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| On his infomercial John Beck talks about a two story home purchased at a tax sale for only $521.56. |
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| However, what the infomercial didn’t show was what this beautiful home used to look like. |
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| After ten long years and more than $100,000 in renovations, the home’s current owner has transformed the once “uninhabitable” home. |
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| Also featured in John Beck’s infomercial was a home he claimed was lost after the homeowner neglected to pay $329 in back taxes. |
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| However, Beverly Glover, the homeowner, never actually lost posession of her home. She ultimately sold it herself for $158,000. |
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| Dawn Zuvic and Lani Mapleson say they have each paid more than $10,000 for Beck’s tutoring and have had no real estate success. |
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| Gary Hewitt, one of the owners of the infomercial and Mentoring of America says, “We help people. We are a legitimate company.” |
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“You’re about to learn how you can start buying homes like these for just a few hundred dollars,” says the announcer at the start of real estate guru John Beck’s infomercial. The infomercial airs morning, noon and night all across the country.
In it, Beck says if you send him just $39.95 he’ll teach you how to buy beautiful homes for next to nothing. According to Beck, buyers can get incredible deals when people fail to pay their property taxes and the houses are auctioned off by the government.
The hostess in the infomercial says, “We could not be telling you about it on national television if it was not true.”
INSIDE EDITION’s Senior Investigative Correspondent Matt Meagher went to Oklahoma where every house featured in the infomercial is located. There, with just a little digging, Meagher discovered, how Beck misleads viewers about the homes featured in the infomercial.
On his infomercial Beck boasts about how a big two story home was purchased at a tax foreclosure sale for only $521.56. However, INSIDE EDITION learned that it actually cost three times as much, which would still be an amazing deal. But what Beck didn’t show is what the home really looked like when it was purchased. It was completely dilapidated and took ten years and more than $100,000 for the current owner to make it look as good as it did in the infomercial.
The current homeowner tells INSIDE EDITION the house was “pretty much.uninhabitable” when he purchased it.
Also featured on the infomercial is another dazzling house that Beck says was actually purchased for less than $100. But, that’s not true. County records show it was acquired for more that $2,200 and was a falling down piece of junk at auction. It took four years and $40,000 to fix up.
Beverly Glover was shocked when INSIDE EDITION showed her the infomercial. The infomercial implied that she lost her home because of just $329 in back taxes. Glover says, “That’s a lie.”
In the infomercial, Beck claims “[Glover's home] was purchased free and clear for only $329.90.”
However, she actually never lost possession of her home. A clerical error had applied her tax payment to the wrong property. The mistake was corrected and she never left her home until she sold it for $158,000.
Butch Freeman has been treasurer of Oklahoma County, Oklahoma for 16 years. He says he has never seen homes that look like the ones in the infomercial ever sell for pennies on the dollar as Beck claims.
Freeman says that not one of the homes featured in the infomercial has sold for the price John Beck has quoted them at.
As many as 15,000 people a week cough up nearly $40 for Beck’s instructional DVDs and booklets. But that’s just the beginning.
Everyone who responds to the infomercial soon gets a call from a telemarketer at a company called Mentoring of America. It’s owned by the same people who own the John Beck infomercial and several others like it. This is where the company makes the real money.
Telemarketers follow a script that says the potential buyer is being considered for a select team that will be trained by John Beck himself, but that’s baloney.
The telemarketers urge people to put up to $15,000 on their credit cards to pay for private over-the-phone tutoring, and say they’re almost certain to make that money back in just a few months
Dawn Zuvic of Mississippi and Lani Maplesden from California both say they fell for the pitch.
“I know that there’s always money to be made in real estate,” Maplesden tells INSIDE EDITION.
Zuvic says, “I was always hoping that eventually that I would be able to be make a good living at it.”
They each paid more than $10,000 for the tutoring and have had no success.
“It makes me cry a lot,” laughs Maplesden. “I’m still paying on the bills.”
Dawn Zuvic says her mentor talked her into buying a tiny piece of land in Pennsylvania at what was supposed to be a huge discount.
