"Lately, I’ve been seeing infomercials that promise big profits from buying ‘government-backed’ tax lien certificates at auction. It smells pretty fishy, but what’s the real story on this?" — Geoff Wisner
I wonder if there’s something inherent in the economics of infomercials that makes all their products a disappointment. I’m not saying there is, just wondering why I’ve never personally encountered happy, successful people with rock-hard stomachs who owe it all to an infomercial. There are presumably hundreds of thousands of such people out there, given the volume of business the successful infomercials do. But the only ones I tend to meet are on TV, on the infomercials themselves.
Anyway, however much they’re charging for the tax-lien books or tapes, perhaps I can save it for you with this column.
The basic idea is to earn a safe 10% or 12% or 14% or even more by participating in auctions that some counties hold to collect back property taxes. You pay the tax for the delinquent property owner, and then if for some crazy reason the owner fails to pay you back in a couple of years, you get his property! So you’re virtually guaranteed a nice return on small chunks of dough, or else — "worst case" — you get the property for the price of a couple of years’ taxes.
I did this myself in Dade County, Florida, a decade ago. Worked fine. But I do know that if they’re doing infomercials on it, there’s going to be a lot more competition at the auctions, driving down the return you can earn from doing this. (In effect, the lowest interest rate wins the auction. "I’ll accept an 18% return!" shouts the first bidder. "I’ll take 16%!" counters the second — and before you know it, some annoying soul in the back row has won the bidding by agreeing to accept 9.8%.")
I also know that in some localities — perhaps even in Dade County by now — there are far more pitfalls than there were the year I did it and wrote a column about it for Time. So if you look into this, be careful. (Don’t, for example, buy the tax certificate on some former gas station only to find out that, as the new owner a couple of years from now, you’re liable for some million-dollar environmental cleanup.) But basically, though it’s labor intensive — it tends to be a lot of odd little $1,844 and $2,329 investments, each of which you have to keep track of — I expect this can still make sense in some parts of the country.
The key thing to do, and I doubt the infomercial product can do it for you, is to check out the current rules of the game in your locality. (I suppose you could drive to neighboring counties and states as well, if you really get into this.) Ask your local real estate agent how it works and what can go wrong. Ask the county clerk or whoever runs the auctions. Find out when the auction is held and what you’d need by way of cash and cashier’s checks, etc. to participate. The research is less about the properties on which tax liens will be auctioned — what property isn’t worth two years’ taxes? — but the overall rules of the game. In some areas it’s not as clean and simple as it was in Dade, where you really could be sure you’d get either your interest or the property — free and clear — without further legal expense or contingencies, and without ever having actually to meet or deal with the delinquent taxpayer. (In Dade, the delinquent taxpayer would pay the county, which passed the money on to you.)
Perhaps the best way to research it is to find some friendly soul in the tax collector’s office (and/or some friendly real estate or bankruptcy lawyer) and ask what would happen if you couldn’t pay your property taxes. Would the state ultimately put your debt up for auction? After how long? What if you repaid it? What if you didn’t? What recourse would you have to get it back? What if you didn’t vacate the property? What if you declared bankruptcy? In other words, learn how it works from the other side of the transaction: the guy whose delinquent tax bill you’d be paying.
Of course, the other way to learn about this is go to this year’s auction just to scout it out, asking questions of anyone who’ll talk. Some may paint a rosy picture, but others may want to discourage your competition and thus emphasize the pitfalls.
Some of the people at these auctions will be real estate professionals and real estate lawyers. You might want to work a deal with one of them to serve as your agent at these auctions. Don’t you bother to go each year. Let him go with your $25,000 or $50,000 and a power of attorney (or whatever), and bid for you, for a fee. He’s got to be there anyway; if he can pick up some extra dough for the day, why not?
Needless to say, you’d want to be very careful in making such an arrangement, especially if the chunk of money you were entrusting were significant to you.
For the most part, you get what you pay for in the financial marketplace, if you’re careful — but not more. The reason these things pay more than money market interest is that, at the very least, they require more effort. You’re being paid for lending your money, yes, but also for your time going to the auction, for arranging for the certified checks and the paperwork, and for having your money frozen for a while and not knowing exactly when you’ll get your money back.
So it’s not a free lunch, but it could be worth looking into. All the information you need on this should be available without charge.
Quote of the Day
If I had my way, I would write the word 'insurance' over the door of every cottage and upon the blotting book of every public man, because I am convinced that for sacrifices that are inconceivably small, families can be secured against catastrophes that would smash them forever.~Winston Churchill
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