, in order to win an especially good TLC.

Online or in person, auction rules and bidding methods vary from state to state,

county to county and (sometimes) town to town. Thankfully, there are only five

methods for determining a winner if more than one person bids on the same lien.

Below is a summary of the five bidding methods. These methods will be covered

in more detail in Chapter 5: The Auction Process.

1. Bidding Down the Interest. Under this method, the official rate of return

offered by the government is the maximum interest rate. However,

investors can accept lower rates. The investor accepting the lowest rate of

return is the winner. If more than one bidder is willing to accept the same

rate, a random or rotational technique is used to break the tie. (Florida

and Arizona use this method.)

2. Bidding a Premium. Here, the investor is willing to pay the highest

“premium” (a sum above the lien amount) is the winner. The premium

may or may not earn interest, and may or may not be returned to the

investor on redemption of the lien. (Colorado uses this method.)

3. Random Selection Bidding. Bidders are randomly selected from among

the participants, often by computer, though smaller counties and towns

may employ more old-fashioned methods – such as drawing marked ping

pong balls from a jar. (Nevada uses random selection.)


Notes4. Rotational Selection Bidding. Here, the first lien is offered to the investor

holding bidder number one, who has the right to purchase or pass on the

lien. If bidder number one refuses the lien, bidder number two may bid.

However, bidder number one will not be offered another lien until his

number comes up again. The next lien for sale will then be offered to the

next number in line. Under this method, the investor has little control over

which liens he will acquire, except to take or refuse what’s offered.

5. Bid Down the Ownership. This method awards each lien to the bidder

willing to purchase the lien for the lowest percentage of encumbrance on

the property. For example, a bidder may agree to accept a lien on 98

percent of the property. If the lien is not paid off, the investor receives 98

percent ownership of the property, with the remaining two percent retained

by the original owner. In reality, few investors bid on liens for less than full

ownership in the property or the sale proceeds. When everyone bids 100

percent ownership in the property, the auction moves to random selection

bidding.

In some states, liens that aren’t sold at auction are offered over the counter to

investors, who conduct the transaction at the offices of the county treasurer or

assessment department. In some instances, transactions can also be done by

mail.


NotesRedemption PeriodsBefore cashing in your TLCs, you must wait for a specified period (the redemption

period) during which the lien – plus interest and penalties – may be repaid by the

property owner. You are not permitted to contact the property owner or anyone

else with an interest in the property (such as the mortgage holder) to demand

payment or threaten foreclosure. If you do, the TLC can be voided.

In most cases, property owners do pay the liens, since the value of the land and

improvements is usually far greater than the unpaid taxes. (In some jurisdictions,

you must agree to pay subsequent unpaid property taxes during the redemption

period. If you don’t, a new lienholder can buy out your interest.)

At the end of the redemption period, you can initiate foreclosure proceedings

if the property owner hasn’t paid up. Sometimes, you will incur the cost of

the foreclosure proceedings, and sometimes the redeeming property owner will

have to pay them as part of redemption. Either way, you will acquire title to the

property, usually in the form of a quit claim deed or through a tax deed sale of

the property. NOTE: If you do not act within a specified time, as defined by the

state’s law, you can lose your investment. This is one reason why it’s important

to track your TLCs, since you may be purchasing a lot of them! Believe it or

not, there have been cases in which investors have forgotten about some of their

TLCs.

%HQH¿WV�RI�7/&�,QYHVWLQJThe biggest attraction of TLCs is, of course, their consistently high yields. The

maximum rate of return on a tax lien can be far higher than other investments.

For example, Florida offers a maximum rate of 18 percent (1.5 percent a month,

with a guaranteed 5 percent return regardless of the time you’ve held the lien).

Arizona offers a maximum rate of 16 percent, and Iowa offers a guaranteed two

percent per month – a 24 percent annual return. With yields like these, investors

will earn not just enough to enjoy a few post-retirement vacations, but could

easily earn enough money to acquire a few vacation homes, especially if they’re

able to foreclose on some of the encumbered properties.

Another benefit to TLC investing is that, unlike jumbo CDs and some other

safe investments, you don’t need a vault full of money in order to earn another

vault full of money. The percentage return doesn’t depend on the size of your


Notesinvestment. You’ll earn the same 16 percent, 24 percent or 36 percent rate

of interest – day after day, month after month – whether you invest $500 or

$50,000. Of course, the larger the investment, the bigger your earnings, but

the point is that you don’t have to go “all in” to begin enjoying some of the

highest yields on the planet. Start small; learn the ropes, and then increase the

size of your investments as you get more comfortable with the processes and

procedures, as well as your competitors’ habits and strategies.

There are few other investments that offer the advantages of TLCs, including:

We should also point out that by purchasing TLCs, you are not kicking widows

and orphans out of their homes, but actually helping them keep the homes.

Because you are – in effect – loaning delinquent taxpayers the money needed to

pay back the principal on their debt, you are allowing them more time to get

current with that financial obligation. If it weren’t for private investors like you,

local governments would probably have to shorten their tax lien redemption

periods in order to collect badly needed revenue as soon as possible.

Far from playing the role of the stingy “Mr. Potter” from It’s a Wonderful Life,

you’re playing the role of George Bailey (Jimmy Stewart). Instead of profiting

from a property owner’s misfortune, you are providing a solution. You’re helping

local governments to continue providing essential services without resorting

to mass layoffs and service cutbacks. Simultaneously, you are giving property

owners extra time to meet their financial obligations. In the vast majority of

cases, you are facilitating a win-win scenario.

A guaranteed high rate of return.

Fixed interest rates and penalties.

The ability, in the event of foreclosure, to

increase your earnings by 10, 50 or even

100 times your original investment.

Low or no market “volatility.” Unlike the

stock market, investors aren’t becoming

exuberant one minute, and then selling off

their portfolios the next minute – after a bit

of bad news floats across the news wires.

Money that works for you 24/7/365.


NotesCHAPTER 3

*HWWLQJ�6WDUWHGWith interest rates ranging from 16 to 36 percent, Tax Lien Certificates are such

a reliable high-yield investment that you may be tempted to instantly plunge into

this exciting wealth-generating pool. Before you do, however, it’s important to

think things through, and not become irrationally exuberant. If you dash out

to buy thousands of dollars’ of TLCs from the nearest county treasurer’s office

without doing any homework, you may get burned.

As mentioned in the introduction, the principals and processes involved in

buying TLCs are simple and straightforward – so simple that you might reap

generous earnings from investments into which you’ve placed very little thought.

(You may even acquire a good real estate property – free and clear, for pennies

on the dollar, that you can sell for massive profits – if the owner doesn’t pay the

property taxes before the end of the redemption period. We call this winning

the lottery!) But why rely on luck? Why not work to guarantee these incredible

rates of interest with rock-bottom risk?

1DUURZLQJ�<RXU�6HDUFKNow that you’ve decided to invest in TLCs, your first step should be choosing a

state in which to purchase the certificates. Your choice can be based on a variety

of factors, including the maximum interest rate or the redemption period, as

well as the laws and regulations governing sales, auctions, deposits, fees and so

forth. We recommend that you begin with your own state, or a state located

within reasonable driving distance. That’s because one key to successful TLC

investing is physically checking out the properties whose liens you plan to buy.

Revisit Chapter 1 for a list of states offering Tax Lien Certificates, as well as

their interest rates. If you happen to live in one of the states listed, you’re in

luck! You can begin your research immediately. If you don’t, look for nearby

TLC states with attractive interest rates and other factors with which you’re

comfortable. If you have a friend or family member who lives in a TLC state –

someone willing to assist you in scouting properties – you can arrange to have

this person work as your assistant or your partner.


NotesA key factor to consider is the redemption period. Why? Aside from pursuing

TLCs that offer high yields through simple or compounded interest, savvy

investors purchase TLCs in areas where the redemption periods significantly

increase their yields. In some states, property owners have two years to pay

off the liens encumbering their land. In other states, property owners are not

required to pay off the liens for three or even four years. Maryland features

a redemption period of six months to two years, whereas South Dakota and

Wyoming allow property owners four years to pay the liens.

Here’s why redemption periods matter. Let’s say a state has a redemption period

of two years. If the TLC is redeemed before the two-year period, the property

owner pays an interest penalty, a mandatory five percent charge on the certificate,

if the rate that is calculated at the time of redemption is less than five percent.

Therefore, if after only one month the property owner redeems the certificate,

the actual interest paid can be as high as 70 percent annually, because the owner

had to pay an entire years’ interest (at five percent) even though he redeemed

the certificate after just one month. The property owner would have to pay that

price regardless of when he redeemed the TLC, so it doesn’t matter to him that

he redeemed the certificate after just four weeks. But it certainly matters to you!

Remember, during the redemption period, the property owner has to repay the

taxes, plus interest and penalties, to the county treasurer’s office, which forwards

the check to you.

In addition to increasing the yield by allowing a longer period to earn interest,

the redemption period also affects when an investor can foreclose. If a property

owner doesn’t pay off the lien within the mandated period, you can foreclose.

If acquiring property through foreclosures is one of your goals, it’s critical to

consider the different redemption periods offered by the states issuing TLCs.

Other factors to consider include the general economic condition of the state.

If the state is experiencing bad times, with depressed real estate prices and high

unemployment, odds are higher than there will be many delinquent property

owners there. On the other hand, if you’d rather not foreclose on properties,

you may want to focus on states and counties enjoying better economic climates.


NotesIn theory, it’s always better to earn 24 percent interest than 16 percent, but this

shouldn’t be the only factor driving your decision. It goes without saying that

when one state offers a much higher return on its TLCs than a neighboring state,

the one with the higher interest rates will attract more investors and, therefore,

more competition for good properties, especially at the auctions. And because

the auction process usually involves bidding down the interest rate or bidding

up a premium, increased competition often results in actual yields that are lower

than the official maximums.

For this reason, it’s not a bad idea to check out states with relatively low interest

rates, depending on the level and intensity of the competition in the high-

interest states. All things being equal, it’s better to purchase a larger number of

TLCs with slightly lower yields than to find yourself outbid again and again in

locations that attract hundreds or thousands of more experienced investors. As

you gain experience and wisdom, feel free to jump into the lion’s den, but in the

beginning, you may want to go where the competition isn’t.

Once you’ve narrowed your choice to a particular state, it’s time to check out

specific counties.

There are thousands of counties to choose from among the 30 states that issue

TLCs. Though the rules for the sale of certificates are established by the states,

the actual sales are made by local governments. Even within a single state, the

rules, regulations and guidelines governing TLC auctions can vary dramatically.

We recommend that you begin your county-by-county research at www.naco.

org – the website of the National Association of Counties. From there, check

out www.NETROnline.com, which lists treasurers’ sites, assessors’ sites, and

clerks’ sites for almost every jurisdiction in the country.

Your next decision will be whether to select an urban or a rural area in which to

invest. Many beginners decide to invest in rural areas, because the competition

is often lighter and employees at the government offices have more time on their

hands for chit-chatting with potential investors. However, there are others who

prefer urban counties because there is a larger selection of properties to choose

from or because they are attracted by the amenities and economic strengths or

the cities located within populous counties. In the beginning, you may want to


Notesstick with rural counties to take advantage of reduced competition, but be sure

to check into the percentage of properties that are eventually redeemed, as well

as any environmental problems that the county has experienced. You won’t

find much competition in towns sitting atop hazardous waste sizes, but there’s

obviously a good reason that nobody’s interested in their properties.