But, INSIDE EDITION found property records showing the land had been bought for only $585 and then sold to Zuvic for more than $2,595 only five months later. That wasn’t a discount, it was more than a 300% markup!
The land was sold to Dawn Zuvic by none other than John Beck himself! She’s never been able to resell the land and has now had to take a second job as a waitress.
Zuvic tells INSIDE EDITION, “I felt like, like I was taken.”
Bill Mitchell of the Better Business Bureau in Southern California says John Beck’s infomercial has generated hundreds of complaints and the company has received an “F” rating.
“Their real business is selling blue sky, hot air,” Mitchell says.
John Beck wouldn’t talk with INSIDE EDITION, but INSIDE EDITION’s Matt Meagher caught up with Gary Hewitt, one of the owners of the infomercial and Mentoring of America.
When Meagher asked Hewitt if his companies were ripping people off, he replied, “Absolutely not. We help people. We’re a legitimate company.”
When Meagher asked how his companies helped people, Hewitt responded, “Why are you confronting me like this?!” He says that Mentoring of America is not a scam. “It is not [a scam]. First, first of all…you have your facts wrong.”
His attorney later supplied INSIDE EDITION with a list of 13 people who said they had a good experience with the program, earning between $550-$39,600.
But Lani Maplesden isn’t convinced. She’s $20,000 in debt and in danger of losing her home. She says if she could talk to John Beck, she’d ask him, “How can you sleep at night? Do you have any conscience at all?”
The company says they dispute the Better Business Bureau’s ratings system and claim they work to resolve consumer complaints. As far as the houses, they say Beck never states in the infomercial that the homes were in the condition shown when purchased. |
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The collection of real estate property taxes is paramount for counties across the country. Counties use property taxes to fund many services, such as public school, fire departments, and police departments. Without this money, the county government would not be able to function. Because of this, tax collection is a top priority.When a property owner fails to pay his property taxes, a lien is placed on the property. A lien is a legal action that encumbers personal property to compel payment of debts. After numerous warnings to the property owner, and in order to get their money quickly, counties auction off tax lien certificates for these properties to investors. The investor is then entitled to the amount of the tax lien certificate plus interest and penalties, to be paid when the property owner settles the debt.Real Estate tax liens are attached to a property, not an owner. This means that even though an owner is allowed to transfer ownership of the property, the lien will still remain. This can be a difficult task for the owner, as people do not generally want to purchase a property encumbered by a lien. Homes with property tax liens, in particular, are hard for an owner to sell because of the high priority that tax liens carry. Tax lien holders have the right to enforce payment of the debt through foreclosure, allowing them to effectively take the title to the real estate. When this happens, junior lien holders (such as mortgage companies, to whom a debt of lower priority is owed) no longer have claim to the property. To an investor, this means that when one of your liens goes unpaid, you can acquire the property for the cost of what you paid for the lien certificate, and are under no legal obligation to pay off the mortgage on the home.Real Estate taxes are calculated each year according to the assessed value of a property. Many lenders require homebuyers to provide a fund, called an escrow account, which can help pay for future real estate taxes. In the past few years, increasing numbers of sub-prime mortgages no longer carried this requirement. As property values increased, so did property taxes. Many homeowners could no longer afford these fees along with their mortgages, and without escrow accounts to cover the taxes, liens are being placed on properties at a rapid rate. This means that there are consistently increasing numbers of properties being made available to tax lien investors. There is little risk when investing in government issued tax liens. Yields from government issued tax lien certificates are fixed by state law, unlike the inconsistent ups and downs of the stock market. The rise and fall of interest rates and the condition of the stock market have no effect on high yielding tax liens. These guaranteed returns can be up to 25% per year until the lien is redeemed.
In a tax lien state, the lien is offered to prospective investors at public auction. Most auctions are held in person; however, Internet-based auctions (especially within large counties having numerous liens) are becoming more common.
