Tax Lien & Tax Deed (5) – Free Money Part 1

Did you notice I said “theoretically”? Because the vast majority of people want to buy debt because they want to use very little money to acquire the debt and then obtain the deed auction rights to the property, thereby making a huge profit from selling the property! For example, they can spend a few thousand to buy the debt, pay off a few thousand in debt, then obtain the auction rights to a property worth over 300,000 and sell it way under market value for tens of thousands or even hundreds of thousands in profit (because the cost may be just a few thousand!) Yes, this is what many people pay coaches to learn. It’s true and doable, but let me tell you clearly, the probability of you being able to do it is very low!

The reality goes like this: the lien acution method is actually most suitable for people whose sole goal is to get a return somewhere between the 14%-18% range, instead of being able to sell the hosue itself! All will be expkained in these 2 episode series. 

Let me break it down a bit.

Firstly, there are countless people holding onto the fantasy I mentioned earlier of buying the debt to gain auction rights to the deed/title of the house. So, the competition is intense. However, just think about it, if a property worth hundreds of thousands or millions simply owes hundreds or thousands or tens of thousands in taxes, what do you think the homeowner would do? It’s too easy to borrow a few hundred or a few thousand from any third party isn’t it? There are plenty of private lending and small lending companies, and there are hundres of specialized wholesale buyers for quick cash property purchases. Even if the home owners sell to a low ball cashbuyer, it’s still better than auction! So, any one of them can help the homeowner solve the problem easily. And do you think you can get the auction rights to the deed/title after 2-3 years of time? Again, the reality is, the vast majority of owner will pay you to buy back their tax lien certificate within the redemption period specified by that county! As for you, when redemption from the homeowner happens within the allowable timeframe by law, you simple get your principal and interest back. The redemption period varies, depending on the county, but roughly averages about 2-3 years.

Next, do you think with so many people holding the same fantasy as you, when bidding, would they input a maximum interest rate of “18%” to bid, or something close to “0%” in order to win the bidding? So, the truth is, although countless paid courses boast of cases with interest rates of 12%, 16%, 18%, in reality, the vast majority of tax liens are won at interest rates of 0% or 1%!!!

Now that I’ve clarified the above two points, let me walk you through my thinking process. Conclusion first: because there are so many states in the US, and over 3,000 counties, there are still plenty of opportunities, but, combined with the two most important points mentioned above and other considerations, this is how I personally think about it:

Firstly, you have to determine the state. States can roughly be divided into two categories, which I’ll crudely summarize as lien states and deed states. The previous series I wrote about was US deed acutions, which didn’t work at all. So, the first step eliminates thousands of counties already in deed states.

Next, across lien states, the interest rate ceilings varie from state to state, and there are many details to look for such as when interest starts accruing, whether there are penalties (which can earn a few more points of return), etc. You need to filter through the general information of each state first. Here’s the key point: because my current legal lending path can easily achieve a 10% annual return rate with full prepayment of interest (equivalent to an 11.3% annualized rate), my minimum requirement is that if I’m going to do all this work to buy the lien certificate, anything below 14% is not worth it. So, this 14% floor interest rate has again removed thousands of states and counties from my list

At this point, the list has been reduced by a lot from 3,000, but it’s still not enough. There are still dozens or even hundreds of counties to consider. Funds are limited, so returning to the two most important points mentioned earlier, how can I find counties where I can still get a rate of 14%-18% with very small lien amounts while the property is still much more valuable?

The process of getting the answer to the last step above is the most tedious, requiring manual researching, checking, and calling one county at a time in order to get past acution results to cross verify my theory. 

This is why I can say with great certainty that the vast majority of lien auctions will only yield 0-1% interest, and there are almost no lien certificate with huge profits that can make it to the auction stage becasue homeowners almost always redeem them within the redemption period. So, with this method, I can determine that in terms of probability, neither you nor I will be the lucky one who can get high-interest liens and then get the auction rights to the property two or three years later, nor can we scale. So, the strategy for what to do is very very clear – there are only two paths that can work:

Choice one: In the final selection of hundreds of counties, bid on all small denomination liens with high property values at 0% interest, take a bet to hopefully win a few liens, and then make a bet that some of these liens will not get redeemed, and make a bet that these ones will result in a few deed/title rights in the end of the day after a few years so that you can make a handsome profit at the end of the whole cycle by selling the assets directly. 

Choice two: In the final selection of hundreds of counties, find records of past action results that still had certificates sale at 14-18%, while qualifying with all the criteria I mentioned above. So in this case, find small denomination and high property value counties, and bid on all liens at 14-18% interest rate, expect to get a few if you can, but don’t expect to obtain the deed/title rights, just wait for the homeowners to redeem at a high-interest rate in 2-3 years, get all your money back plus interest and call it a day. 

The advantage of the first path is that the profit in a few years may be great, but the uncertainty is high, so you have to bid on more liens, which means even more funds will be tied up in these liens with almost no interest return for a long time, and it’s very likely that all liens will be redeemed. And after waiting for several years, there may be no profit at all. That is to say, for optimization, it’s best to bid on liens with very high face value so the competition and redemption probabilities will be slightly lower, which also means you tie down even more funds to execute this strategy in order to have a chance of making a big profit in a few years.

The advantage of the second path is the high certainty. As long as you can find counties that still have the chance to auction at 14-18%, you bid on all the liens that fit the criteria at a high interest rate, get a few if you can – this way at least you can almost guarantee yourself a handsome interest payment when the homeowners redeem, and the funds invested in them are not wasted. If by chance any certificate didn’t get redeemed, that’s a bonus and you can still make a big profit in a few years; but if not, it’s expected, and you get your 14%-18% interest anyways.  

Guess which path I chose? Till next time!