Now, you’ll want to research specific cities, towns and neighborhoods. With

few exceptions, every county and locality features good and bad areas. You’ll

usually want to purchase TLCs on properties in the better areas. To determine

the good from the bad from the just plain ugly, it’s a good idea to talk with local

realtors. A better idea, however, is talking – in person – with staffers at the local

tax collector’s office. These employees can tell you not only which areas are the

most desirable, but also which areas produce the highest rates of redemption.

Another factor to consider is your ability to research liens on county websites.

Not every county has a site, and not every site contains all of the information

you’ll need before ticking off properties on your “Must Buy” checklist.

You’ll also want to know how subsequent years’ tax liens are addressed by

each jurisdiction. Some counties offer TLCs for sale for every year the tax is

outstanding on a property. In other words, if you purchase a TLC on the two-

story colonial home at 741 Evergreen Terrace for $1,000 for tax year 2011,

the county may issue another certificate for tax year 2012 – for sale to a new

investor. Usually, counties issuing TLCs for each tax year that a property remains

delinquent give the first lien holder “dibs” on subsequent TLCs, but this isn’t

always so. Research this in advance in order to have the funds available to

purchase new certificates for subsequent tax years (if desirable).

0DNH�)ULHQGV�RQ�WKH�,QVLGH�Because of the wealth of information you’ll want to obtain about individual

jurisdictions and properties, it’s a good idea to establish good working

relationships (or even friendships) with people “on the inside” – i.e., individuals

who actually work in the tax assessment or treasury offices. At a minimum, an

acquaintance on the inside can translate some of the “legalese” used on various

forms into plain English. Better yet, the employee may be able to crosscheck

data from various sources on your behalf, allowing you, for example, to identify


Notesthe physical locations of the properties listed on the tax sale forms, which often

don’t identify the properties for sale by their street addresses. Because some of

the information provided on county websites and in newspaper advertisements

aren’t especially informative, especially to “newbie” investors, a friendly county

employee can act as your mentor in the early months of your investing career,

later becoming a trusted ally in locating the best properties, including the

occasional “diamonds in the rough” that your “unconnected” competitors will

likely pass up.

Instead of barging into one county office after another, sweating palm extended

for a round of hugs and handshakes with your new friends, we recommend

that you take a more subtle – and professional – approach to establishing good

working relationships with local government officials. For example, once you

get your hands on the list of available TLC properties (the tax sale list), email a

copy to the appropriate employee at the treasurer’s office or assessment office,

along with a polite note asking which of the properties are still available for

over-the-counter sale. Most likely, he or she will return the list with the available

the properties highlighted.

Next, you’ll need a breakdown of the assessments in order to determine how much

value the assessor attributed to the raw land and how much to the improvements

on the property. As a rule of thumb, if the land’s assessed value is more than

40 percent of the total property assessment, you should forget that lot. (Most

likely, this ratio indicates that there is a problem with the improvements on the

land – e.g., the building is in poor condition, there are environmental hazards

present, etc.) Within a short time, your new acquaintance will forward a list of

the acceptable properties.

Realistically, you can’t expect much more help than this – not unless you take

time to do a little schmoozing with the person. Still, you’ve now got a “leg

up” on many competitors. However, if you’d care to invest more time in the

relationship, the dividends can be quite handsome. Because the information

you’ve gathered so far doesn’t reveal where properties are physically located, but

your new friend knows, s/he may be willing to compile a list of street addresses

for you. This information is pure gold, because now you can drive to each of

the properties on your “Must Buy” list to determine if they will make good


Notesinvestments or if they look like they were long ago abandoned by the Adams

Family.

Over the course of your investing career, you will probably strike up relationships

with a number of government employees anyway – simply from repeated visits

and phone calls to their offices. However, because information is power in

this game, it’s better to put in some phone time – and especially friendly face

time – from the get go. Once you’ve done this, you’ll be able to mine data

that’s even more valuable than addresses and assessment breakdowns. You’ll

be able to find out exactly how much money each property owner must pay

in interest and penalties, as well as tips and advice on which are more likely

to be redeemed and the redemption rates in particular jurisdictions (and even

particular neighborhoods). You may even receive friendly advice on how to

participate in auctions, learn the identities of the “usual suspects” who attend

the auctions, and even some “inside dope” on their bidding strategies and habits.

Of course, it’s not always possible to establish friendly relationships with county

workers. This is especially true at offices that are routinely busy, which usually

means county offices in the most populous areas. This is another reason that

many investors would rather do business in rural counties, where the pace of

life is slower and the atmosphere more friendly and relaxed. Of course, it’s

important to pick and choose your moments to visit any assessment office if your

main purpose is to strike up a friendly conversation with Susan or Pete. If the

employees appear harried, don’t push to become their best friends on the spot.

Return at a better time. Alternatively, you could try showing some empathy for

their busy lots in life, and that might ignite a productive conversation. Use your

judgment and be patient with the relationship-building process.


Notes'HYHORS�<RXU�,QYHVWPHQW�6WUDWHJ\Before you send that email to Pete or Susan or drive to your first auction, develop

a sound investment strategy based on the amount of money you’re willing to

invest, as well as acceptable rates of return. In addition, you should decide in

advance whether you’re interested in receiving the benefits of foreclosing on

delinquent properties in addition to TLC earnings. If you choose to focus only on

income from the certificates, you’ll probably want to invest in states with longer

redemption periods, since they offer businesses and homeowners more time to

repay their tax obligations. If you’re equally interested in acquiring property

deeds, then it makes sense to invest in TLCs that feature shorter redemption

periods, as well as economically distressed counties, since it’s likely that a higher

number of property owners will be unable to pay their liens.

While deciding how much to invest, consider these criteria:

1. The amount of available cash you’d like to put toward TLCs at the moment.

2. The availability of desirable TLCs in the counties and state of your choosing.

3. Your ability to successfully acquire the desired certificates.

You can’t possibly address Criterion #3 until you’ve actually participated in tax

lien auctions and/or made at least one over-the-counter purchase. For this reason,

we recommend that you start small. TLCs are available from ten dollars to tens-

of-thousands of dollars. Pick a modest investment ceiling for your initial foray

– perhaps a few thousand dollars – as well as smaller individual ceilings for each

TLC that you plan to purchase. Then, stick to those ceilings! Don’t be tempted

to invest too much in the beginning. Remember, you can’t be sure how long your

money will be tied up in the TLC. It might be a month, a year, three years, or

even longer, especially if you’re given the chance to foreclose on a property.

Over the long term, you’ll craft an investment strategy that strikes a good balance

between high yields and the cash flow you need to meet current obligations. Best

of all, you’ll be able to achieve growth and steady income without having to

constantly worry that the stock and bond markets will “tank” at any moment –

or, worse, just when you need to start living off those investments. In the short

term, however, it’s important to start small. Once you’ve gained some experience

and confidence, you’ll know how, when and where to invest more money in

TLCs to achieve higher yields on even larger investments, accumulating more

wealth than you ever thought you could with a conservative investment vehicle.


NotesCHAPTER 4 &KRRVLQJ�3URSHUWLHVWhile it’s important to research any new investment, this is particularly true

of investing in Tax Lien Certificates, since the certificate is only as valuable as

the underlying land and improvements – or at least people’s perception of that

value. In some cases, there are valid reasons why a property owner hasn’t paid

the taxes. For example, the owner may have purchased an undeveloped lot for

which he’s been unable to obtain water or a sewer hookup, rendering the land

less valuable than what he paid. Or, the property may be located in a depressed

neighborhood. Or, it may contain hidden environmental problems such as a

leaking underground fuel tank.

As a TLC investor, it’s important that you never “judge a book by its cover,”

meaning you can’t rely entirely on the data gathered from the county treasurer’s

or local assessor’s office. Collecting this data is a critical start to the research

phase, but keep in mind that initial assessments aren’t always accurate. A few

years ago, a county property assessor in Maryland was given the routine task of

updating the assessment on a multi-unit residential building in a popular resort

town. The exterior of the building was in excellent condition. It was newly

repainted, and the grounds well-manicured. Often, the assessor would have

limited his inspection to a brief tour of the exterior, as no major improvements

had been reported since the last inspection. On a whim, however, he decided

to have a look inside. He was in for quite a shock. It seems the landlord had

allowed illegal migrant workers to occupy many of the units, most of which were

now “trashed.” Needless to say, the assessor’s new valuation was significantly

lower than the previous one – an earlier inspection that was probably limited to

the building’s exterior.


NotesMistakes can sometimes work in your favor, but they can also make the difference

between a profitable investment and a lemon. Either way, you should see for

yourself whether a property is worth your time and money.

There is a dizzying variety of properties available at tax lien auctions, including

single-family residences, multi-unit apartments, condominiums and co-ops,

stand-alone commercial properties, industrial-use properties, raw land, etc.

Initially, it might seem that the property attached to the lien isn’t that important.

Do not believe this for a moment! Though each property has been assessed as

more valuable than the tax lien certificate you want to purchase, the property

type can make a huge difference when it comes to your risk, especially if you

have to foreclose on the property.

Types Of PropertiesYou’ve contacted your favorite counties to learn when and where their upcoming

auctions will be held. You’ve acquired information concerning the rules and

guidelines for purchasing TLCs in these localities, as well as the redemption

and foreclosure procedures. This process starts when you acquire a tax sale list

of the properties which you’ve been able to run past a friendly employee at the

county treasurer’s or assessor’s office.

Obviously, you’ll need to have the street addresses of the available TCL properties

before you can inspect them. Now it’s time to check out the real estate that will

secure your potential TLC investments.

When it comes to investing in real estate (and TLCs are a form of real estate

investing), one guiding principle is that the value of land lies only in what you

can do with it. And the best indicator that land can be developed is that it’s

already been developed. Regardless of the current appraisal on raw land, the

number of investors interested in undeveloped lots is usually small. Therefore, if

you purchase a TLC on a vacant lot and the property goes into foreclosure, you

could experience long delays in selling it.

Commercial and industrial properties can also be problematic when it comes

to valuation. In addition to the possibility that the land may require extensive

and expensive clean-up – something for which you might be liable if you buy


Notesthe property – commercial properties tend to be much more expensive to buy

and maintain than residential properties. Because industrial and commercial

properties are usually assessed based on the revenue they can produce (and have

produced), they are more difficult to sell during economic downturns. In fact,

these properties are by their very nature more difficult to sell, since there are

fewer people interested in buying commercial and industrial properties than

residential properties. Everyone needs a place to call home, but not everyone is

searching for an empty storefront or factory in which to locate a new business.

We advise you to launch your TLC investment career by focusing on residential

properties. Please don’t misunderstand: we are not suggesting that investments in

raw land or commercial properties are a bad idea. Millions of dollars are made

every day from such investments. That said, most of the people making money

in this arena are experienced investors and/or developers who know what they’re

doing – not novice TLC investors. Most of you are interested in buying secure,

high-yield investments in the certificates themselves as opposed to acquiring tracts

of land. If, at some point, your interest shifts to acquiring properties, we advise you

to focus on tax deed sales versus TLC auctions. (This is detailed in Chapter 11.)

To generate as much income as possible, the TLC investor will want to redeem

certificates on many properties. In general, a higher percentage of homeowners will

redeem the certificates on the properties at which they live than will commercial

property owners. Many commercial landowners are either struggling to stay in

business or have gone out of business, which is a leading reason they fail to pay

the property taxes. It is much rarer for residential property owners to default on

their liens. In other words, because a greater number of commercial properties

will go into foreclosure, it makes sense to invest in them only if you have a

keen interest (and preferably some experience) foreclosing on such properties.