In the event that more than one investor seeks the same lien, depending on state law the winner will be determined by one of five methods:
- Bid Down the Interest. Under this method, the stated rate of return offered by the government is the maximum rate of return allowed. However, investors can accept lower rates of return, including zero percent in some cases (though this is rare in practice). The investor accepting the lowest rate of return is the winner. In the event more than one investor will accept the same lower rate, a random or rotational method (see below) will be used to break ties. (Florida and Arizona use this method)
- Premium. Under this method, the investor willing to pay the highest “premium” (or excess above the lien amount) will be the winner. The premium may or may not earn interest, and may or may not be paid back to the investor upon redemption of the lien. (Colorado uses this method)
- Random Selection. Under this method, a bidder will be randomly selected from those offering a bid. Usually a computer is used to make the selection, but in smaller jurisdictions more rudimentary methods may be used (Larry Loftis, a professional tax lien investor from Orlando, Florida and an author on the subject, mentions in his book of an Iowa county whose random selection method consisted of drawing numbered ping-pong balls from a fried chicken bucket).
- Rotational Selection. Under this method, the first lien offered for sale will be offered to the investor holding bidder number one, who has the right of first refusal. If bidder number one refuses the lien, bidder number two may then bid. However, bidder number one will not be offered another lien until his number comes up again in the rotation. The next lien will go to the next number in line. Under this method, the investor has virtually no control over which liens s/he will obtain in the bidding, except to take or refuse what is offered.
- Bid Down the Ownership. Used only in Iowa, the investor willing to purchase the lien for the lowest percent of encumbrance on the property will be awarded the lien. For example, a bidder may agree to take a lien on only 95% of the property. If the lien is redeemed, the investor would only receive 95% of the proceeds. In practice, few investors will bid on liens for less than full right to the property or sale proceeds. Therefore, with multiple owners bidding on 100% encumbrance, the process then generally reverts to the random selection.
Liens not sold at auction are considered “struck” (or sold) to the entity (usually the county) conducting the auction. Some states allow “over the counter” purchases of liens not sold at auction. However, in most instances the unsold liens are on marginal or worthless properties, the liens on better properties having been purchased at auction.
Redemption process
The investor must wait a specified period of time (referred to as the “redemption period”), during which time the property owner (or someone with an interest in the property) may repay the lien with interest. Usually the lien holder is not permitted during this period to contact the property owner (or anyone else having an interest in the property, such as the mortgage holder) to demand payment or threaten foreclosure, or else the certificate can be forfeit.
In some jurisdictions, the lienholder must agree to pay subsequent unpaid property taxes during the redemption period in order to protect his/her interest. If the lienholder does not pay such taxes, a subsequent lienholder would “buy out” the prior lienholder’s interest.
Once the redemption period is over, the lien holder may initiate foreclosure proceedings. The proceedings (the costs of which must be paid by the lien holder, though a redeeming property owner may be required to pay them as part of redemption) may result in either acquiring title to the property (normally this will be a quitclaim deed and not insurable title), or a tax deed sale of the property where the lien holder has the right of first bid (and may participate by making additional bids if s/he so chooses). During the period between the initiation of proceedings and actual foreclosure, the property owner still has the opportunity to repay the lien with interest plus the costs incurred to foreclose.
If the lien holder does not act within a specified period of time as defined by state law, the lien is forfeit and the holder loses his investment. Also, a lien issued in error of state law is repaid, but usually at a far less interest rate than had the lien been valid.
Hazards of tax lien sales
The rates of return can be highly attractive. For example, Florida (a popular tax lien state due to its growth and investor-friendly rules) is a “bid down the interest” state with a maximum rate of 18% (1.5% per month). However, Florida law guarantees a 5% minimum return regardless of the rate bid (except if the bid is zero percent) or when the lien is redeemed. Thus, if a certificate is purchased one day at 0.25% (the lowest possible rate greater than zero percent) and redeemed the next day, the investor will earn 5% over the certificate price for one day’s holding, or a mind-boggling 1,825% return! (Loftis, the author mentioned above, in his book tells another story where he went to pay for a lien, only to find a redemption check waiting for him on the lien he bought; thus, he actually obtained a return rate of infinity, or, mathematically speaking, it has no meaning since it involved division by zero) Iowa, another tax lien state, offers a guaranteed 2% return per month (or 24% return per year). And, in practice, most liens are redeemed before the property is foreclosed.
