Read an Excerpt
Investing Without Losing
By Don Sausa
The Vision PressCopyright © 2006 Don Sausa
All right reserved.
Chapter OneDay 1
"Only those who dare to fail greatly can ever achieve greatly." -Robert F. Kennedy
Day 1: Know The Types of Auctions
The safest type of investment is the one that's either secured or insured. For instance, a savings account from your local bank is insured by the federal government. You're relatively secure knowing that the government is behind you. Unfortunately, savings accounts have a relatively low rate of return - usually hovering somewhere between one to four percent. It's as fun as watching snails move!
Though there's nothing inherently wrong about savings accounts or other slow growth accounts, they should not be the main place for your investments if there are other safer venues that can deliver better returns. Why take 1-4% returns if you can achieve 12% or more for relatively the same amount of risk?
Best Returns Usually Means High Risk
The best returns usually come from the riskiest types of investments. In the past, only those brave enough to risk it all in either the stock market or other similar financial ventures were fortunate enough to realize large gains from their investments. Unfortunately, opportunities such as these don't pay off for everyone. While some gain, most lose.
The Y2K bubble economy of the late 1990s was a clear example of this. Even fundamental investors started toquestion whether sound investment principles no longer applied as people continued to gain millions of dollars in stock by investing in non-performing high market cap companies.
In the fall of 2000, reality hit and everyone learned what happens when you play with speculative investments. You get burned. Dot com companies that were the darlings of Wall Street were continuing to report record losses. As stock losses came in, companies were pressured to perform and corporate executives played accounting magic.
The end result of all the hype, speculation, and corporate scandals fueled the way for a devastating recession. Individuals, families, retirees, and corporations went bankrupt.
Those that were able to catch on early withdrew their investments off the stock market and reinvested into more stable accounts or funds, at a lesser rate of return.
During this time, many investors (like this author) looked for alternative methods of investing their money.
The million dollar question that came out of the dot com bust was: is there a type of investment vehicle that can offer good returns yet be secure?
The answer is yes.
Introducing Tax Liens: Safe, Good Returns
The tax lien investment vehicle is the ultimate blending of good returns and security. Like savings accounts, it is "insured". Instead of the FDIC, tax liens are secured by real estate.
Tax liens also offer a peace of mind because it's enforced by the state government and set in state statute. Additionally, since its run by the government, the rates do not get affected by corporate scandals, Middle East oil issues, North Korean missiles, or quarterly earning reports.
For instance, if you invest in tax liens in the state of Florida, you could potentially earn a yearly interest rate of 18 percent. In Arizona, their default interest rate is 16 percent. In 2005, Colorado's rate of return was 14 percent.
These interest rates are set! They are not modified or moved on a whim by market pressures.
Within the next few days, you'll quickly learn how to participate in these auctions and how to come out with a profit.
What Are Tax Liens?
A tax lien is a statutory lien placed against a property. A tax lien is usually filed because the owner did not pay his property taxes.
Property taxes are the primary source of revenue for state and county governments. On a local and state level, without assessing these taxes, there would be no schools, police, road improvements, road repairs, fire departments or any other county or parish funded entities.
By filing a tax lien and selling the lien to an investor, the county is able to recoup their property tax loss. The investor in return will be paid interest and penalties if the property owner pays for the lien.
If the lien is not paid after a certain amount of time, the owner could lose the property. Each state that sells tax liens has a set redemption periods for repaying liens.
A redemption period is the length of time property owners are allowed to pay the debt after the lien is filed. If they don't pay within that given time frame, the investor can recoup his investment by owning the property outright.
For instance, in the state of Texas, if a property owner doesn't pay his lien to the county's tax collector within the given six month redemption period, he could lose ownership of his non-homestead property to the investor.
Why Do Property Owners Do This?
You may be wondering why a property owner would allow his property to have a lien held against it. Many have paid on their property for years and have acquired thousands or even hundreds of thousands of dollars in equity. So what would cause them to fall behind on their taxes to the point of risking all that they have in their investment?
Surprisingly, many of these situations arise from the simple mishandling of a tax bill. Some also leave the properties that they do not want to simply fall into foreclosure. Whatever the reason is for their tax delinquency, their loss is your gain.
Remember, not only are you helping yourself by investing in tax liens, you are also helping others - without investors, county governments wouldn't have balanced budgets and government employees like 911 operators wouldn't exist.
Are These Properties Dumps?