Residential properties provide all of the benefits that come with TLC investing

with fewer complexities of commercial property ownership.


Notes$VVHVVLQJ�WKH�3URSHUW\�$VVHVVPHQWBefore investing in tax lien properties, obtain assessments of the properties’

values, as well as breakdowns of the value of the land versus the improvements.

In general, improvements should account for 60 percent to 75 percent of the

total assessment. If they represent less than 60 percent of the property’s total

value, we advise you to run (not walk) away from the property, because there

is probably a problem with that lot – unless there’s a great deal of raw land

surrounding the improvements. The most likely reason for an unbalanced

assessment breakdown is that the improvements are dilapidated houses, shacks

or mobile homes, which is why they represent such a small fraction of the value.

If you have time, have a look at some of these properties. By scoping them out,

you’ll get a better idea of what to expect whenever these statistics crop up and,

most important, why you should normally avoid them.

A skewed “land-to-improvements assessment ratio” may also indicate that

there’s an environmental problem with the site, but unless foreclosure is a

distinct possibility (and you’re interested in acquiring the land), it makes no

sense to commission an environmental inspection of the property, since these

are expensive and can be time consuming. (See Chapter 9 to learn more about

environmental problems.) After all, if the TLC on the property is worth just

$1,000, and there’s a 95 percent chance that it will be redeemed, there is no way

to justify the cost and effort of an environmental inspection.

A good place to start your research is www.realestate.com,

which provides comps (comparable values) on similar properties in

a particular area, as does www.realestate.yahoo.com/homevalues.

Visit www.earth.google.com for aerial views of properties in which

you’re interested, as well as www.zillow.com, which also provides

street level views of properties and estimated values.


NotesSome properties are easy to check out, and others are not. Regardless, make

an effort to perform a physical inspection and some due diligence. You might

acquire a TLC that goes unpaid, and then claim the property – only to learn that

there is an underground fuel storage tank that must be removed at an enormous

expense. There is no such thing as a 100 percent “risk free” investment, but by

following the guidelines below, you’ll reduce that risk to extremely comfortable

levels.

Pursue residential properties over commercial.

Target developed lots to undeveloped ones.

Improvements should represent at least 60 percent of the assessed value.

Choose good neighborhoods over bad ones.

Be conservative in estimating the value of the property. In many counties,

the assessed values are lower than the current market values. Trim

some value from the government’s assessments to arrive at an even more

conservative estimate.

Purchase TLCs in smaller, rural counties instead of large urban areas.

Conduct your research based on the investment strategy that you’ve created

– a strategy tailored to the amount you’re willing to invest, your preferred

interest rates, locations, redemption periods, purchase methods, etc.

When you attend tax lien auctions, you’re likely to meet people who violate some

or even all of the guidelines above. Some may bid on every property without

looking at them or even knowing anything about them. When you meet such

people, you can draw one of three conclusions: (1) the person is a newbie; (2) s/

he is paying for the liens with a large fund of pooled money; (3) the individual

represents a large institutional investor. In the last two cases, these investors are

counting on the fact that most tax liens are paid off, and those that aren’t can

be investigated before a foreclosure. In other words, they are playing the odds.

This makes sense if you are bidding on hundreds or thousands of properties,

since you’re not likely to get burned on enough properties to significantly impact

your bottom line. For most of you, however, banking on statistical laws is risky

business. You won’t be purchasing enough tax liens to put those odds in your

favor. If you’re purchasing only a handful of TLCs, one or two “rotten eggs”

can have an adverse effect on your wallet and your time.


Notes5HFRUG�DQG�7UDFN�<RXU�,QYHVWPHQWVUnless you hire an assistant, or work with a friend who enjoys paperwork, you

will be responsible for organizing and tracking your TLC portfolio. Without a

filing system and a tickler file, you could find yourself buried under a heap of

documents. Even if TLC investing never becomes a full-time occupation, you

should still run the operation like a business.

One of the first things you should do is create a suitable worksheet for each

property. This form should include the following information:

The name of the county and state where the property is located, as well as

the street address.

The identification number that the county has assigned to the property.

The minimum cost of the Tax Lien Certificate.

The interest rate and penalty.

The assessed value of the property.

Any economic data and forecasts you’ve collected about the neighborhood

in which the property is located.

Your plans for that property should foreclosure become an option.

Notes on the level of difficulty you anticipate if you decide to foreclose and

then sell the property.

Type of property – residential, commercial, farmland, etc.

Your reasons for deciding to purchase this particular TLC.


Notes

�� *��!��*��#�*��*�� '��!��#�� #��(��!�*��"��!�%�#��%�"#�!)��#�!�"#��!#��#��(�$!��$�#(�#�'��"��+��(��#��#��&��#��$!��"��!��$�#��!#��#�"�&�#��"�)��!#��$��"��!�#��!� $�!��(��#��#�#��#��"��+�� #�#��(��!��!�#��!�(�$!��$�#��-"��)��"��#��#��##��!��(�!�#$!��#��(�$"��#��"#��)�"��,��!�""��%��!�%��+��$��(�$��%��(� $�"#��")��"��#��#��#�''',''',''''+�� (�$��%��!�(�$!��""�"#��+��"#�!��!�")��.��$!��/��


Notes�� *��!��*��#�*��*�� '��!��#�� #��(��!�*��"��!�%�#��%�"#�!)��#�!�"#��!#��#��(�$!��$�#(�#�'��"��+��(��#��#��&��#��$!��"��!��$�#��!��!#��"��!��(�(�$!��$�#(��#�#��'#�#�'��$�#��&�#��"�)��!#��$��"��!�#��!� $�!��(��#��#�#��#��"��+�� #�#��(��!��!�#��!�(�$!��$�#��-"��)��"��#��#��##��!��(�!�#$!��#��(�$"��#��"#��)�"��,��!�""��%��!�%��+��$��(�$��%��(� $�"#��")��"��#��#��#�''',''',''''+�� (�$��%��!�(�$!��""�"#��+��"#�!��!�")��.��$!��/��


Notes�� $��#��*�� '��"��!��#��!��!-��)��"��!�%�#��%�"#�!)��#�!�"#��!#��#��(�$!��$�#(�#�'��"��+��(��#��#��&��#��$!��"��!��$�#��!#��#�"�&�#��"�)��!#��$��"��!�#��!� $�!��(��#��#�#��#��"��+�� #�#��(��!��!�#��!�(�$!��$�#��-"��)��"��!�%��#��&��!��#��#��##��!��(�!�#$!��%��#��#��%�"#�!��0��+��+��#��#�!��)�"��$��(�$��%��(� $�"#��")��"��#��#��#�''',''',''''+�� (�$��%��!�(�$!��""�"#��+��"#�!��!�")��.��$!��/��


Notes�� $��#��*�� '��"��!��#��!��!-��)��"��!�%�#��%�"#�!)��#�!�"#��!#��#��(�$!��(�$!��$�#(�#�'��"��+��(��#��#��&��#��$!��"��!��$�#��!��!#��"��!��(�(�$!��$�#(��#�#��'#�#�'��$�#��&�#��"�)��!#��$��"��!�#��!� $�!��(��#��#�#��#��"��+�� #�#��(��!��!�#��!�(�$!��$�#��-"��)��"��!�%��#��&��!��#��#��##��!��(�!�#$!��%��#��#��%�"#�!��0��+��+��#��#�!��)�"��$��(�$��%��(� $�"#��")��"��#��#��#�''',''',''''+�� (�$��%��!�(�$!��""�"#��+��"#�!��!�")��.��$!��/��


Notes 1. General Information (please verify or make any corrections): State: County: Address 1: Address 2: Phone: Contact name: Email: 2. Next Tax Lien Auction: Please provide the time, date and location of your next tax auction. Please include any future scheduled auction dates. ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 3. Do you offer on-line auctions? ___________Yes ____________No 4. Can I purchase a lien by mail or through an assistant? ___________Yes ____________No 5. What are the registration requirements? Can this be done via mail or email? Please include any applicable fees and in what form the fee payment is to be made. ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 6. Please provide a complete list of the liens available for purchase. Include any relevant details about the liens.

County Tax Lien Summary


Notes7. A list of any and all venues for advertising your auction. Please include scheduled advertising dates. ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 8. What is the procedure for selling tax lien certificates not sold at auction? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 9. Please provide your county’s web site address: ________________________________________________________________� 10. What type of payment is required: ________________________________________________________________________________________________________________________________________________________________________________________________ 11. If a foreclosure is necessary, what is the process the county will implement: ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 12. Are “Over-the-Counter” sales accepted? ___________Yes ____________No


Notes

Property Analysis Worksheet

Property address: Property type and description: Property size (square feet): What is the property value? Does the property need repairs? Does the property have any environmental issues? What is the neighborhood like? Does the property have quick sale value or potential? Minimum bid amount: Maximum bid amount: Notes:


NotesOnce you’ve purchased a TLC, be sure that your records include the following

information about each investment:

1. The tax lien identification number.

2. The actual rate of return.

3. The amount you paid for the certificate.

4. The identification number and street address of the property to which the

TLC is attached.

5. The date of purchase.

6. Copies of the regulations for early redemption by the property owner.

7. The procedures for getting paid by the county.

8. Information about foreclosure timelines, as well as laws, regulations and

procedures for instituting a foreclosure proceeding.

Because many counties give current lienholders a first-right-of-purchase

for subsequent years’ TLCs on the same properties, it’s a good idea to have

the relevant regulations and deadlines on hand, too. If you forget about the

deadlines, you might wake up one morning to discover that another investor has

bought your right to collect interest and penalties for the coming year, which

would certainly put a dent in your yield.


NotesCHAPTER 5 The Auction ProcessThere are five common methods for purchasing TLCs at public auctions:

1. Bidding down the interest rate.

2. Bidding a premium or bonus amount.

3. Bidding down the percentage ownership in the property.

4. Rotational bidding.

5. Random selection bidding.

Each technique has its advantages and disadvantages, which we will discuss in a

moment. However, the most important factor to consider is how each method

will affect the yields on the certificates. Bidding down the interest rate and

bidding a premium are the most commonly used methods, and both can produce

a significant impact on yields, substantially reducing your rates of return – unless

you bid carefully and bid wisely.

Arrive Early and Well-PreparedFirst of all, it’s important to arrive early and make any necessary introductions.

This will help you learn what’s going on, when, and with whom. Watch for

other participants who know how to play the game. If possible, get acquainted

with them and get to know something about their goals, bidding strategies and/

or “systems.” Remember, “intel” is a crucial part of this business. (At the same

time, be aware that not everyone knows what he’s doing.) If need be, glean as

much information as you can from the officials conducting the auction. Most

will be happy to answer your questions.

By now, you should have a rough idea of what to expect. You will have already

made a deposit or come prepared with the proper sum in a form acceptable to

the county. You should also have determined the minimum interest rate you will

accept or the highest premium you will pay for any given TLC.

Once these decisions are made, you should (metaphorically) carve them in stone.

Do not get swept away by the excitement and electric energy that infuses many

live auctions and accept lower returns just to experience the “thrill of victory.”


NotesAuctions bring out the competitive side of almost everyone who participates,

even people who thought they weren’t very assertive. Resist the temptation to

win at any cost – it could wind up being a costly mistake.

Instead of allowing yourself to get caught up in the emotional rush that comes

with bidding, remind yourself of the consequences of foolish overbidding, as

well as the ultimate reason that you’re attending this auction: to buy as many

high-yield investment products as possible – not any old investment product

with any yield.

