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.

How to Profit From Property Taxes

Steve Sjuggerud shares a smart way to profit from property taxes by buying a tax certificate from the county. By paying another homeowner's property taxes, you can receive your money back plus all the late fees once they pay their taxes with virtually no risk. See the following post from Daily Wealth.

I got a nice Christmas surprise... a check in the mail for about $2,250.

It is the easiest 18% interest I've ever earned. And – as I will explain – I feel like I had no risk in the deal... at all.

You can easily do the same thing I did. Here's the story...

Here in Florida, if you don't pay your property tax, you're hit with late fees. As you might expect, the later you are in paying your taxes, the more the late fees rack up.

Of course, it's foolish not to pay your property taxes... because ultimately your property can be sold out from under you, literally on the county courthouse steps, just to recoup the back taxes due to the government.

In plain English, YES, you can lose your $100,000 property – over a couple thousand dollars of late property taxes. Ouch!

I took advantage of this situation. I invested in a no-risk way... My possible outcomes were to either get:

1) 18% interest over up to two years, or (in a much less likely case)
2) the property.

Now how does that work?

In short, the county can't wait for you to pay your property taxes if you're late. It needs your property tax money RIGHT NOW. And it's going to get that money from someone else, if not from you.

As soon as you're late on your property taxes, the county sells a "tax certificate." That's what I bought. Basically, the county strikes a deal with the buyer of the tax certificate (in this case, me). It goes like this:

"If you pay Mr. Jones' property taxes today through buying this tax certificate, then we (the county) will pay you back all your money PLUS all Mr. Jones' late fees, once Mr. Jones pays his taxes."

Well, Mr. Jones just paid his taxes. And I just got a nice Christmas check.

The key to turning tax certificates into a "no risk" 18% is knowing the property... This is actually pretty easy, too.

I know the property I just got paid on pretty well... as well as you need to. Let me tell you about it.

The property is about two miles from both my home and my office. It's about a mile from the beach. It is an empty lot (0.38 acres) in a neighborhood. The owners paid six figures for it.

It was simple. No issues... a six-figure empty lot not far from the beach that the owners didn't pay taxes on.

Now they're caught up on their taxes. And I received 18% interest for my troubles... which were hardly more than driving by the lot, looking at it on the property appraiser's website, and then clicking to buy the tax certificate just like I was buying a book on Amazon.

Seriously, what's my risk in this deal? The main risk is if the property is not worth what you pay for the back taxes. But this is a problem that's easy to avoid as long as you know the property you're buying. A $2,000 certificate on a six-figure empty lot is perfect.

I'm telling you this story so you start saving to buy tax certificates when "the season" kicks in again.

This time of year is not the time to buy tax certificates. The time to buy them is in the summer... when counties start to sell them again.

Taxes are usually officially late by April 1. And the tax sales usually start in late May. I bought in July, when I could get a guaranteed 18% interest.

You can actually do much better than Florida, by the way... Iowa, for example, has a guaranteed 24% interest. And don't even get me started on Texas... the penalty STARTS at 25%.

But my experience is in Florida. I live here. All the properties I have 18% tax certificates on are empty lots within a couple miles of my home – most of which are just a few hundred feet from either the ocean or the intercoastal waterway. I am confident I'll either end up with 18% interest or the property – and I am quite happy to get either.

It sure is nice to get random checks from the government for a few thousand dollars at a time...

Start learning now about tax certificates and tax deeds (skip the Internet and instead buy the first few books you can find on Amazon related to this topic). And when the "season" kicks in again, get yourself in line for your own no-risk 18% interest checks.

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