One of the biggest misconceptions about tax auctions is that the property must be worthless for the owner not to pay their taxes on time. Though you'll find many listed in tax lien auctions as unbuildable, and unsellable, there are many diamonds in the rough.
Check out this beautiful five acre lot in Ft Garland, Colorado:
This stunning ranch property that sits besides the Rocky Mountains had a tax lien on it. The owner was from Saudi Arabia and no longer paid the property taxes. Who knows why he ignored his five acre ranch property - he may have forgotten about it, or thought it was too cumbersome to maintain something thousands of miles away.
No one truly knows the reason why people leave assets behind, sitting idle with taxes unpaid. What is known is that it is an opportunity for investors like you.
To recap, there are two avenues of realizing a return on an investment when purchasing tax liens.
The first is through redemption. The delinquent tax bill is paid off and the investor receives the funds plus interest and penalties.
The second avenue is through foreclosing on the property. After the specified period of redemption, the lien holder can then file for a deed on the property and thereby take control of it. They can then sell it or rent it out; either option will net them a return on their investment.
A tax deed is a type of legal conveyance similar to a quit claim deed. Unlike tax liens, which simply are debt held against the property, tax deeds give the investor ownership rights to the property in most states.
There are two ways to acquire a tax deed - through a lien conversion in a tax lien state or through a tax deed auction in a tax deed state. A lien conversion means you are converting your tax lien into foreclosure because the redemption period has expired.
For instance, in Arizona, if you purchase a tax lien from the county, and it has not been paid back in three years, you can file for foreclosure and own the property free and clear.
Some states simply sell tax deeds and do not have tax lien auctions; hence, there are no redemption periods or any tax lien conversions to keep track of. You simply own the property immediately after the sale is complete.
Tax deed auctions are typically more expensive than tax lien auctions. The price of tax liens are based off how much property taxes are owed, while the price of tax deeds are usually based on the number of bidders and their perceived market value of that property. Here's an example of a tax deed property for sale in Lee County, FL and what the opening bid was for this piece of land:
The opening bid started at $21,821.43. If this was a tax lien sale, the opening bid would have been around $1000.00 rather than $21,821.43.
If for some reason the property doesn't sell at the tax deed auction, it reverts back to the county and the county can upon its own discretion sell it in an over the counter (OTC) sale. This leaves investors with the opportunity to make a purchase of a tax deed without having to bid for it.
Another important thing to keep in mind when considering making an investment at a tax deed sale is that with this type of purchase, the investor is not receiving a warranty deed as you would get with the purchase of a property through conventional means. Instead, the investor receives either a constable's deed, a bargain and sale deed, or a sheriff's deed. These deeds come with no warranty and are sold "as is".
"As Is" Conveyance
The problem with "as is" property is its resale value. You will not be able to sell it at its full market value without court action or convincing a title company to issue title insurance on it.
Most buyers want to make sure that the property they are buying is without risk; hence, they are reluctant to purchase property that has no warranties. By filing a quiet title suit in court, you will forever remove any doubts about the property's ownership. The cost of quiet title suits depends in court and attorney fees in your area. In South Florida, it costs roughly $3,000-$4,000 per parcel.
You can also seek out title companies that will insure tax deeds. Companies like Tax Title Services offers title insurance for tax deeds sold in Alabama, Georgia, Maryland, South Carolina, California, Illinois, Michigan, Colorado, Indiana, Mississippi, West Virginia, Florida, Louisiana, Missouri, Oklahoma, Tennessee, and New York. Their web site is accessible at www.TaxTitleServices.com.
Their base fees start at $750.00 which is a significantly lower cost than a quiet title suit.
Is This For Me?
Purchasing tax liens and tax deeds at auction offers an investor a better return on investment than many other "safe" investments.
Now that you understand what tax liens and tax deeds are and the difference between the two, how do you know if this type of investing is right for you?
Ask yourself the following questions:
(1) Are you annoyed that you have little or no control with your investment portfolio? (2) Do you have to guess market trends and read over SEC filings just to achieve 12 percent returns? (3) Are you finding your investments go up and down dependent on what a supposed Wall Street analyst says on CNBC?
If your answer was "yes" to all of the above questions, then this investment vehicle is definitely right for you. Because it is an "auction format", you control how much you spend and what your risks are. No stock brokers, no middle man.