States that offer TLC auctions generally hold them once a year – sometimes

twice a year. A few states conduct auctions of leftovers from previous auctions,

but these are not common. Exactly when the auction will be held is outlined in

state law, but it can vary a little from county to county. For example, Arizona

counties hold their auctions in February while Colorado counties hold theirs in

December.

Aside from locations, times and bidding methods, the only variable at most

auctions is the number of bidders and the intensity of the competition. Thanks

to the recent economic downturn and the still-sluggish housing market, there

is more competition today than there was a few years ago, with many counties

seeing double-digit jumps in the number of TLCs sold. That increase reflects both

the sharp rise in struggling homeowners and the number of homebuilders who

haven’t been able to generate enough cash to cover taxes on their undeveloped

lots. There is more interest in tax lien auctions than there once was, but the

increased number of bidders is balanced out by the increased number of TLCs

for sale.


Notes&RQVLGHUDWLRQV�IRU�'LIIHUHQW�%LGGLQJ�0HWKRGVBidding Down the Interest Rate: This is perhaps the simplest bidding technique,

since it merely requires that you choose a price “floor” – below which you will

not bid. Again, once you have decided on the lowest interest rate acceptable to

you, don’t bid beneath that. If you’re not careful, you could quickly bid away

most of your profits.

When setting your floors, consider factors that include the number of properties

for sale at this particular auction, the amount of competition that you anticipate,

the fair market values and assessed values of your favorite properties, the

likelihood that the TLC will be redeemed by the property owner before the

expiration date and, if so, the yield you’ll receive if this happens. Unless you’re

a math prodigy, make these calculations before you arrive at the auction. Once

it starts, thingS will probably move too fast to determine the precise yields and

profit margins.

Bidding a Premium: Using this method, the winning bidder is the one who

offers the largest amount in excess of the amount due on the delinquent tax.

Obviously, your bid will be based on whether the premium is returned upon

redemption and, if so, whether it earns interest during the redemption period.

Some premiums are not refundable, and others earn no interest.

At premium auctions, the opening bid for each TLC is for the amount of the

delinquent taxes, interest accrued, penalties and any other costs. If more than

one bidder pursues the certificate, it’s sold to the person willing to pay the highest

price – i.e., the person willing to take the biggest “hit” on his profit margin.

Note: To redeem the TLC, the delinquent property owner must pay the price of

the highest bid.

Bidding Down the Percentage of Ownership: Unsurprisingly, this is the least

popular bidding method, since nobody wants to foreclose on a property in which

the delinquent taxpayer retains a percentage of ownership. In fact, the technique

is so unpopular that it’s common for bidders to throw a monkey wrench into the

works – each of them bidding 100% of the ownership percentage in order to force

the auctioneer to switch to another bidding method. Here, the winning bidder is


Notesthe person who agrees to pay the amount of the delinquent tax, the interest and

other costs, and who accepts the least percentage of property ownership.

Typically, bidding starts at 99 percent ownership, and decreases according to the

action of the bidders. Obviously, the person who wins the TLC is the one who

bids the lowest percentage ownership in the property.

Of course, there is one major advantage to this method: the yields on TLCs are

unaffected by the bidding. This is small comfort to the lienholder if the property

owner fails to redeem the lien, but otherwise it’s better than bidding down your

profit margins. (Bidding down the percentage of ownership is used in only a few

states.)

If you are a winning bidder under this method, you essentially share the property

with the original owner, becoming what’s known as a “tenant in common.” You

can still foreclose, but you will have to buy out the original owner’s percentage –

or split profits from the foreclosure sale – because the original owner has become

your legal partner. In sum, this method has the advantage of leaving your rate

of return unaffected, but instead negatively affects your security in the property.

You can’t acquire full title to the property unless the original owner agrees to

relinquish his share.

Rotational Bidding: Using the rotational system, bidding is conducted according

to seat order at the auction. When a bidder’s seat number is identified, the

investor has the option of bidding on the TLC, or passing on it. If she elects

to pass on the certificate, the TLC is offered to the bidder in the next seat to

purchase or refuse. This process continues until the certificate is sold or is

refused by everyone in attendance.

It’s important to note that when you refuse to buy a certificate during your

“turn,” you do not get another turn until every other bidder has also received a

turn. In other words, use it or lose it.


NotesRandom Selection: Random selection bidding is just another form of rotational

bidding. Here, the auctioneer assigns each bidder a “bingo” number. When

the number is randomly called, the person holding that number receives the

opportunity to bid. He can then bid to reduce the interest rate or pay a premium,

depending on the method used by the county.

If you’re thinking of “gaming” the rotational and random selection methods by

placing multiple deposits to acquire multiple seats or “bingo” numbers, think

again. At many auctions, you are allowed to do this, but you’re only allowed

to represent a single seat or bingo number at any given time. Unless the state

and county allow you to use proxies (usually someone who does not share a

physical address with you), you will have to walk in and out of the auction

room, exchanging one number/seat for another and then returning to represent

that seat or number. This may give you an advantage in some situations. On

the other hand, since some fees are non-refundable, you will have to win enough

properties to justify the additional expense.

5HGHHPLQJ�<RXU�&HUWL¿FDWHVPerhaps the best feature of TLCs is, the local government that issued the certificate

– not you – does the work of collecting your money. If the property owner pays

off the lien, she submits payment to the treasury office, which then mails you a

check. You can keep your money working for you by continually rolling over

profits into new TLCs.

It should go without saying that if you change your address, you should notify

the government offices that have issued the TLCs – all of them. We’ve mentioned

this anyway, because people have been known to forget this simple fact, and

then wonder where their checks went.

It also goes without saying that few things in life are better than receiving a check

in the mail for an amount substantially larger than what you invested. This is

money that you can count on – unlike investments in the stock market. And

because you can rely on earning the same returns that you anticipated the day

you bought the certificates, there’s no reason why you shouldn’t be re-investing

your profits again and again. With fixed and guaranteed interest rates of 16 to

36 percent, it makes perfect sense to keep investing!


NotesThe Tax Lien Certificate (TLC) Investing Process -- How You Earn 16% To 36% Guaranteed By Law�

OR Acquire Valuable Real Estate Free & Clear

A Property Owner Does Not Pay Property Taxes To The County

The County Tax Collector Puts A Lien On The Property For The Tax Due

The County Tax Collector Sells The Lien To Private Investors As A Tax Lien Certificate

For The Amount Of Tax Due

A Private Investor Buys The TLC And Holds It For 6 Months To 4 Years

Does The Property Owner Pay Off The Tax

Due?

TLC Investor Is Repaid

Entire Investment Plus A Guaranteed High Interest Rate

The TLC Investor Acquires The Property

Free & Clear (Can be sold for a tremendous profit.)

Yes No


NotesCHAPTER 6 Online Auctions

Excerpt from a newspaper ad announcing a tax sale auction in rural Worcester

County, Maryland.

WORCESTER COUNTY MARYLAND

OFFICE OF THE TREASURERGOVERNMENT CENTER

1 WEST MARKET STREET, ROOM 1105

SNOW HILL, MD 21863

TAX SALE OF PROPERTIES LOCATED IN WORCESTER COUNTY, MARYLAND

State and County taxes for the 2010 tax levy (and prior years) by the County Commissioners of

Worcester County and/or delinquent water, sewer, and assessment charges on the properties

hereinafter described being due and in arrears and unpaid, and in order to compel the payment

of the same, together with interest thereon and costs attending the proceeding, as provided by

law, by virtue of the power and authority vested in me as Treasurer, Finance officer, and Collector

of State and County taxes for Worcester County, Maryland, as provided by the Acts of the General

Assembly of Maryland, the undersigned Treasurer, Finance Officer and Collector, aforesaid, will sell at

public auction to the highest bidder the following properties. This public auction will be held at the

Worcester Government Center, County Commissioners Meeting Room, Room 1101, 1 West Market

Street in Snow Hill, Worcester County, Maryland on

Thursday, May 24, 2012

at the Hour of 10:00 A.M.

LIST OF PROPERTIESItem #1Account#10146046

Assessed To 123rd Street LLC, Described as Lot 1-B – 30,000 Square Feet West Side Coastal Highway

Plat Leeward Cay, Deed Reference 4456/0038, Assessed Value $1,380,000, Taxes Due $37,977.05.

Item #16Account#08003416

Assessed to Allen Victoria Selena, Described as Improvements 1.09 Acres Saint Paul’s Road Survey

Lands of Victoria Allen, Deed Referenced 1961/0495, Assessed Value $35,200, Taxes Due $553.06.

Item #17Account#08003416

Assessed to Ames Maurice, L, Described As Improvements 118’ X 225.72’ X 118.10 X 225’ North Side

Market Street, Deed Reference 4679/0005, Assessed Value $65,000, Taxes Due $1,570.34.


NotesJust a few years ago, online auctions were a rarity, but they’re fast becoming the

rule – not the exception.

The good news is that seven states now permit online auctions: Arizona,

Colorado, Florida, Indiana, Maryland, Louisiana and Nevada. The bad news:

online auctions allow other people, from across the country and even overseas,

to participate in tax sales, dramatically increasing the competition for the

most prized TLCs. This often translates into lower rates of interest and higher

premiums bid for the best certificates. In another decade or so, it’s likely that

most TLC auctions will be held online, so now is the time to familiarize yourself

with the differences between the web-based and “live” varieties.

One advantage of buying TLCs online is that many of the counties provide

investors with access to economic statistics, forecasts and demographic data about

the neighborhoods where property is located, and in some cases photographs

of the delinquent properties. This can help you narrow your search before

hopping in your car to visually inspect your “short list” of TLC properties. One

disadvantage of online auctions, aside from increased competition, is that you

will have to pay a commission to the online auction company – companies such

as Realauction.com. The commission can represent up to 10 percent of the price

paid for the tax liens.

+RZ�WKH�3URFHVV�:RUNVIn the weeks and months before the auction takes place, the county or the

company to which it outsources the auction, will create a website and then mail

an information packet to previous and prospective bidders that details the sale

procedures and provides the dates and times of any

training classes. A demonstration website also “goes

live” to let prospective bidders test the system and

procedures before the event. You can visit the site at

any time to register to participate in the sale. On the

same day the county publishes an advertisement for

the sale (see page 39), it also publishes a list of the

delinquent properties on the demonstration site.


NotesTo be eligible to win TLCs at the auction, not just bid, you must meet the county’s

deposit requirements by using the Automated Clearing House (ACH) feature on

the website or via cash, wire transfers or check. The amount of money needed

for the deposit, as well as the date by which it must be received, differ from one

county to the next, so don’t assume that the rules of Apache County, Arizona

apply to Lake County, Indiana.

For example:

As of this writing, six of Arizona’s 15 counties hold online tax lien sales each

year, all of which are conducted in February. To participate in one of these

auctions, you must register a couple of weeks before the sale and make your

deposit in advance. The amounts of the deposits, however, vary widely from one

county to the next, with some jurisdictions requiring as much as $5,000.

Meanwhile, the five Indiana counties that conduct online auctions do not even

schedule them at regular intervals. These auctions are the county commissioner’s

TLC sales – comprising unsold certificates from sales conducted by the county

auditor or county treasurer (depending on the jurisdiction). During the

online sales, the minimum bid may be lower than the original lien amount. In

addition, the redemption period for TLCs purchased at the online auctions is

just 120 days, and not the one year allowed for certificates that were sold at

the treasurer’s tax sale.

