The TLC Investing Toolkit 2
Notes
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The TLC Investing Toolkit 3
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
The TLC Investing Toolkit 4
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
The TLC Investing Toolkit 5
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.
The TLC Investing Toolkit 6
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.
The TLC Investing Toolkit 7
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.
The TLC Investing Toolkit 8
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.
The TLC Investing Toolkit 9
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.
The TLC Investing Toolkit 10
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
The TLC Investing Toolkit 11
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.)
The TLC Investing Toolkit 12
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.
The TLC Investing Toolkit 13
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
The TLC Investing Toolkit 14
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.
The TLC Investing Toolkit 15
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.
The TLC Investing Toolkit 16
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.
The TLC Investing Toolkit 17
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
The TLC Investing Toolkit 18
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
The TLC Investing Toolkit 19
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
The TLC Investing Toolkit 20
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.
The TLC Investing Toolkit 21
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.
The TLC Investing Toolkit 22
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.
The TLC Investing Toolkit 23
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
The TLC Investing Toolkit 24
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.
The TLC Investing Toolkit 25
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.
The TLC Investing Toolkit 26
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.
The TLC Investing Toolkit 27
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.
The TLC Investing Toolkit 28
Notes
������������ ������������������������������ �*���!��*����#�*����*�� �'���������������!��#������� ��������#��(������!�*���"����!�%�#����%�"#�!)��������#�!�"#��������!#�����#�������(�$!���$�#(�#�'������"���+��(���#��#����&�������#���$!���"�������!��$�#�������!#�����#�"�&�#����"�)���!#�������$��"��!�#���!� $�!�����(���#��#�#���#�������"���+�� ��������#�#���(��!���!�#������!�(�$!��$�#���-"���)�����"��������#��#����##��������!�����������(�!�#$!���#��(�$"����#���"#�����)�"���,���!�""�����%�������!�%����+�����$���(�$���%����(� $�"#���")�����"�����#��#�����#�''',''',''''+�� �����(�$������%�������!�(�$!��""�"#����+����"#�!���!�")��.��$!����/�� �
The TLC Investing Toolkit 29
Notes����������������������������������������� �*���!��*����#�*����*�� �'���������������!��#������� ��������#��(������!�*���"����!�%�#����%�"#�!)��������#�!�"#��������!#�����#�������(�$!���$�#(�#�'������"���+��(���#��#����&�������#���$!���"�������!��$�#������!���!#��"�����������!����(�(�$!���$�#(��#�#�����'#�#�'�������$�#����&�#����"�)���!#�������$��"��!�#���!� $�!�����(���#��#�#���#�������"���+�� ��������#�#���(��!���!�#������!�(�$!��$�#���-"���)�����"��������#��#����##��������!�����������(�!�#$!���#��(�$"����#���"#�����)�"���,���!�""�����%�������!�%����+�����$���(�$���%����(� $�"#���")�����"�����#��#�����#�''',''',''''+�� �����(�$������%�������!�(�$!��""�"#����+����"#�!���!�")��.��$!����/�� �
The TLC Investing Toolkit 30
Notes����������� ����� ��������$����#�����*�� �'������"��������!��#����������!���!-����)���"����!�%�#����%�"#�!)��������#�!�"#��������!#�����#�������(�$!���$�#(�#�'������"���+��(���#��#����&�������#���$!���"�������!��$�#�������!#�����#�"�&�#����"�)���!#�������$��"��!�#���!� $�!�����(���#��#�#���#�������"���+�� ��������#�#���(��!���!�#������!�(�$!��$�#���-"���)�����"���!�%����#��������&��������!��#�������#����##��������!�����������(�!�#$!��%���������#������#���%�"#�!����0������+���+�����#�����#�!��)�"��$���(�$���%����(� $�"#���")�����"�����#��#�����#�''',''',''''+�� �����(�$������%�������!�(�$!��""�"#����+����"#�!���!�")��.��$!����/��� �
The TLC Investing Toolkit 31
Notes���������������� �������$����#�����*�� �'������"��������!��#���������!���!-����)���"����!�%�#����%�"#�!)��������#�!�"#��������!#�����#�������(�$!����(�$!���$�#(�#�'������"���+��(���#��#����&�������#���$!���"�������!��$�#������!���!#��"�����������!����(�(�$!���$�#(��#�#�����'#�#�'�������$�#����&�#����"�)���!#�������$��"��!�#���!� $�!�����(���#��#�#���#�������"���+�� ��������#�#���(��!���!�#������!�(�$!��$�#���-"���)�����"���!�%����#��������&��������!��#�������#����##��������!�����������(�!�#$!��%���������#������#���%�"#�!����0������+���+�����#�����#�!��)�"��$���(�$���%����(� $�"#���")�����"�����#��#�����#�''',''',''''+�� �����(�$������%�������!�(�$!��""�"#����+����"#�!���!�")��.��$!����/���������������������
The TLC Investing Toolkit 32
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
The TLC Investing Toolkit 33
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
The TLC Investing Toolkit 34
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:
The TLC Investing Toolkit 35
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.
The TLC Investing Toolkit 36
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.”
The TLC Investing Toolkit 37
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.
The TLC Investing Toolkit 38
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
The TLC Investing Toolkit 39
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.
The TLC Investing Toolkit 40
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!
The TLC Investing Toolkit 41
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
The TLC Investing Toolkit 42
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.
The TLC Investing Toolkit 43
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.
The TLC Investing Toolkit 44
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.
The TLC Investing Toolkit 45
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.
The TLC Investing Toolkit 46
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.
The TLC Investing Toolkit 47
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
The TLC Investing Toolkit 48
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
The TLC Investing Toolkit 49
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�
The TLC Investing Toolkit 50
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
The TLC Investing Toolkit 51
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.
The TLC Investing Toolkit 52
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.
The TLC Investing Toolkit 53
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
The TLC Investing Toolkit 54
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.
The TLC Investing Toolkit 55
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.”
The TLC Investing Toolkit 56
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
The TLC Investing Toolkit 57
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.
The TLC Investing Toolkit 58
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.
The TLC Investing Toolkit 59
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.
The TLC Investing Toolkit 60
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
The TLC Investing Toolkit 61
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!
The TLC Investing Toolkit 62
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.
The TLC Investing Toolkit 63
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.”
The TLC Investing Toolkit 64
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!
The TLC Investing Toolkit 65
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.
The TLC Investing Toolkit 66
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.
The TLC Investing Toolkit 67
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.
The TLC Investing Toolkit 68
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!
The TLC Investing Toolkit 69
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.
The TLC Investing Toolkit 70
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.
The TLC Investing Toolkit 71
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.
The TLC Investing Toolkit 72
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.
The TLC Investing Toolkit 73
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.
The TLC Investing Toolkit 74
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