Pitfalls of tax lien investing
- Payment is usually required at purchase or within a very short time afterward (often no more than 24-72 hours). Failure to pay the full amount results in all lien certificates purchased by the investor being cancelled, and may result in the investor being barred from future sales.
- In many states further actions must be taken to protect the lien holder’s rights after purchase of a lien. Failure to comply exactly with these requirements may make the lien worthless.
- Tax liens on “choice” properties are quickly purchased by major institutional investors having sufficient time and resources to research valuable properties vs. worthless ones and who can afford the occasional poor choice; smaller liens usually involve properties that are generally worthless (such as odd strips of land). (In addition, Florida does not allow auctions or sales of tax liens of less than $100 on homesteads.) In “random” and “rotational” jurisdictions, investors have even less control over which liens they purchase.
- In “bid down the interest” jurisdictions, valuable properties are usually bid to the lowest rate possible greater than zero percent. (For example, Florida permits the interest rate to be bid down to a minuscule 0.25%
Over the last few years several remarkable things have happened in order to create a sort of “perfect storm” for tax lien investing. First, one must understand how tax liens work. Property owners must pay taxes on their properties. If they owner does not pay their taxes, a lien is placed on the property for the amount of taxes owed. The jurisdiction where this property is located needs the funds from these taxes in order to pay for things like police department, schools, roads, etc. So, the city’s will sell the lien to investors. The city sets a mandated interest rate that must be paid by the property owner on top of the back taxes owed, in order to pay off the lien.
Now, why is the current market great for tax lien investing? For many reasons:
1. I am sure everyone has heard about the “subprime mortgage crisis” in the news. One of the great things about subprime loans is that they often did not include escrow accounts (accounts that automatically paid taxes and insurance). Without escrow accounts it is an added responsibility of the home owner to pay taxes each year. As more people fall behind on their mortgage payments, more people also fall behind on their taxes… If they are not making their mortgage payments, they are not paying their property taxes, which leads to more tax liens being sold.
2. Over the last few years EVERYONE was a “real estate investor.” Meaning, they refinanced their home and bought an “investment” property. Now that the values of these “investment properties” are less than what many of them paid, a lot of the owners are walking away from the properties, leaving the taxes unpaid.
3. The banks that made those compelling “subprime” loans, are now so inundated with foreclosures, that they dont have the manpower to closely monitor all of the property accounts, and are letting many of the properties taxes go unpaid, leaving many of them to go to tax sales.
4. Oh the beauty of securitzation! This amazing vehicle allowed the banks to make the risky loans, pool them together, and sell them off in peices with different ratings on different tranches of the bonds. Now that the loans are split into peices and sold off to seperate investors, banks are having a hard time proving who really owns the mortgage note. This is a fantastic opportunity for tax lien investors because when the banks get notice that one of their properties were sold at a tax lien sale, they cannot prove that they own the note and pay off the lien. Another benefit is that banks are not sure who is responsible for paying off the tax liens, and are transfering it from one department to another, leaving the liens unpaid.
1. Who is responsible to pay taxes? (top)
Property owners. Every owner of record of real property must pay real estate property taxes on that property. Real estate property taxes on rental properties are the responsibility of the property owner. If there is a mortgage on the property, it is the responsibility of the property owner to send or deliver the real estate property tax bill to the bank, building association or other lending institution. Some, but not all, mortgage companies pay the real estate property tax bills. Only when, as a condition of the loan, an escrow account is established does the mortgage company pay the real estate property tax bill. Real estate property taxes are due and payable every year even if there is no mortgage due on the property.
2. When do real estate property taxes become delinquent? (top)
Real estate property taxes are due and payable on July 1st and become delinquent October 1st each year.