As these examples show, it’s essential to acquaint yourself with the rules and

idiosyncrasies of each jurisdiction’s auctions before sitting down at your computer

to place bids. Failure to do your homework could cause you to be blocked

from participation, or incur costs you hadn’t anticipated when determining your

acceptable rates of return.


NotesMost counties require you to place a deposit before you can make your first bid.

The deadlines for placing deposits are set at one or two weeks before the close

of the last auction for the county. When you’re ready to place your first bid,

simply choose a bid type, enter your bid amount in the “Bid Amount” box, and

click on the “Bid On This Item” button. Before you can place the bid, you will

be prompted to log in (or register if you haven’t already done so). Once you’ve

submitted your bids, the auction company sends you a bid confirmation email,

and places a similar message in your account’s inbox on the site.

Winning bidders receive emails within 24 hours from the auction company,

which contains settlement and deed transfer instructions. If you are the winning

bidder, your deposit will be transferred to the county tax collector as a non-

refundable down payment. If you are not the winning bidder, your deposit will

automatically be refunded within 10 business days from the close of the auction.

At most online auctions, certificates are bundled into batches. The number of

certificates per batch varies by county, but most batches contain 500 to 1,000

certificates apiece. As soon as all of the TLCs in each batch are sold (or passed

up), that batch is “closed” and the winners are announced minutes later. This

is the main benefit of the “batch format.” You learn whether you’ve won your

desired TLCs shortly after every batch closes, rather than having to wait until

the entire auction ends.

You can make additional deposits at any time during the sale and, after all the

batches have closed, you can pay for your certificates using the ACH feature, or

opt for a more traditional form of payment. Unofficial results are posted on the

site, along with other statistics on the bidding patterns. Do not ignore this data!

It can help you adjust your bidding strategies in the future.

Note that some states and counties do NOT use opening bidding, meaning

you will not see the amounts bid by your competitors. For example, Nebraska

currently uses a closed bidding system. (It also requires a deposit representing 10

percent of your online auction budget.) When bidding on Nebraska properties,

you should pay very careful attention to the bidding rules posted on the auction

site, as well as important dates, so that you register and submit your deposit in

time to bid.


NotesWhat’s more, you need to pay for all your winning bids by the deadline or

risk losing those bids and being barred from bidding at future tax sales. Once

you submit your deposit, you may bid on as many properties as you want, but

your budget (as reflected by your deposit) will limit how many liens you can be

awarded.

Again, this demonstrates how important it is to get familiar with the auction rules

of every state and county in which you plan to purchase Tax Lien Certificates.

Investing in TLCs is one of the most profitable ventures you will ever undertake,

but it’s not something for people who are fond of skipping “the fine print.”

When it comes to TLC auctions, the laws, rules and procedures must be followed

“to the letter” to avoid potentially costly mistakes.

Especially in the beginning, don’t allow the ease and fun of the online bidding

process to distract you from your primary purpose or cause you to forget the

bidding guidelines you established for yourself. If you’ve ever gotten into a

bidding war on eBay, for example, you know that even when the auction process

is entirely virtual, the excitement of the auction can still tempt you to forget your

investment and bidding ceilings, purchasing things for much more money than

you originally planned.


NotesCHAPTER 7Direct Purchases of TLCsTLC auctions can be fun, allowing you to meet other investors to share tips and

strategies. Some of these people may eventually become good friends or even

partners. The downside of auctions is that competitive bidding generates lower

yields, and high yields are the Number One attraction of TLCs. Fortunately, this

isn’t an issue when it comes to purchasing certificates by mail or over the counter.

There are great bargains to be had, especially in rural counties. There’s really no

downside to purchasing certificates at the county treasurer’s or assessor’s office,

as long as you’ve done your due diligence.

You might think, “If this is true, why don’t most investors skip the auctions in

favor of over-the-counter sales? In fact, many investors do skip the auctions,

preferring to buy certificates directly from the source.

Several states offer over-the-counter sales of TLCs that have not sold at the

auction, allowing you to purchase them directly from the county tax collector’s

office – literally “over a counter.” In some states, the number of people seeking

unsold certificates actually exceeds the number who attended the auction. There

are literally more certificates available than buyers! Of course, be sure to pick

TLCs that are secured by valuable property. Some unsold TLCs didn’t sell for

a good reason. Be aware that in some states, such as Iowa, the law provides

that leftover tax liens from the first auction will be auctioned at a subsequent

auction. In Iowa, liens are never offered for direct sale.

Unsold parcels are listed in a report issued by the county treasurer’s office, which

is made available to the public (often for a fee) after the auction. You pay the

entire amount of taxes, interest, fees and charges due at the time of purchase.

Simply submit a list of your desired properties to the treasurer’s office, along

with a cashier’s check, money order or certified check for the approximate total.

Submissions are processed in the order in which they’re received. If you didn’t

bring enough money to buy every property, you’ll have to let those properties

remain available to other buyers. If you bring more than enough money than

needed to purchase everything you want, money in excess of the amount due


Noteswill be refunded. Be sure to specify “assignment” so that the county does not

inadvertently process the transaction as a redemption pay off. The interest earned

on your purchase (“assignment”) will be the current statutory maximum for that

state.

7LSV�IRU�%X\LQJ�'LUHFW�IURP�WKH�&RXQW\One drawback in buying directly from the tax authority is that you may buy

only what wasn’t purchased at auction. Naturally, this means that you will

have a smaller selection. Your chances for finding good deals are greater when

you choose rural counties that attract fewer investors to the auctions and fewer

people to the local government offices.

Keep in mind that you must be the one researching the relevant facts about your

purchases. Do not call or ask a cashier for amounts or status of taxes. The

amounts on the computer are not the amounts you will pay to buy delinquent

tax liens. Instead, submit a list of the properties for which you wish to buy

TLCs, and the office will research the lots, advising if tax liens are available and

the amounts due. You will be expected to purchase all the available liens on

the list you submit. In addition, some counties will report the interest received

by you in accordance with Internal Revenue Service regulations. Among other

things, this means that you’ll need to have a tax identification number and a

properly executed W-9 form on hand. In these jurisdictions, your certificates

will not be processed until a W-9 is received.

%X\LQJ�IURP�2WKHU�,QYHVWRUVIf you decide to sell a Tax Lien Certificate, you’re in luck! Many states allow

the assignment of tax lien certificates from the holder (you) to another party

(the assignee). However, because state laws sometimes give each county the final

say in whether to allow assignments, contact the county in which you bought

the TLC to determine if this is permitted. You’ll also want to learn if a “grace

period” applies to the transaction, and what the proper procedures are for

assigning the certificates.

Counties may require a grace period of six months to a year before you can

assign a certificate. Usually, the county will charge a nominal fee to process the

assignment – e.g., $10, as well as information about the person to whom the


Notescertificate is being sold. (Many counties want to ensure that you don’t have

outstanding taxes or other fees due to them.)

As you get to know and befriend some of the “regulars” who attend auctions,

you can make arrangements to buy and sell certificates among yourselves. You

might form an investment club, buying tax liens in the same region, and agreeing

that if one of you needs to cash out, the others will purchase some or all of your

certificates. These arrangements are not uncommon, since all TLC investors are

in the same boat when it comes to liquidity.

Please note that merely filling out an assignment form does not complete the

transaction. You must inform the county that you have filled out the required

paperwork, so that when the TLC is redeemed, the government issues a check to

the new owner. Therefore, it’s important to register the transfer of the certificate

with each county.

Online Over-the-Counter SalesCurrently, only one state (Florida) conducts virtual over-the-counter sales of Tax

Lien Certificates, though this could – and probably will – change in the near

future.

.HHS�\RXU�H\HV�IRFXVHG�IRU�FKDQJHV�GRZQ�WKH�URDG�


NotesCHAPTER 8

)RUHFORVLQJ�RQ�7D[�/LHQV

(Or “Winning the Lottery”)

Approximately 97 percent of all TLCs are eventually redeemed. And when

properties are secured by mortgages, the redemption rate is closer to 100%, since

the banks will pay off the liens rather than risk losing their (usually substantial)

investments. That said, defaults do happen, and when they do, you should be

prepared to cash in your “winning lottery ticket.”

Let’s say you purchased a tax lien certificate on a residential property for $5,000,

and the certificate is not redeemed. Let’s also assume that the house has a fair

market value of $100,000. Having acquired the deed completely free & clear

for just $5,000, there are several things you can do with the house you just

acquired for 5% of its market value.

You can live in it.

You can rent it.

You can owner finance it.

You can flip it to another investor or landlord.

You can finance it and pull money out of it.

You can have a realtor sell it for you at a deep discount.

Let’s say you decide to have a Realtor sell the house (with a fair market value

of $100,000). You could list the property at a big discount for a quick sale –

maybe just $70,000. At that price, you would probably receive multiple offers

and have no trouble selling it quickly. Subtract the $5,000 you invested in the

TLC, as well as Realtor commissions and other closing costs, and you still gain a

$50,000+ profit – from one property that you acquired for 5 cents on the dollar!

Whenever a property owner fails to pay the tax lien by the end of the redemption

period, congratulations are usually in order! You now have an extraordinary

opportunity to multiply your yield by geometric proportions, earning many

times your original investment in the Tax Lien Certificate. We call this “winning


Notesthe lottery!” In some instances, investors have won title to beautiful luxury

condominiums and spacious homes for a fraction of their market value –

sometimes opting to live in these homes instead of selling. In most cases, though,

you will want to foreclosure and sell the property as quickly as possible. After

all, your primary focus may be on income, not property ownership. To properly

foreclose, you’ll need to understand the fundamentals of foreclosure procedures

in the jurisdictions where your newly acquired property sits. Foreclosure

windfalls don’t happen every day, so be sure to dot every “i” and cross every “t”

so the process unfolds in a timely and legal fashion.

Hire a LawyerBy now, it will come as no surprise to you that every state has its own

requirements regarding foreclosures. Some states insist that you post a notice

of the foreclosure in public places, while others don’t. Some states require you

to publish foreclosure notices in a newspaper for several weeks; others don’t.

Once again, even if you’re an expert in the laws and procedures of one state, this

means nothing once you cross the border to another state. Most importantly,

you should know that state laws are very strict about foreclosure procedures.

If you fail to follow the required process exactly, you may be prevented from

getting a deed to the property – or the deed you received will be voided.

Because you need to be extremely precise, we recommend that you hire a

lawyer to handle the process for you. There’s too much at stake for you to

be donning an amateur “legal eagle” hat, since there’s little to no margin for

error in foreclosure proceedings. The gains you will receive will more than

offset attorneys’ fees, since you’ll probably be acquiring the parcel for pennies

on the dollar. Also, if the original property owner decides to pay the debt during

foreclosure proceedings, he will often have to pay your lawyer’s fees.

The main reason that we advise hiring a lawyer is that you may need to spend

some time in court, where you’ll need to file pleadings and present evidence.

Most states mandate a court appearance, and any mistakes made can result

in your case being tossed out the window. Judges are not inclined to forcibly

transfer property from one owner to another when the foreclosing party has

done a sloppy job of proving his case.


NotesNotice of Foreclosure In every state, you must give notice to foreclose to everyone interested in the

property, including other lienholders. But naturally, different states have different

requirements concerning the content of the notices, as well as who must be

notified and when. As a rule, the person listed on the property records as the

owner of the property must be notified, and in many cases anyone currently

living at that address must receive notification – e.g., tenants.

