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How to Buy Real Estate for Pennies on the Dollar

by John N. Beck, II, JD   

Real estate paper investors can obtain well-secured high yields by investing in tax lien certificates and their Texas and Georgia counterparts, deeds with a right of redemption. Interestingly, tax lien certificates are not only extraordinary paper investments, but also extraordinary foreclosure investments.

Purchasing real property at foreclosure auctions can produce extraordinary, super-bargain buys. In theory, you need only three things:

  1. An affordable opening bid

  2. Substantial equity in the property being foreclosed upon if bought at that opening bid

  3. No one showing up at the auction sale to overbid your opening bid

Or, you might say, a minor miracle! No necessarily true. A knowledgeable foreclosure investor working intelligently and diligently can locate and purchase such minor miracles. How? By investing in tax lien certificates. Not with the intent of making a well-secured, high yield, but with the intent of getting title to the property.

An affordable opening bid

In those 32 or so states selling tax lien certificates, if an owner doesn't pay his real property taxes (with any interest, penalties, and charges due), the county treasurer will sell the right to collect those sums to investors at a public oral bid auction sale, a so-called tax lien or tax certificate sale. The property is not sold--only the right to collect the delinquent taxes is sold.

In almost all tax certificate states, all certificates are always sold for just back delinquent real property taxes together with any interest, penalties, and charges due together with costs of sale. For a $100,000 property, these sums would typically be in the $1,000 to $2,000 range. Now that's an affordable opening bid!

Substantial equity in the property

What happens if your $1,000 or $2,000 investment isn't repaid with interest? Every tax certificate purchased is secured by the real property on which the investor paid the delinquent real property taxes. Each tax certificate is secured by an assignment of the county's real property tax lien against that real property.

In every tax certificate state, that real property tax lien is a so-called "priority lien." That is, the priority of the real property tax lien is not based upon the date and time it's recorded at the county clerk/recorder's office. By law, the tax lien is almost always the first lien against the property.

Since that first lien secures only what you paid for the tax lien certificate (delinquent taxes, interest, penalties, charges not paid by the owner, and the costs of sale), and since those taxes and penalties can be as little as just 1% of fair market value of the property, you're talking about extraordinarily low loan-to-value ratios--initial loan-to-value ratios of just 1% to 2%.

Put another way, there's a 98% to 99% equity cushion in the property. That's substantial equity!

No one shows up to overbid you

The property owner must pay off the amount the investor paid for the tax certificate together with interest (or, as it is said, "redeem" the certificate) or risk being foreclosed upon. Depending on the state, if the certificate isn't redeemed within six months to three years of the date of tax certificate sale, then the certificate holder can foreclose on the lien.

Interestingly, in every tax certificate state except Florida, that foreclosure process does not involve a public oral bid auction sale. In most certificate states, the certificate holder goes through an administrative process of applying to the county treasurer for a treasurer's deed to the property.

In the other certificate states, the certificate holder must go into court, obtain a court judgment foreclosing out the right of redemption (the right to pay off the certificate), and then apply to the county treasurer's office for a treasurer's deed.

To repeat, (except in Florida) the process of administratively applying for a treasurer's deed or judicially foreclosing out the right of redemption and then applying for a treasurer's deed does not involve a foreclosure action sale.

Upon obtaining a treasurer's deed, the investor gets title to the property for, in effect, just the back taxes, penalties, interest and foreclosure costs the investor paid on the property!

How that's a foreclosure auction sale? One in which no one else but you, the certificate holder, is allow to participate! In other words, if you buy the right certificate, no one else is allowed--by law--to show up at a foreclosure auction sale and overbid your opening bid!

There is no better foreclosure investment opportunity

An affordable opening bid: Basically, just back real property taxes. No other kind of real property foreclosure process consistently offers anywhere near such an affordable opening bid!

Substantial equity: Almost always upon acquisition of the tax certificate, over 95% of the property's value is equity. Again, no other kind of real property foreclosure process consistently offers anywhere near that much potential equity!

No one else showing up at the foreclosure auction sale to overbid you: In all certificate states except Florida, by law no one else can show up; there is no foreclosure auction sale. In effect, you, as certificate holder, can be the only bidder! There is no other foreclosure process where you can hold a foreclosure sale and no one else is allowed to attend!

About the Author:

John N. Beck II, J.D. is a California attorney who has written numerous books on real estate and real estate related investing. Since 1990, he has also written a syndicated newspaper column on foreclosure investing, The Foreclosure Corner. John has also been a real estate broker, syndicator, and real estate consultant and is listed in Who is Who In Creative Real Estate.

 
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