Under the Annual Payment Schedule, real estate property taxes become delinquent as of October 1st. Under the Semiannual Payment Schedule, the first installment becomes delinquent as of October 1st, while the second installment becomes delinquent as of January 1st.
Failure to receive a real estate property tax bill will not relieve the property owner of the requirement to pay the real estate property taxes or the subsequent penalties that are imposed as of October 1st or January 1st should the real estate property taxes become delinquent.
3. Will there be additional interest or penalty? (top)
Yes. Penalty and interest will be assessed on all delinquent real estate property taxes at the rate of 1% interest per month or fraction thereof on the State portion of the bill and 2% per month (1% interest and 1% penalty) or fraction thereof on the City portion of the bill until the bill is paid in full.
4. Are delinquent taxes advertised? (top)
Yes. At least thirty (30) days before any property is first advertised for sale, the Collector must mail a Final Bill and Legal Notice to the property owner(s) of record. An alphabetical list of all properties with delinquent real estate property taxes or other municipal liens is published at least two times, once per week, in alternate weeks, in newspapers of general circulation. The list is also posted on the City
Keith Dorsey
Director of Budget & Finance and
Collector of State and County Taxes for Baltimore County
Collector’s Sale For Nonpayment Of State And County Taxes and Other Liens Due For The 2008 Fiscal Year And Prior Years:
Under and by virtue of the several Acts of the General Assembly of Maryland now in force relative to the collection of taxes, notice is hereby given by the Collector of State and County Taxes for Baltimore County to the owner or owners of the several improved and unimproved lots of ground in Baltimore County, which are hereinafter described and unless the taxes and charges due the Collector of State and County taxes thereon for the 2008 fiscal year and prior years shall be paid by cash, certified check, money order by Friday, May 30, 2008 at 4:30 p.m. each of the said improved or unimproved lots, together with the improvements, will be sold at public auction, to the highest bidder on Tuesday June 3, 2008, Council Chambers, 400 Washington Avenue, Room 205, Towson, Maryland at 9 a.m.
The terms of the sale shall be as follows: The purchaser shall pay the undersigned on the day of the sale, by cash or personal check, the full amount of taxes and other charges due to the Collector of State and County Taxes for said County on the property sold whether the same are in arrears or not, together with interest and penalties thereon and all expenses incurred in making the sale and the residue of the purchase price shall remain on credit until a final decree has been passed, foreclosing the right of the redemption on the property.
When the herein described properties are sold, and said properties are subject to a ground rent or lease for a term of years renewable forever, the Collector shall sell the leasehold interest only, with the improvements erected on the leasehold interest, if any; provided, however, that any property sold, subject to a ground rent or lease, to a bona fide purchaser for value, upon foreclosure of the rights of redemption is not subject to any claim for rent unpaid, due, or accruing prior to the date of the judgment of foreclosure.
Keith Dorsey - Director of Budget & Finance and Collector of State and County Taxes for Baltimore County
For the convenience of the purchasers of property at tax sales in Baltimore County as well as those to whom such property is assessed according to the Assessment Records of Baltimore County and those who last appear as owner thereof on the Collector’s Tax Roll, attention is directed to the fact that sales in Baltimore County are now made under the provisions of the Annotated Code of Maryland, Tax-Property Article. Section 14-820 provides in part that “The collector shall deliver to the purchaser a certificate of sale under the collector’s hand and seal.” Section 14-833 of the Annotated Code of Maryland, Tax-Property Article provides that “at any time after 6 months from the date of sale a holder of any certificate of sale may file a complaint to foreclose all rights of redemption of the property to which the certificate relates.” “The right to redeem shall continue until finally barred by decree of the circuit court in which the foreclosure proceeding is filed.” Unless a proceeding to foreclose the right of redemption is filed within 2 years of the date of the certificate of sale, the certificate is void and any right, title, and interest of the holder of the certificate of sale in the property sold shall cease and all money received by the collector on account of the sale shall be deemed forfeited, and shall be applied by the collector on the taxes in arrears on the property. The Baltimore County Tax Sale will be conducted in accordance with the provisions of the Annotated Code of Maryland, Tax-Property Article, Section 14-817 “Sale at Public Auction”. The collector will establish a high bid premium to be applied to all properties to be sold at the Tax Sale as defined under Section 14-817 (b).
