Thursday, June 24, 2010

Can Individual Investors Still Profit From Tax Certificates?

Investing in tax certificates can be a highly profitable and relatively low risk investment with interest rates as high as 18 percent. However, larger firms have started to take advantage of tax certificates in Florida and the flood of investors have driven down interest rates. See the following post from Daily Wealth.

"Florida was a bloodbath," my friend Brad Thomason told me over dinner in Orlando last week.

Or was it? That all depends on your perspective…

"It went very well," Brevard County Florida Tax Collector Lisa Cullen said. "We got 99.9% of the money," Orange County Florida Tax Collector Earl Wood said.

What am I talking about? The 2010 Florida Tax Certificate sale…

I've personally done well investing in tax certificates in Florida, earning 18% interest safely.

Here's the basic idea with tax certificates: If someone doesn't pay their property taxes, the county still needs that money. Investors (like you and me) can pay off that delinquent taxpayer's property taxes on their behalf. It's essentially a loan to a homeowner until that homeowner pays their taxes… But the local government administers the whole thing. Once the taxpayer pays the government, the government pays you your portion, plus interest.

Normally, the investor can earn a high rate of return… as high as 18% in Florida. But not this year!

I didn't end up buying any tax certificates this year. My friend Brad, who manages a large portfolio of tax certificates, didn't buy any in Florida this year either.

"I heard there were literally thousands of bidders bidding on single tax certificates," Brad told me. In Florida, the bidders bring down the interest rate they're willing to receive when the property taxes are paid. With lots of bidders, the interest rate gets bid down to an unattractively low level.

"It seems like a lot of big investors came down to Florida expecting to take advantage of the high rates in Florida – but it really didn't work out," Brad told me in Orlando, Florida, on Friday. Essentially, the big investors crowded each other out.

Consider Orlando, for example… According to the tax collector, 98.5% of tax-lien certificates were sold. That's shocking because – while a high number of them are safe opportunities to earn high rates of interest – plenty of tax liens are simply not worth the time or the investment.

Orange County raked in over $90 million in unpaid property taxes (that's apparently 99.9% of what was offered for sale, dollar-wise). Think about this for a minute… Let's say property taxes in Orange County are roughly 1.5% of the assessed value. That means $6 billion worth of property was delinquent on its taxes – in this one county alone!

"The previous two years were great in Florida for tax-certificate investors," Brad told me. And he would know... Brad is one of the most knowledgeable tax-certificate investors around. He is based in Alabama, and he buys millions worth of tax-certificates all over the U.S.

He had a hunch the Florida auctions would be over-run, so he didn't plan on bidding here.

But Brad still sees plenty of opportunities in tax certificates in other states…

He explained that Mom and Pop investors can do particularly well in tax certificates. It is a bit of work… but the potential is there for safe, big returns. Investors must simply take the time to understand how they can make money and learn the potential pitfalls.

Individual investors have an advantage… they know their local properties better than big investors flying in from places like New York. Individual investors have a big advantage particularly in smaller counties, because the big investors often avoid the smaller markets.

To educate yourself, this is one rare case where I'd say not to bother with the Internet. Buy a few books instead. The first few books that come up on Amazon.com when you type "tax certificate" are all worth a read. Buy 'em all… some of them cover different ground, and it's a small price to pay to get going.

From there, you can contact your local Clerk of Court to find out when your next local tax certificate sale is.

Florida's tax sale is over. But as far as high returns go, you didn't miss anything. Brad tells me he is getting the high rates he wants in other some other states where he's buying. For more on Brad, visit www.redmountainassetresearch.com.

This might sound like a bit of work… but the reward is more than worth it.

This post has been republished from Dr. Steve Sjuggerud's blog, Daily Wealth.

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