Part 1:

THE BASIC TERMS

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LIEN

A lien is just a fancy way of saying, “you owe me money, and you haven't paid me, so I am placing a claim on your property.” A tax lien is just one type of lien, usually placed on a piece of property by the state or local government after nonpayment of property taxes.

The IRS can place a lien on your assets if you don't pay your income taxes. A contractor can place a “mechanic's lien” on your property if he or she does some work on the premises (for example installing a new shower in the guestroom downstairs), and then is not paid. If any of these liens persist in being not paid, whoever (local government, Federal government, shower guy) placed the lien on the property will eventually HAVE CONTROL OVER THE PROPERTY TO DISPOSE OF AS THEY WISH.

Now, the shower guy might want your house, but the local government has better things to do with its time. Usually, they just want the value of the property taxes owed on the property. And that's where we come in. The local government still isn't going to get their property taxes from owning a real property, so it will possibly choose selling its claim on the property to some savvy investor.

Here's the thing, though: the local government still only wants its property taxes, so it's possible they'll start the bidding for the real property at the amount of the taxes, which could only two or three percent of the value of the property! This conceivably gives you the opportunity to grab a $100,000 home for only $3,000! That's a good day's work, I think you'll agree.

EXAMPLE:

Remember the old family farm from the introduction? Let's say it's somewhere in Ohio outside Cincinnati. The farm had been in the family for generations, and had been modestly successful – successful enough to keep the house in good repair and to buy a new tractor. However, over the past few years, other farmers in the area sold out to shopping malls, and the assessed land value in the area skyrocketed.

Now young Mr. and Mrs. Tarlow, who own the farm, don't have to drive twenty miles into town to rent a movie! Unfortunately, the value of their farm is no longer being assessed as farmland. Since the surrounding parcels are malls and condominiums, the county appraises the Jones' farm as if it were being used for malls and condominiums!

This system, called “highest and best use,” is excellent for the Joneses if they want to sell their land and move to a new condo in Cincy, but they decide to continue to work the farm. But, over the years, they can't pay the ballooning property taxes on the place, so the local government, which has the legal right to collect those taxes in any way they can, places a lien on the property in the amount of those back taxes.

So, due to the fact that the farm owners haven't yet paid their back taxes, the local government now has a completely legitimate claim over their property, and can dispose of that claim in any way they see fit. That disposal will probably take the form of a tax sale!

TAX SALE

A tax sale is generally a public event where investors buy, depending on the state, “tax deeds” – essentially deeds to real property – or “tax certificates” – essentially pieces of paper that represent the tax lien, or debt, a property owner owes in delinquent real property taxes.

Whatever the type of tax sale, it offers you the opportunity to make FANTASTIC PROFITS for a TINY INVESTMENT at LITTLE OR NO RISK! Generally, a tax sale for a county is held once a year. Some states require all their counties to hold their sales on the same date.

EXAMPLE:

Every year in February you fly down to Sedona, Arizona to attend the local tax certificate sale, as the state requires each county in Arizona to hold its tax sales in February. By the way, you also write off this sunny trip in the winter each year. Doing business at a tax sale is, of course, tax deductible. You always get there early to research the properties in question, and to get in a few extra rounds of golf!

At the tax sale itself, you bid on certificates for likely properties you have located, purchasing some, and giving yourself the chance to make fantastic profits for a tiny investment at little or no risk!

EQUITY

I can easily define equity as the difference between the sales price of a property you are buying and any debts (for example , a mortgage) you owe on it. People refer to equity variously in either relation to dollars: “$20,000 equity in that parcel of land,” or as a percentage: “20% equity in that parcel of land.” Tax deed sales and tax certificate sale can sometimes offer amazing opportunities for acquiring HUGE equity stakes for TINY initial investments.

EXAMPLE:

Rhonda Wayans and Lars Mushkin are in love in Washington, D.C. They're going to get married next year, but can't wait that long to live together and Rhonda's landlord is selling the Craftsman house that she rents. They both love the house, and after some serious soul-searching (and checking account searching) they decide to buy the place.