Example:
| Assessed value |
$100,000 |
Bid price |
$50,000 |
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X 40% |
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- 40,000 |
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$40,000 |
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$10,000 |
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x 20% |
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Bid premium paid at sale |
$ 2,000 |
The descriptions of properties listed in this notice are the descriptions shown on the Collector’s tax rolls. More detailed descriptions are on file in the Transfer Office of the Department of Assessments and Taxation of Baltimore County, Hampton Plaza, 300 E. Joppa Rd, Suite 602, Towson, Maryland, and identifying account numbers are shown in this notice for reference thereto.
The Baltimore County Code Section 11-2-402 (1988 Code, Section 33-72) provides for interest at the rate of 12 percent per annum for redemption of property sold at the Tax Sale.
In event of a Tax Sale that is subsequently invalidated for any reason, the Tax Sale Purchaser, upon the surrender of his certificate, will receive a refund of the amount paid at the Tax Sale, but will receive NO redemption interest, or reimbursement of attorney fees, title search fees or other costs. Events that will invalidate a Tax Sale include, but are not limited to, bankruptcy filings prior to Tax Sale, payment of taxes due by Interactive Voice Response Credit Card option immediately prior to the sale, and transfer errors on the Assessor’s records that cause a failure of notice to the true property owner.
If you are interested in participating as a bidder at the Tax Sale, you must register and agree to the “Collectors Terms And Registration Form for the 2008 Tax Sale” before bidding. You may pre-register by mail or in person with valid identification beginning May 1, 2008. Corporations and other legal entities must pre-register by mail. The deadline for pre-registration is May 29, 2008 at 4:30 p.m. Registrations at the sale will be limited to private individuals only.
Additional information and a copy of the bidder registration form is available between May 1 and the date of the sale.
Revised May 1, 2008
A tax lien sale is the sale, conducted by a governmental agency, of tax liens for delinquent taxes on real estate. It is one of two methodologies used by governmental agencies to collect delinquent taxes owed on real estate, the other being the tax deed sale.
In a tax lien state, the lien (consisting of delinquent taxes, accrued interest, and costs associated with the sale) is offered to prospective investors at public auction. Traditionally, auctions were held in person; however, Internet-based auctions (especially within large counties having numerous liens) have grown in popularity as this method allows for bidders from outside the area to participate.
In the event that more than one investor seeks the same lien, depending on state law the winner will be determined by one of five methods:
- Bid Down the Interest. Under this method, the stated rate of return offered by the government is the maximum rate of return allowed. However, investors can accept lower rates of return, including zero percent in some cases (though this is rare in practice). The investor accepting the lowest rate of return is the winner. In the event more than one investor will accept the same lower rate, a random or rotational method (see below) will be used to break ties. (Florida and Arizona use this method)
- Premium. Under this method, the investor willing to pay the highest “premium” (or excess above the lien amount) will be the winner. The premium may or may not earn interest, and may or may not be paid back to the investor upon redemption of the lien. (Colorado uses this method)
- Random Selection. Under this method, a bidder will be randomly selected from those offering a bid. Usually a computer is used to make the selection, but in smaller jurisdictions more rudimentary methods may be used (Larry Loftis, a professional tax lien investor from Orlando, Florida and an author on the subject, mentions in his book of an Iowa county whose random selection method consisted of drawing numbered ping-pong balls from a fried chicken bucket).
- Rotational Selection. Under this method, the first lien offered for sale will be offered to the investor holding bidder number one, who has the right of first refusal. If bidder number one refuses the lien, bidder number two may then bid. However, bidder number one will not be offered another lien until his number comes up again in the rotation. The next lien will go to the next number in line. Under this method, the investor has virtually no control over which liens s/he will obtain in the bidding, except to take or refuse what is offered.
