Strategy #6 - "Pennies on the Dollar", the real deal...

First of all, to the person who sent me the email wondering, "Where the h#x# was yesterday's blog?"

Welcome to my blog, I don't work on Mondays :) Now that it is summer time. Monday is mine and David's (my five year old) day. You live your life as you want to, I live mine according to my plan, and my plan says Monday is my day.

Now back to the strategies:

By now most people have seen the late night infomercials talking about how you can buy houses for "Pennies on the Dollar" and shows slide after slide of houses which were purchased for a fraction of their "true" market value.

The reality is that you can buy houses for pennies on the dollar, sometimes, but the real value in the information being discussed is not the potential for a huge windfall from what happens when someone lets their house go at tax sale - NO the real game here is the high rates of interest that you earn when people do not redeem their houses.

So, what the heck are we talking about??

In every state in the Union (and territories) the local (not state, local) jurisdictions tax the ownership of property. These taxes are collected at the local level and pay for things like the salaries of teachers, firemen and police officers and, of course, the local government.

Now, what happens if a someone, or a group of someone's decides not to pay their local property taxes. Well, the teachers, firemen and police officers would have to work for FREE that day. And since you and I don't work for FREE, we should not expect the same of the people who keep our children from becoming wild animals and worthless dregs of society and will be the first ones to show up when our stove's catch on fire, or some mangy animal wonders into our garage.

Therefore, the local governments have laws that allow them to take your property away in the event you either decide, or forget (repeatedly) to pay your property taxes. One particular way that the local governments take care of this is to actually allow someone else to pay your property taxes and to then file a lien on your property until you pay them back. If you do not pay them back in a reasonable period of time, then the government assigns to them their rights to foreclose and the private party forecloses and gets your house. ITS A GOOD SYSTEM. The government gets the tax money it needs to keep on operating, and you get a property for Pennies on the Dollar, BUT WAIT, there is more...

In this country, every local jurisdiction must abide by something call the US Constitution, and according to the Constitution, you can not simply take away someone's property with out two key things: 1) Due process - meaning you have to have a chance to fix the problem, 2) Compensation - if they take your property, or even threaten to take it, you must be given an opportunity to redeem it.

So, why would any investor in their "right mind" want to invest in a process whereby the property owner(s) may have the right to unwind the transaction after the deal is done..??? One word: GREED. In most states, local jurisdictions are allowed to pay these private investors as much as 16%-24% on their investment if they pay the property taxes for someone else. So in essence it works like this: You the investor pay the property taxes of a delinquent owner directly to the municipality or county. The local jurisdiction then gives you a tax certificate and files a lien on the property and if the property owners does not pay up within a reasonable period of time, you have the right to foreclose, with the proceeds from the foreclosure being the means for how you get paid back. if the property owner pays up, then usually they have to pay not only the outstanding amount, but also interest and fees - this is how the local municipality is able to pay you a high rate of interest.

Now the reality is that most people who do not pay their property taxes when due will eventually pay - some studies say the figure is as high as 98%. So the reality is that there are very few chances to actually get your hands on a property for "pennies on the dollar". Not that it can not happen, it can - it is just rare versus the numbers of people who are delinquent on the initial property tax bill. However, even if you do not get the property, a solid 24%, 16% or for that matter 12% rate of return secured not only by real estate, but also the local jurisdictions' blessing to go and foreclose is NOTHING TO SNEEZE AT!

At a 24% rate of return, your money doubles in less than four years, and if you do this through a self-directed IRA, it can be 100% tax Free for life!

So while you may not get that $500,000 house for $5,000.00, having your $5,000.00 grow and double every 3-4 years by investing in tax lien certificates is not a bad strategy at all - sure beats mutual funds!