NOTE: in most cases, a mortgage holder will pay off your TLC as soon as it receives notice of your intention to foreclose. Banks are not anxious to have their mortgages wiped out by superior liens for inferior sums of money.If the redemption period is about to expire and the owner hasn’t paid the tax, the bank will almost always pay off the lien. Because the bank knows that if the lien holder forecloses, its mortgage will be wiped out. It will almost certainly pay a smaller sum to protect a mortgage that may be worth six figures. (By the way, many banks routinely invest in TLCs.)

If you know the name of the property owner, and can locate him/her, you will

probably have to hire a process server to deliver notification to that person.

Every state specifies when personal service is required, as well as service by

registered or certified mail. All states permit “service by publication” – i.e.,

notification in a specified newspaper, as a substitute for personal service if the

person who must be served cannot be found. Of course, almost nobody thumbs

through the newspaper searching for legal notices to see whether there might

be a legal notice that applies to her, but it’s still a legal requirement. Don’t

forgo this important step! And be sure that any notice adequately describes the

property and contains all other required information. If not, your case could be

tossed out on a technicality. It can, and does, happen.

Another thing that happens, occasionally, is that the property owner will show

up in court to claim that the foreclosure should not take place. Once in a while,

a property owner is able to prove that he actually paid the property taxes, but

that the county made an error and didn’t record the payment. This is extremely

rare, but it happens. In the vast majority of cases, though, the property owner

never appears, and nobody opposing the foreclosure shows up.


NotesTaxes

Which laws or regulations determine whether foreclosing on a tax lien is a

taxable event and, if so, when you will have to pay capital gains taxes?

Good question.

There isn’t a regulation that clearly covers when such foreclosures can be taxed.

This isn’t to say that the state and federal governments won’t tax you – only that

when the taxes are due (and how much) isn’t spelled out by state and federal

regulations. The IRS does state that when “mortgaged or pledged” property is

bought by a creditor for less than fair market value, the difference between the

purchase price and fair market value will be taxed. That being said, your lawyer

can argue that in the case of a TLC, the property was neither mortgaged nor

pledged to you. At a minimum, you can argue about when the capital gains tax

will be due – upon foreclosure or upon sale of your new property.

If you’re concerned about the tax implications, you can take a few practical

steps. For one, you can control when the foreclosure and sale occur. It’s a good

idea to foreclose early in the year so you have plenty of time to sell the property

before the end of that year. Then, if you do owe a tax, you’ll have the money

for pay it. For another thing, unless you plan to occupy the property, you have

every incentive to sell the real estate as soon as possible. Since you bought it for

a song, there’s no reason (other than excessive greed) why you can’t price it to

sell.

Insurance After you’ve acquired a property, immediately contact an insurance agent in

the area to obtain liability insurance. As the new owner, you need to protect

yourself in the event some innocent stranger has an accident on the property

while taking a shortcut through the backyard. You should also purchase fire

insurance, as well.

Your second step should be to bring a Quiet Title Action. Although you already

have the title, this lawsuit brought against any potential claimants to the property

will help to ensure that you receive a declaration from the court that you hold

good title. You want to receive a judgment from the court that will protect


Notesyou against later legal challenges to your title by anyone who thinks he wasn’t

given the required notice, or that the description contained in the notice wasn’t

adequate. The person who buys the property from you will need assurances

that he or she is getting good title, as most new owners don’t look forward to a

lawsuit in exchange for their money. In addition, the title insurance company

may require you to file the Quiet Title Action.

You may also want to bring an Unlawful Detainer Action. You will only need to

do this if there are tenants, guests or squatters living on the property who aren’t

inclined to leave. The Unlawful Detainer Action seeks an order from the court,

granting you possession of the property. After you have the order, you can

receive assistance from the sheriff in removing inhabitants and their possessions.

In many states, you can receive such an order within a few weeks.


NotesCHAPTER 9

0LQLPL]LQJ�5LVNIs it possible to locate seemingly low-worth properties with hidden value?

Absolutely! Conduct an Internet search, and you’ll discover anecdotes about

people who unearthed the equivalent of “buried treasure” in real estate by

purchasing tax lien certificates on properties that were dismissed by even the

savviest of investors.

Market valuations are not always accurate, developers might decide to purchase

the vacant lot you just acquired, or maybe the previous owner didn’t pay the

taxes because he died without heirs. For the most part, however, “if it looks like

a duck, walks like a duck and quacks like a duck, then it is a duck.” Rags-to-

riches stories are popular because they are so rare. If this sort of thing happened

every day, it wouldn’t make for such exciting reading.

$YRLGLQJ�-XQN�3URSHUWLHV�One of the first steps in your due diligence should be trying to determine why the

taxes were not paid in the first place. The most common reason, of course, is

that the property owner didn’t have enough cash to pay them. This is especially

true during economic downturns when people are losing jobs or having their

hours reduced. Or, the property owner may have experienced a financial

disaster related to emergency medical bills, property damage, other investments

gone bad, etc. Another common reason – and it’s a big “red flag” – is that the

property owner has the money to pay the taxes, but the money for the mortgage

is no longer there, so he determined that it wasn’t worth paying the taxes.

Every so often, a homeowner decides

to park the money in another “great”

investment, and figures the returns on

his other investment are so good that it’s

worthwhile to pay interest and penalties

to the county in exchange for the “loan.”


NotesHow do you weed out the “junk” properties from the promising ones?

Start with the appraisals of the property’s value from the county (and if it’s

available) one from a professional realtor, as well. Again, these assessments are

sometimes wrong, but more often than not, they are pretty accurate. And in

any case, they’re a good starting point in determining the true market value of

the land and improvements. At a minimum, appraisals will quickly reveal those

properties that are studded with red flags.

For example, if the property’s value is high for the area, but the owner walked

away without paying the taxes, this screams trouble. Unless the owner was a

financial idiot or encountered personal problems, it’s likely that something is

wrong with the property – something that may not be obvious. If the assessment

seems unreasonably low for the area, determine why before placing it on your

“to buy” list. Otherwise, you’ll have to assume that something is wrong with

the property. Maybe the building on the lot is ready to collapse, and would have

to be razed before anything could be done with the property.

When evaluating assessments, your mission is to find properties with appraised

values that are comparable to similar properties in the area. Never assume

that you’ve found an amazing bargain until you can back up that assumption

with solid proof. Assessments are occasionally wrong, but more often than

not, they’re pretty close. Keep in mind that values can vary dramatically from

not just one state and county to another, but from one town to the next. A

property valued at $200,000 in southern New Jersey may be just fine, but if

that same property were located in Washington, D.C., you may be looking at an

undesirable neighborhood.

Though we’ve already offered some recommendations on the types of properties

on which you should focus, some of this advice bears repeating here:

Focus on improved properties. One of the most important laws of real estate

is that raw land is a more troublesome investment than developed property.

Because you are buying a TLC rather than the property itself (if not, you should

be focusing on tax deeds), and will want to buy multiple certificates, you should

be choosing properties that are easy to evaluate. In general, the value of a

property hinges on whether (and how) it can be improved. If it can’t be improved


Notesat all, or improved in ways that offer much economic opportunity, it’s doubtful

the land will ever provide much value to investors. Some of the reasons that raw

land can be of limited value include:

If the county or municipality will not allow much (or any)

development of the property, you probably have a “duck” on your hands.

Though the local government may not have zoned the land as a natural

space, making it off limits for future development, it may be zoned as a

commercial property in the midst of a residential neighborhood or vice

versa, making a quick sale more difficult. Another possibility is that the

land is compromised by toxic waste or sits atop an earthquake fault line.

Property that’s high and dry during the summer may be an

underwater wonderland during spring

floods if it’s located near a river or a

marsh. If you’re thinking of purchasing

a TLC attached to land that’s near

water, consult with someone at the local

planning department to see which areas

have been designated as floodplains. The

same holds true of low-lying lots in regions that are prone to high tides and

hurricanes.

Having little or no water is just as bad as

having too much. Unless the land is served by a water agency, and the

agency confirms that it can connect to available water and sewage systems,

you’ll need to provide for your own water and sewage. Worse, it may

not be practical (or even possible) to drill a well or install a septic system,

depending on the geology. What if the water table is located so far beneath

the earth’s surface that the cost would be prohibitive? What if the soil is

composed of clay, rock or some other non-porous substance, and will not

allow wastewater to properly drain? You’ll want to uncover these issues

before investing in a TLC attached to this property.


Notes During the reign of Russia’s Catherine the Great,

her favorite prince (Potemkin) learned that the Tsarina would be paying a

visit to one of the many new towns that the prince had constructed as part

of a much-hyped modernization program. The only problem? Few of the

new towns had actually been built. Therefore, legend says that the prince

had numerous “towns” hastily constructed that consisted of nothing more

than facades – a ruse that succeeded in fooling Catherine. Forever after,

these phony improvements were known as “Potemkin Villages.” Don’t

fall for this trick! In the past, guileless investors have been persuaded

to invest in properties that turned out to be ghost towns or lots whose

“buildings” were empty shells, as well as land featuring mobile homes that

“disappeared” once the Tax Lien Certificate was purchased. As part of

your due diligence, conduct as thorough an investigation of the property

as you can. Be sure to pose questions to your friends in the government

offices, making sure that the improvements on the land are real, permanent

and in good condition.

Yet another reason to make friends with people at the tax collector’s office is

that they’re in a good position to know about the properties that actually do

contain hidden value – those once-in-a-lifetime opportunities. For example,

property assessors and treasury officials are often the first people to learn when

developers plan to purchase lots that might otherwise seem like ‘ducks.” One

of your friends may be kind enough to clue you in to one of these impending

deals, allowing you to jump on the TLC while the assessment is undervalued.

We don’t advise you to pursue this strategy as a matter of course, but in special

circumstances, it can pay off handsomely. Remember, it takes only one buyer to

make a real estate deal. A seemingly worthless property may be as good as gold,

provided you can locate one interested buyer.

Beware Environmental Problems A good reason to focus on TLCs attached to residential properties is that

residential lots are far less likely to have environmental problems. In fact, the

odds of encountering environmental issues with residential properties are about

as likely as discovering that your own property sits atop a long-forgotten waste

dump.


NotesThe vast majority of properties sold at TLC and Tax Deed sales do not have

environmental problems. If a property does have a problem, the county almost

always indicates that the lot has some environmental issues. Obviously, you’ll

want to avoid any property that’s been red flagged with environmental problems.

In very rare instances, an environmental problem may have gone undetected by

the taxing authorities, but in such a case, your visual inspection combined with

other due diligence efforts should uncover the situation – just one more reason

why you should physically inspect all of your prospective purchases. Unless

you’ve become quite expert in purchasing TLCs, never buy a Tax Lien Certificate

on a gas station or any other industrial property. (Of course, you won’t do this

if you’re already avoiding commercial properties.)

:KDW�LI�WKH�2ZQHU�)LOHV�IRU�%DQNUXSWF\"�If you have concerns about bankruptcy filings by property owners, you needn’t

worry. Though a bankruptcy filing will delay your ability to redeem the TLC

or acquire the tax delinquent property, it will almost never wipe out your

investment. Remember, you are not just a secured creditor, but the superior lien

holder on the property. And since you’ll be investing in multiple TLCs, and were

already prepared to exercise some patience while your money is hard at work,

the added delay shouldn’t put much of a crimp in your plans.