- Bid Down the Ownership. Used in Iowa and few other states, the investor willing to purchase the lien for the lowest percent of encumbrance on the property will be awarded the lien. For example, a bidder may agree to take a lien on only 95% of the property. If the lien is not redeemed, the investor would only receive 95% ownership of the property with the remaining 5% owned by the original owner. In practice, few investors will bid on liens for less than full right to the property or sale proceeds. Therefore, with multiple owners bidding on 100% encumbrance, the process then generally reverts to the random selection.
Liens not sold at auction are considered “struck” (or sold) to the entity (usually the county) conducting the auction. Some states allow “over the counter” purchases of liens not sold at auction. However, in most instances the unsold liens are on marginal or worthless properties, the liens on better properties having been purchased at auction.
Redemption process
The investor must wait a specified period of time (referred to as the “redemption period”), during which time the lien (plus interest and any other fees) may be repaid. Usually the lien holder is not permitted during this period to contact the property owner (or anyone else having an interest in the property, such as the mortgage holder) to demand payment or threaten foreclosure, or else the certificate can be forfeit.
In some jurisdictions, the lienholder must agree to pay subsequent unpaid property taxes during the redemption period in order to protect his/her interest. If the lienholder does not pay such taxes, a subsequent lienholder would “buy out” the prior lienholder’s interest.
Once the redemption period is over, the lien holder may initiate foreclosure proceedings. The proceedings (the costs of which must be paid by the lien holder, though a redeeming property owner may be required to pay them as part of redemption) may result in either acquiring title to the property (normally this will be a quitclaim deed and not insurable title), or a tax deed sale of the property where the lien holder has the right of first bid (and may participate by making additional bids if s/he so chooses). During the period between the initiation of proceedings and actual foreclosure, the property owner still has the opportunity to repay the lien with interest plus the costs incurred to foreclose.
If the lien holder does not act within a specified period of time as defined by state law, the lien is forfeit and the holder loses his investment. Also, a lien issued in error of state law is repaid, but usually at a far lower interest rate than had the lien been valid.
Benefits of tax lien investing
- 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% (1.5% per month), while Arizona offers a maximum rate of 16%. Iowa offers a guaranteed 2% per month (or 24% annual return).
- However, as an incentive to encourage bidding, Florida law guarantees a 5% minimum return regardless of the rate bid (except if the bid is zero percent) or when the lien is redeemed. Thus, if a Florida certificate is purchased at auction on one day and redeemed on the next, the investor will earn 5% over the certificate price for one day’s holding, or a mind-boggling 1,825% return! [Loftis, the author mentioned above, in his book tells another story where he went to pay for a lien, only to find a redemption check waiting for him on the lien he bought; thus, he states that he obtained a return rate of infinity (to be mathematically correct, since it involved division by zero, the rate of return is actually not calculable).]
- In practice, the majority of tax liens are redeemed before the property is foreclosed; thus, the risk of loss is minimal.
Pitfalls of tax lien investing
- Payment is usually required at purchase or within a very short time afterward (often no more than 24-72 hours). Failure to pay the full amount results in all lien certificates purchased by the investor being cancelled, and may result in the investor losing his/her deposit and/or being barred from future sales.
- In many states further actions must be taken to protect the lien holder’s rights after purchase of a lien. Failure to comply exactly with these requirements may make the lien worthless.
- Tax liens on “choice” properties are quickly purchased by major institutional investors having sufficient time and resources to research valuable properties vs. worthless ones and who can afford the occasional poor choice; smaller liens usually involve properties that are generally worthless (such as odd strips of land). (In addition, Florida does not allow auctions or sales of tax liens of less than $100 on homesteads.) In “random” and “rotational” jurisdictions, investors have even less control over which liens they purchase.
- In “bid down the interest” jurisdictions, valuable properties are usually bid to the lowest rate possible greater than zero percent. (For example, Florida permits the interest rate to be bid down to a minuscule 0.25%
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