They put down $30,000 cobbled together from his inheritance and her internet stocks, and they take out a mortgage for the other $70,000 of the $100,000 house. They now have 30% ($30,000 divided by $100,000) equity in the house.

But love is fleeting—Rhonda spends fourteen hours a day on the net, and Lars has this incredibly loud and annoying laugh. To make a long story short, they decide NOT to get married, and can't figure out what to do with the house. They're not able to sell it, Lars disappears and Rhonda rents out the place to somebody else. The money from the rent just covers the mortgage, so Rhonda sets up an automatic payment to the bank, and then leaves the material world, joining a Buddhist monastery in Tibet.

The mortgage is paid, but, oops! the property taxes aren't. The state government can't find Rhonda or Lars, and they eventually place a lien on the property.

You are at the next annual District of Columbia tax certificate sale, and you swoop in to purchase a claim to this $100,000 Craftsman for the price of the unpaid property taxes, a mere $5,000. If Rhonda and Lars don't show up soon to pay you back at a significant interest rate, you now have 95% EQUITY in the house! Nice going.

RIGHT OF REDEMPTION

To redeem something is to buy it back. In plain and simple language, if you buy a used car from me, and then I realized it would be a great gift for a relative, it's possible you might let me buy it back, or redeem it. You might or you might not. It's your choice. In the world of real estate tax law, there's a term floating around called a “right of redemption.” In some states, after you buy a tax lien, the previous owner has a period of time, established by state law, when they can buy back the lien to the property from you, for the price you paid for it, plus quite a bit extra!

EXAMPLE:

In Baltimore, Crabcorp went bankrupt. This company running an excellent restaurant had dreams of expansion, but had a run of really bad luck, and went under.

All of their assets were dealt with, but interestingly, one of the partners, Danny Torp, had bought a piece of property down by the water with the company's money, intending to create another, fast food version of Crabcorp. He never told his partners about it, and when the company went bankrupt, the property taxes went delinquent over time, as nobody knew about the property. It's a beautiful stretch of land, and you end up getting possession of it at a tax sale.

However, the partners of the newly rejuvenated Crabcorp find out that their ex-partner, Danny Torp, had purchased this amazing property, and they decide to exercise their right of redemption (in Maryland they have between 2 and 6 months) to buy back their property.

So, that means they owe you the price of the tax lien, PLUS 24% INTEREST! So you don't get the property, but you do get an absolutely astonishing return on your investment!

DUE DILIGENCE

There are a huge amount of good opportunities out there in the world of tax liens, but I can help you find the great ones! But I won't lie to you. The difference between making an okay living and a dream life of huge profits is essentially some solid research, or what the lawyers call doing your “due diligence.”

Essentially what I mean when I use this term is doing your homework, or eating your vegetables. Having a good meal when you were thirteen was about that amazing hamburger, but your mom made you eat the spinach, too, because it was good for you. If you take just a little bit of time to sort the good properties from the bad, you're on your way to huge profits at little or no risk!

Dictionaries define it as “the care that a reasonable person exercises under the circumstances to avoid harm to other persons or their property.” I define it as knowing your area, knowing the local customs, and figuring out the properties you're interested in ahead of time. We'll go into further detail in the next chapter.

EXAMPLE:

You go to a tax sale in Oklahoma, and two properties are up on the block. They're one street apart from each other, and each assessed at $50,000, and you can buy the lien to either for around $2,000. So what's the problem! Why not buy both liens, right?

Wrong. Since you drove by the sites and did your due diligence , you know that one property, 38 West 1 st Street, is an excellent choice. The other property, 38 West 2 nd Street, is an abandoned lot that residents have decorated with abandoned cars, appliances, and gasoline or heating oil or other toxic elements you can only begin to imagine. Besides paying someone to remove all that stuff from the property, you're also dealing with a possible environmental clean-up problem!

So what do you do? You buy the tax lien for the 1 st Street property, and let some other person who didn't do their homework deal with the problems of 2 nd Street!