Regardless of whether the property owner chooses to file for a Chapter 7

“liquidation bankruptcy,” a Chapter 11 “reorganization” or a Chapter 13

“repayment plan,” the most important effect of a bankruptcy is that it imposes

an immediate, automatic freeze, or “stay”, on the actions of any creditors –

including you – to enforce claims outside of the bankruptcy court. In fact,

this is the most common reason that petitioners file for bankruptcy – to get

their creditors “off their backs” while they reorganize their affairs, develop a

repayment plan or, in the case of Chapter 7, eliminate as much of their debt as

the law permits. Please note that the automatic “stay” takes place whether or

not you were aware of the bankruptcy filing, and any action – even a successful

collection action – has no legal effect, and must be undone. Until the bankruptcy

filing is discharged and the automatic stay is lifted, there’s nothing you can do to

enforce your lien on the property.


NotesThe bankruptcy court will lift a stay for only two legitimate reasons:

1. The debtor has no equity in the property, so lifting the stay will not affect

the distribution of property in bankruptcy.

2. If a creditor can show cause, which usually requires the creditor to show

that his interest will somehow be harmed by continuation of the stay. In

this case, you would normally have to prove that the value of your interest

would deteriorate if the stay remains in place, which is almost never the

case for a tax lien holder. And even if you can prove such a claim, the

court will probably fashion some sort of protection for your interest, such

as periodic payments. It probably won’t lift the stay.

Certain types of property are exempt from the reach of creditors, such as the

tools of the filer’s trade, health aids and household goods, but this is irrelevant

when it comes to TLC investors, because tax liens are not subject to exemptions.

Another area of no concern is the ability of trustees to set aside (delay) certain

property transfers if they took place within 90 days of the bankruptcy filing. The

law is designed to prevent debtors from preferentially paying off one creditor

before another creditor in the same class. But because a trustee may not set aside

a transfer made pursuant to a valid statutory lien – and property tax liens fit

that requirement – your redemption of a TLC that was made 30, 60 or 90 days

before the bankruptcy petition cannot be set aside by a trustee.

As long as the property involved is worth more than the lien, you’re entitled

to interest on your claim. Fortunately, the property securing a TLC is almost

always worth more than the taxes, so you’ll be entitled to interest on that debt.

However, the interest may not be at the same rate you would have earned had

the bankruptcy not been filed.

If the property owner files for Chapter 11, you may have to file a “proof of claim”

in a timely manner or risk losing your investment. Proof of Claim filings are not

required for secured creditors in Chapter 7 or Chapter 13 bankruptcies, but in

Chapter 11, you must prepare a list of claims and interests in the property. Any

person whose claims or interests are described as disputed, contingent, or un-

liquidated (not in an unknown amount) does not need to file a Proof of Claim.

Normally, this would let you off the hook. However, it’s possible that the debtor


Notesmay not have listed you as a creditor and, if he did, that he might have entered

the wrong amount of money. Obviously, it’s in your interest to protect your

investment, so be sure the property owner has listed the correct amount of your

lien in the petition, or you’ll be bound by that mistake in the debtor’s listings. It

isn’t common for TLC investors to have to file proofs of claims, so consider this

a “better safe than sorry” warning.

Overall, you would rather not deal with a property that’s tied up in bankruptcy.

Therefore, if you have reason to believe that a property owner may be considering

this option, you should avoid purchasing the tax lien on the property, since

this action will reduce the liquidity of your investment. All things considered,

though, it’s not the worst thing that could happen, and it’s also not the most

common occurrence. As a small investor, you might never have to deal with a

bankruptcy at all, but as your portfolio grows, so do the odds that this situation

will crop up once in a while. Thus, it’s best to be prepared, and to keep abreast

of the latest changes to the bankruptcy laws.

Better to be safe than sorry!


NotesCHAPTER 10

%X\LQJ�7/&V�ZLWK�D�6HOI�'LUHFWHG�,5$What could be better than earning guaranteed high interest from one of the

most secure investments available? How about deducting all or a portion of the

investment amount from your taxable income? With a self-directed Individual

Retirement Account (IRA), you will combine the benefits of two powerful

financial instruments.

As the name indicates, the main difference between a self-directed IRA and a

traditional IRA is that the self-directed one allows you (the account owner) to

make the investment decisions in tandem with a qualified trustee or custodian.

The custodian maintains the IRA’s assets and conducts all transactions, maintains

the proper records, files necessary IRS reports, issues client statements, helps you

understand various rules and regulations, and performs other administrative

duties on your behalf.

Establish a Self-Directed IRA in 5 Easy StepsHere’s how to set up a self-directed IRA containing a portfolio of TLCs.

First, you must establish an account with an IRS-approved custodian who allows

investments in non-publicly traded instruments. (Two companies that can help

you with self-directed IRAs are Equity Trust Company or PENSCO. You can

also do a Google search for other asset custodian companies.)

Second, you’ll need to fund the IRA with enough money to cover your costs,

including the purchase price of the certificates and expenditures such as auction

deposits and government fees. You can fund the IRA with direct contributions,

transfers from existing IRAs and/or rollovers from a 401(k), 403(b) or Tax

Sheltered Annuity.


NotesThird, you’ll need to request sufficient funds from your custodian in order

to purchase the tax liens with the IRA. To do this, you’ll need to fill out a

direction of investment form. You’ll have to complete the form whenever you

want to allocate funds from the IRA. It requires that you supply the following

information:

General account information.

A description of the assets to be purchased.

The sum needed to purchase the assets.

The name of the jurisdictions to which checks will be written.

The methods by which funds will be remitted.

The easiest way to ensure that IRA funds are available is to notify your custodian

seven to 10 business days before the sale regarding how much money you’ll need

to purchase TLCs. That way, they can send the funds before the event. Most

investors instruct their custodians to send them a number of incremental checks

that will add up to the total amount they need for their purchases. For example,

if you want to buy $10,000 worth of tax liens, you could instruct your custodian

to send you 10 checks of $1,000 apiece, made out to the county in which the

auction is held. By doing this, you will be prepared in the event you’re not able

to purchase the full $10,000 worth of liens that you had planned to buy. For

example, if you only purchase $5,000 worth of liens, you would give the county

five checks (of $1,000 each). You then send the remaining five checks back to

the custodian for re-deposit into your account.

If you need IRA funds sooner, most custodians can send the money by overnight

delivery or through a wire transfer to a local account.

NOTE: You must have your Tax Lien Certificates (and deeds) titled in the name

of your IRA. In addition, you must use your custodian’s Tax ID number.

The fourth step is purchasing the tax liens. The only thing you need to remember

here is that the assets must come from your IRA and be titled in the name of

your IRA, i.e., “Equity Trust Company for the benefit of John Smith, IRA.”


NotesStep 5 is to have the liens or deeds recorded using your IRA’s title and custodian’s

Tax ID number – after which the county will send the TLCs for confirmation of

ownership to the custodian. (All original documents concerning an asset owned

by your IRA must be sent to your custodian.) Be sure to provide the county with

your custodian’s information when it comes to the liens purchased. Because

your IRA has purchased these assets – not you – the custodian must receive these

documents.

Any income produced from the tax lien must flow directly into your IRA. When

a payment is received, it will be posted to your account the same day.

If a delinquent property owner doesn’t pay the taxes, your IRA may receive the

property, but that property must be titled in the name of your IRA. Once an

IRA owns property, any expenses or income generated from it must be paid by

or to the IRA. If the property needs repairs or upgrades, these expenses must be

paid by the IRA.

In addition, property taxes and insurance must be paid from the IRA, and if

you rent the property, the rental income has to flow back to the IRA. Also, all

proceeds from the sale of a delinquent property must flow back to your IRA.

Interest payments from your investments are sent to the custodian and deposited

to your account. The only caveat is that at no time can you comingle funds

from your personal accounts with that of the IRA. This applies to the entire

process of purchasing the TLCs, acquiring real estate in the event the property

owner doesn’t pay the lien, as well as repairing, maintaining and collecting sales

proceeds from that property.

The process of purchasing TLCs with a self-directed IRA is that easy! Choose the

liens in which you’re interested, and use the IRA to purchase those investments.

Just be sure to properly title them in your IRA’s name, not your own, and you’ll

soon be enjoying the tax benefits of an IRA with the generous yields and rock-

solid safety that comes with Tax Lien Certificate investing. Remember: your

government-issued TLCs come with fixed interest rates of 16 to 36 percent –

guaranteed!


NotesCHAPTER 11

Tax Deed StatesAlthough the focus of this manual is TLC investing, we would be remiss if

we didn’t touch on direct property sales, since 20 states don’t engage in TLC

auctions. Instead, these states foreclose on delinquent properties themselves,

and then offer them to private investors.

Tax Deed states postpone collecting delinquent property taxes because they hope

to collect even more revenue by auctioning the properties. Therefore, when you

attend a tax deed auction, you aren’t just buying the right to collect the taxes

plus interest and penalties, you are bidding for the chance to purchase a deed to

the property itself.

0DNLQJ�0RQH\�RQ�)UHH�DQG�&OHDU�'HHGV�Depending on the state, auctions allow investors to achieve one of two goals:

1. Purchase title to a specific property. If you are the winning bidder, the sale

is final and you are granted a deed to the property.

2. Acquire a “right of redemption.” In this case, the deed to the property is

not transferred at the conclusion of the auction. Instead, just as in Tax

Lien States, you are given a specific period of time during which to pay

the back taxes and interest and penalties on the property. If after the final

redemption period expires, the original owner hasn’t repaid these sums,

you receive title to the property.

Whether you are bidding for the deed or the right to redemption, the auction

process is similar to that used in Tax Lien States. Before investing, you should

also familiarize yourself with the relevant laws, rules and regulations. Contact

county officials to learn the dates and times for the next auction, and make

sufficient funds available to purchase the properties at auction, and to cover

associated costs.


Notes*HWWLQJ�6WDUWHG�ZLWK�7D[�'HHGVAs with Tax Lien Certificate investing, you should research the pros and cons

of investing in different states, counties and municipalities. To get started, we

recommend that you follow the steps on the following checklist:

1. Contact the relevant tax collector or treasurer’s office to determine when

the next tax deed sale is taking place. Unlike TLC auctions, tax deed

auctions occur much more often.

2. Request a list of properties being auctioned. You should receive a list or

be referred to a local newspaper that offers the list. Learn whether the list

will give you specific information about the opening bid for each property.

Counties open their bidding either with the amount of the delinquent taxes

owed (plus interest and penalties) or with a percentage of the property’s

assessed value + taxes, interest and penalties. Depending on the state’s

redemption period, the amount of back taxes owed can be substantial.

3. Request a copy of the rules governing the sale. The guidelines will include

pre-registration requirements, methods of acceptable payment, due dates

for the payments, and so forth.

4. Find out when the successful bidder is entitled to the deed on the property.

In addition, learn about the type of title that will be issued if you are the

winning bidder.

5. Determine whether the government agency has a “right of redemption

and, if so, what the deadlines are for the redemption period.

Texas Tax Deeds: A Case StudyThe state of Texas uses a competitive bidding system, meaning a property goes

to the highest bidder, who then receives a tax deed. You must then file the deed

at the county clerk’s office, because the redemption clock won’t start ticking

until this is done.

Once you have purchased the property, the property owner usually has a

redemption period of six months. During this period, he or she will have the

opportunity to buy back the deed. If this doesn’t happen within the allotted

time, the property now belongs to you. However, if the homeowner does pay

the back taxes, he will be required to give you what you paid at the auction + a

25 percent interest penalty + additional fees.