Day 1 Summary
Tax liens are like an IOU ("I owe you") certificate for delinquent property taxes. The local government sells the IOU certificate to investors who in turn will get a return when the owner pays back the taxes with interest and penalties.
If the owner does NOT pay the taxes, he could lose his property to the investor. Even if a mortgage company has a mortgage lien on the property, a tax lien supersedes it and the property will be transferred free and clear.
Some states do not have tax liens but have tax deeds. Tax deeds convey property rights to the investor.
Many assume parcels sold at these auctions are dumps - but in reality, they are often valuable properties that have a high resale value.
Chapter TwoDay 2
"Unless you're willing to have a go, fail miserably, and have another go, success won't happen." -Phillip Adams
Day 2: Before You Start ...
It takes money to make money! If you have bags of pocket money stashed away, then skip today's lesson. But for the rest who needs some startup money before starting on this venture, read on.
Investing in new ventures is like starting your own business. You need cash flow and you prefer to have someone else's money to play with rather than your own (ie: the bank's). If you can borrow $1,000 and you make $2,000 out of it - why not do it?
In most cases, borrowing money requires a good credit rating. If you don't know what your credit rating is, you need to find out today!
As of September 1, 2005, thanks to President Bush and Congress' passing of the Fair and Accurate Credit Transactions Act, you are entitled to a FREE credit report from the three credit bureaus (Equifax, Experian, TransUnion) through one centralized source.
There are many offers of free credit reports on the Internet, but only one web site is facilitated by the government. Please try to avoid sites that tout free services, as they often have additional charges after a free trial of monitoring your credit.
To request your free credit, you can do so online, by phone, or by mail. Here is the contact information:
Toll-free: 1-877-322-8228 Toll-free (TDD): 1-877-730-4104 Web: https://www.annualcreditreport.com/ Annual Credit Report Request Service PO Box 105283 Atlanta, GA 30348-5283
If you are ordering by the Web, the web site will look similar to this:
You want to make sure you read each credit report carefully and dispute any inaccurate debts or correct any delinquent accounts before applying for any financing from an institution.
You may also want to purchase your credit scores (sometimes called the FICO score), which is a summary of your credit history. The score is calculated and weighed by your payment punctuality (35% weight), ratio of debt to available credit (30% weight), length of credit history (15% weight), types of credit used (10% weight), and how many times you've applied for credit in the past few months (10% weight).
Your credit score could vary anywhere from 300 to 850.
A score of 660 is considered a breaking point for credit worthiness and a score of 720+ is considered above average (you get approved for almost any loans).
Financing by Friends & Family
Friends and family is the first round of financing for any startup investor. There usually no hassles, no credit checks, and no collaterals.
Even the biggest investors of real estate started out this way. For example, Donald Trump, had his father co-sign business loans when he was starting out and gave him seed money for his company.
When Larry Page and Sergey Bin were starting Google, they couldn't convince Yahoo! or other investors to give them money, so they sought out friends and family. Their first big break was for $100,000 from an acquaintance at Sun Microsystems.
Financing by Prosper.com
If you don't want to ask acquaintances, friends, and/or family for money, you can ask strangers online for help - securely!
Using sites like Prosper.com, you can borrow up to $25,000 without any collateral! All you need is a driver's license, a bank account, and a social security number.
Touted as the "eBay equivalent" for personal loans, you can post how much you need (up to $25,000) and what interest rate you are willing to pay for.
Lenders composed of individuals with extra cash will then bid for your loan by a minimum of $50.00 increments.
Once your loan request is bid on by other lenders and is completed, a monthly payment schedule will be arranged by Prosper and your money can be automatically deposited to your bank account.
Financing by Angel Investors
Angel investors are fairly affluent folks that have already done their rounds in business. They have money and are willing to spend it for the right causes and if you have the right sales pitch.
Inc.com has a great resource online about angel investors. You can access articles about getting financing from angels through here:
Financing by Banks - Lines of Credit
Several institutions have "lines of credit" programs for small businesses and investors. A line of credit allows you to borrow money an infinite amount of times without reapplying as long as it doesn't exceed the credit limit allocated for your account. It's much like a credit card but without the 24% interest rates.
After the bank sets your credit limit, you'll be given a checkbook and/or a VISA/Mastercard card to use for your spending. Lines of credit interest rates hover around 7-8% which is far better than most credit cards.
Excerpted from Investing Without Losing by Don Sausa Copyright © 2006 by Don Sausa. Excerpted by permission.
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