The Single Most Lucrative And Little Known Invesment On The Planet According To The Wall St Journal

Here I am today, to tell you about what I believe to be the single most lucrative, unique, exciting and little known investment on the planet. Let me introduce you to tax liens investing.

Quite a unique idea, and most likely very different to anything you’ve ever done before. By investing in tax liens, you can expect returns on your money like 16%, 24%, even up to 36%. That’s partly why it’s described as very lucrative. But the best thing about it, is that it has virtually no risk! The reason this is described as no risk, is because it is backed up and mandated by the U.S. state government.

Now to me, safety is really high on my priority list, and given what’s going on with the economy lately, I’d be really surprised if safety wasn’t towards the top of everyone’s priority list right now.

Now the great thing about investing in tax liens, is regardless of what happens in the economy, as soon as you make that investment, you are locked in – into the 16% 18% 25%, and nothing can affect your principal investment, allowing you to sleep soundly at night

First of all, let me tell you what a tax lien certificate is… it’s a first position lien on a property, due to delinquent property taxes. In over 2000 jurisdictions across the United States, once a property owner becomes one year delinquent on property taxes, the county government holds a sale. Now just to be clear – you are not buying somebody’s house. You are only dealing with the county. And in actual fact, the county’s going to do most of the work for you.

Now in return for you putting up the money for delinquent taxes at the county, the county will give you in return, a tax lien certificate, and that then goes on file down at the county courthouse. It is a legal document, and it’s going to attract an interest rate. The interest rate you get is different across the various states and counties, but it ranges between about 8% and 50% (that isn’t a typo – it says 50%). So that’s what a tax lien certificate is.

Here is an example… 
Imagine a hypothetical scenario involving 3 individual parties. Firstly there is the county – that’s fairly straight forward. Then there is a property owner – let’s call him Jim. Jim is an owner of a property with a “fmv” of $200,000. Fmv is short for fair market value – so in this hypothetical scenario, the deemed fair market value of Jim’s property is $200 000. Jim has a $100,000 mortgage, and he also has $1,000 worth of delinquent taxes on his property, and we will assume an interest rate of 24%.

Jim has become 1 year delinquent on his property taxes, so the county is going to hold a sale. At that sale, people like you and I, can go down there and put up the money for those delinquent taxes. So let’s assume I go along and pay the $1000 to the county, and remember I’m only dealing with the county – never directly with the property owner, and they will give me a certificate, which goes on file down at the county courthouse.

When Jim eventually goes down to the county courthouse to pay off his delinquent taxes, he is going to be charged a penalty for being late (in this case, 24%). That is the law, and no matter who you are – if you are late to pay your taxes – you get assessed a penalty. It is the law. In fact, the United States is the only country on the planet that has rules like this allowing people to invest in tax liens.

Jim is only allowed to pay the whole amount that he owes, including the interest component. In other words, he can’t pay half now and half later – it’s all or nothing. So Jim goes along and pays the $1000 plus the 24% interest, which then means, by law, the county has to send me a cheque for the $1000 plus the 24% interest. I know that depending on where you live, some governments can drag their feet, and slow things down with red tape etc, but this is the law in the U,S. They have to send me my cheque immediately – and in my experience, it’s always been within a few days depending on the county. So at this point, I’m happy since I’ve just made 24% on my money, and I’m now looking for my next tax lien investment opportunity.

However should Jim not go and pay his delinquent taxes, the county will give Jim a grace period – the legal term for it is redemption period. This grace period or redemption period can be anywhere from 6 months to 3 years, again depending on the state and county, but for the purpose of this example, we will assume 1 year. That means that Jim has 1 year to come in and pay off his delinquent taxes

Many people get a little concerned at this point, thinking that it’s taking advantage of property owners etc, however in reality, I have actually done Jim a favour, by buying him some time. The county is charging Jim the interest rate – not me, and I am the one that’s bought him the time he needs to pay his taxes. If people like you and I didn’t go down to the county and put up the money for Jim’s taxes, the county would be forced to take Jim’s house. As for the county, I am helping the county by paying the taxes, because county’s rely on the money for things like schools, roads, the fire department, police, bridges etc, especially at the moment in the current economic situation.

The big advantages in tax lien investing, are that you know where your money is going, you are helping the property owner, you are helping the county, plus you are getting a great interest rate.

In the scenario where Jim doesn’t come in during the one year period and pay his property taxes, I would pick up my phone, call the county, and say “I’m the lien holder on record, and I’d like to execute my right to foreclose”. Everything so far is documented, and this is the law. The law states that the tax lien takes priority over the claim of any person whose property is encumbered by the tax lien and over the claim of any holder of a lien on the property whether or not the lien existed before the attachment of the tax lien.

To put it simply, if I foreclose on this property, I will wipe out and extinguish all liens on that property, and that includes a mortgage (that isn’t a typo – it does in fact includes a mortgage – and I’m not kidding).

Banks spend a lot of money making sure they have a first position lien. To have a first position lien means they have to have been the first to record. Many people wonder at this point, how can a tax lien jump ahead of something that’s already filed? One way to think about it, is that they have been collecting property taxes for a very long time, certainly longer than the mortgage on the property. The property taxes have been due on the property for longer than the mortgage.

If property taxes don’t get paid, the county takes first position so they can always ensure they get their money. So if I go in and pay the money to the county, and they give me the tax lien certificate, I have the same power as the county. It is not diminished in any way just because it’s in my name.

So in the example, if Jim fails to pay the $1000 plus the 24% interest during the 1 year period, I’m going to end up with a $200,000 house, free and clear of all existing encumbrances, for $1,000. However in reality, it is more likely that Jim is going to find a way to get the money together and pay his property taxes. But when he does, he also has to pay the 24% interest on top of it at the same time.

So the bottom line is, either get my initial investment of $1,000 back, together with the 24% interest, or worst case, I get the property free and clear, and that is really all there is to tax lien investing.

If your initial reaction to this is “you can’t just get rid of mortgage like that” – and it is a very normal reaction, my response is “yes you can”. I’ve done it, seen it, and read about lots of people who have done it. There is lots of documentation about it if your mind needs to see proof. The reason is simply because it’s the law. How amazing is that for you and I as investors?

Really the only down side, is that some people freak out a little at the thought of owning the property, and they just want the interest. Others don’t want the interest, they want the property. But there are ways of making sure you don’t get the property, and there are also ways of making sure you get the property every time.

As a final note, if you don’t live in the US, there are a couple of housekeeping things you’ll need to tidy up first to allow you to invest in tax liens. I live in Australia, I’ve never been to America, and I get by quite nicely. I do it all online.

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