NotesActually, if the homeowner wants to redeem the deed, the amount they must pay

you is: The amount you paid at the tax lien auction + the amount paid to record

the deed + additional costs (e.g., taxes due, repairs, etc.) multiplied by an interest

rate of either 25 percent (for the first year) or 50 percent (for the second year).

This equals the total amount paid at redemption.

Moreover, it’s the responsibility of the delinquent owner to deliver the money

to you. Even if they pay one week after the auction, the interest owed is still

25 percent. This is why it’s possible to generate profits of up to 300 percent in

Texas. That 25 percent interest is calculated by the month – not the year!

Please note that, in Texas, the redemption period for properties classified as

homesteads or agricultural is two years. For all other properties, the redemption

period is 180 days.

When locating potential investments, it is important to determine whether a

property is classified as either a homestead or agricultural. And keep in mind

that properties classified as homestead are more likely to be redeemed, since

these are the owner’s primary residence. On the other hand, properties classified

as agricultural may be used for raising cattle, growing crops, etc. These types of

properties should be avoided.

The penalty due when the homeowner is redeeming their homestead property is

25 percent if done in the first year, and 50 percent if it is redeemed in the second

year. So if you’re seeking high interest returns without having to actually sell

the houses, homesteaded properties are a great investment. If you are more

interested in acquiring property itself, then non-homesteaded property is the

better route.

You can determine whether a property is homestead or agricultural by searching

on the internet for the local tax records. Or, you can contact the county office

where the property is located. When you contact the county office, be sure to

have the Cause number available, because they will need this information.


NotesAnother way to find out if a property is homestead exempt is to match the

address of the property to the mailing address that is listed on the tax suit. If

these don’t match, then there’s a good chance the property is not homestead

exempt.

Thanks to the astounding rates of return that investors can enjoy by investing

in tax deeds, this is an investment that many people are jumping on, but not

all of them know what they’re doing. Knowledge is power and the lack of it

can produce costly mistakes. Even after you learn how the processes work in

the state (or states) in which you’re interested, it’s important to apply the same

standards of due diligence that you did for TLC purchase. After all, the chances

of ending up with actual property (rather than a slip of paper) are much higher,

and by the time the auction occurs, most of the foreclosures will be underway.

Provided you’ve done your homework and don’t get carried away, the returns on

tax deed investing can be astronomical without carrying much risk.

High interest rates; government guaranteed. TLCs are a “conservative

investment” worth getting excited about!


NotesResources:HEVLWHV�WR�+HOS�ZLWK�<RXU�7D[�/LHQ�&HUWL¿FDWH�,QYHVWLQJ

1. SearchSystems.net - This website lists thousands of publicly available

websites that provide information about areas holding tax lien sales. Use

it to find the assessor’s website for a jurisdiction. This is where you can

find information on the particular properties you are interested in.

2. NETROnline.com - This site lists treasurers’ sites, assessors’ sites, and

clerks’ sites for almost every jurisdiction in the country. Click on “Public

Records Online/Online Directory.”

3. NACO.org - This is the website of the National Association of Counties,

featuring links for every county in the U.S. It also links to census data for

each county. This lets you obtain information such as number of housing

units, average housing unit value, etc.

- This site is similar to SearchSystems.net, but has links

to each of the state statutes. It also allows you to check the tax sale laws

for a particular state.

- Use this site to find information on residential properties.

You’ll see photographs of the properties, both aerial and street level, and

estimated values.

6. RealEstate.com - This site gives you comps (comparable values) on

properties. Simply enter the address of a property in which you’re

interested, and you’ll be presented with a list of approx. 20 properties in

the area that have recently sold, the date they sold, a description of the

property and the year the property was built.

7. Yahoo Real Estate: http://realestate.yahoo.com/homevalues - This site

offers you 10 comps in the area for the property address you enter. It also

lists 10 properties in the area that are currently for sale.


Notes8. Google Earth: earth.google.com - Enter an address on this site, and it gives

you an aerial view of the area. I will also show a street level view of the

property. This is useful for commercial property, as none of the sites above

offer commercial property information. Also use Google Earth to see the

neighborhood where a property is located.

GlossaryAnnual Percentage Rate (APR): The measure of the cost of credit stated as a

yearly rate; includes such items as the stated interest rate, plus certain charges.

Appraisal: A written estimate or opinion of a property’s value prepared by a

qualified appraiser.

Appreciation: An increase in the value of an item (e.g., the increase in the market

value of real estate).

Typically the value placed on property for the purpose of

taxation.

Assessor: A public official who establishes the value of a property for taxation

purposes.

Assignment of Mortgage: A document evidencing the transfer of ownership of a

mortgage from one person to another.

A legal proceeding that allows debtors to eliminate or restructure

debts when they have financial difficulties.

Certificate of Deposit (CD): A document issued by a bank or other financial

institution that is evidence of a deposit, with the issuer’s promise to return the

deposit plus earnings at a specified interest rate within a specified time period.

Chain of Title: The history of all of the documents that have transferred title to

a parcel of real property, starting with the earliest existing document and ending

with the most recent.

Clear Title: Ownership that is free of liens, defects, or other legal encumbrances.

Collection: The efforts a lender takes to collect past due payments.

Condominium: A real estate project in which each unit owner holds title to an

individual unit in a building, and an undivided interest in the common areas.


NotesCertificate of title: A document provided by a qualified source (such as a title

company) that shows the property legally belongs to the current owner; before

the title is transferred at closing, it should be clear and free of all liens or other

claims.

Deed: The legal document conveying title to a property (i.e., transferring the

ownership of real property from one party to another.)

Default: The failure to make a scheduled payment or otherwise comply with the

terms of a mortgage loan or other contract.

Delinquency: Failure to make a payment when it is due. The condition of a loan

when a scheduled payment has not been received by the due date, but generally

used to refer to a loan for which payment is 30 or more days past due.

Encumbrance: Any claim on a property, such as a lien, mortgage or easement.

Eviction: The legal act of removing someone from real property.

The price at which property would be transferred between a

willing buyer and willing seller, each of whom has a reasonable knowledge of all

pertinent facts and is not under any compulsion to buy or sell.

First Mortgage: A mortgage that is the primary lien against a property.

Foreclosure: The legal process by which a property that is mortgaged as security

for a loan may be sold and the proceeds of the sale applied to the mortgage debt.

A foreclosure occurs when the loan becomes delinquent because payments have

not been made or when the borrower is in default for a reason other than the

failure to make timely mortgage payments.

Forfeiture: The loss of money, property, rights, or privileges due to a breach of

a legal obligation.

Grantor: A grantor is the person who is making the conveyance on a recorded

document. This would include a person who is selling a home, mortgaging

property, making a lien against a property etc.

Grantee: A grantee is the person who a document is being made in favor of.

This would include a person who is purchasing a home, a person or financial

institution who is loaning money, or a person who a lien is being placed against

etc.

Home Inspection: An examination of the construction, condition and internal

systems of a home prior to purchase; satisfactory home inspection may be a

condition of purchase.


NotesInterest: The fee charged for borrowing money, usually expressed as an annual

percentage of the principal.

Interest Accrual Rate: The percentage rate at which interest accumulates or

increases on a mortgage loan.

Interest Rate Cap: For an adjustable-rate mortgage, a limitation on the amount

the interest rate can change per adjustment or over the lifetime of the loan, as

stated in the note.

Judgment Lien: A lien on the property of a debtor resulting from the decree of

a court.

Junior Mortgage: A loan that is subordinate to the primary loan or first-lien

mortgage loan, such as a second or third mortgage.

Late Charge: A penalty imposed by the lender when a borrower fails to make a

scheduled payment on time.

Lien: A legal encumbrance or claim on property as security for a debt.

Lifetime Cap: For an adjustable-rate mortgage (ARM), a limit on the amount

that the interest rate or monthly payment can increase or decrease over the life

of the loan.

Liquid Asset: A cash asset or an asset that is easily converted into cash.

The relationship between the loan amount and the

value of the property (the lower of appraised value or sales price), expressed as

a percentage of the property’s value. For example, a $100,000 home with an

$80,000 mortgage has an LTV of 80 percent.

Loan: Money borrowed that is usually repaid with interest.

Loan fraud: Purposely giving incorrect information on a loan application in

order to better qualify for a loan; may result in civil liability or criminal penalties.

A type of investment in which funds are invested in

short term securities.

Mortgage: A loan to finance the purchase of real estate, for which the borrower

pledges the real property as security for the repayment of the loan. The borrower

gives the lender a lien on the property as collateral for the loan.

Mortgagee: The institution or individual to whom a mortgage is given; the lender.

Mortgagor: The owner of real estate who pledges property as security for the

repayment of a debt; the borrower.


NotesNonliquid Asset: An asset that cannot easily be converted into cash.

Original Principal Balance: The total amount of principal owed on a mortgage

before any payments are made.

Owner Occupied Property: A property that serves as the borrower’s primary

residence.

Principal: The amount of money owed on a loan, excluding interest. Also, the

part of the monthly payment that reduces the remaining balance of a mortgage.

Real Property: Land and anything permanently affixed thereto — including

buildings, fences, trees, and minerals.

Recorder: The public official who keeps records of transactions that affect real

property in the area. Sometimes known as a “Registrar of Deeds” or “County

Clerk.”

Recording: The filing of a lien or other legal documents in the appropriate public

record.

Second Mortgage: A mortgage that has a lien position subordinate to the first

mortgage.

Secured Loan: A loan that is backed by property – e.g., a house, car, jewelry, etc.

Security: The property that will be given or pledged as collateral for a loan.

Survey: A precise measurement of a property by a licensed surveyor, showing

legal boundaries of a property and the dimensions and location of improvements.

Title: A legal document evidencing a person’s right to or ownership of a property.

Title Insurance: Insurance that protects the lender (lender’s policy) or the buyer

(owner’s policy) against losses arising from defects in the title not listed in the

title report or abstract.

Title Search: A check of the public records to ensure that the seller is the legal

owner of the property and to identify any liens or claims against the property.

Unsecured Loan: A loan that is not backed by collateral.


NotesCopyright ® MMXII by The TLC Institute

ALL RIGHTS ARE RESERVED. No part of this publication may be reproduced

or transmitted in any form or by any means, mechanical or electronic, including

photocopying and recording, or by any information storage and retrieval system,

without permission in writing from the Publisher.

Published by:

The TLC Institute

Austin, TX 78733

DISCLAIMER AND/OR LEGAL NOTICES:

While all attempts have been made to verify information provided in this

publication, neither the Authors nor the Publisher assumes any responsibility for

errors, inaccuracies or omissions. Any slights of people or organizations are

unintentional.

This publication is not intended for use as a source of legal or accounting advice.

The Publisher wants to stress that the information contained herein may be

subject to varying state and/or local laws or regulations. All users are advised to

retain competent counsel to determine what state and/or local laws or regulations

may apply to the user’s particular business.

The purchaser or reader of this publication assumes responsibility for the use of

these materials and information. Adherence to all applicable laws and regulations,

both federal and state and local, governing professional licensing, business

practices, advertising and all other aspects of doing business in the United States

or any other jurisdiction is the sole responsibility of the purchaser or reader. The

Authors and Publisher assume no responsibility or liability whatsoever on the

behalf of any purchaser or reader of these materials.

PRINTED IN THE UNITED STATES OF AMERICA

Documents

The TLC Investing Toolkit 1 - Premier Tax Liens · The TLC Investing Toolkit 6 When you purchase a TLC, you purchase the right from a county government to Notes collect delinquent