Florida 5% Rule

I skimmed through a book called Investing in Real Estate, 7th Edition, by Gary W. Eldred, PhD, and I came across this section:

“Are Tax Liens and Tax Deeds an Easy Way to Make Big Profits?

If you believe that you can easily earn big profits through tax liens or tax deeds, you’ve been watching too many infomercials. You can earn profits in this arena only if you work hard to research markets, research properties, and research legal procedures. Then bid selectively when your research indicates a satisfactory trade-off between risk and reward. For a realistic view of tax liens and tax deeds and a state-by-state listing of legal procedures, see Profit by Investing in Real Estate Tax Liens by Larry Loftis (Dearborn, 2005).”

I have not read the Loftis book yet, but I may pick it up if I can get it cheap. I bet a lot has changed in the seven years since it was written, and it is probably even harder to make money in tax liens now. Why the downer attitude? As promised, here is the skinny on the Florida 5% rule:

First, from the Florida statutes:

197.472 Redemption of tax certificates.--

(2) When a tax certificate is redeemed and the interest earned on the tax certificate is less than 5 percent of the face amount of the certificate, a mandatory charge of 5 percent shall be levied upon the tax certificate. The person redeeming the tax certificate shall pay the interest rate due on the certificate or the 5-percent mandatory charge, whichever is greater. This subsection applies to all county-held tax certificates and all individual tax certificates except those with an interest rate bid of zero percent

So, am I happy with my 0.25% winning bids in Florida? With a redemption time of two years in Florida, you could get a paltry return of 5% over 2 years. Calling this a 2.5% annual return would be exaggerating slightly as this interest is not compounded. As you cannot take control of a property in Florida, you could get stuck with this return. This is certainly not the road to getting rich quick.

There is a bright side, though. If the lien is redeemed in under a year, your returns will looked pretty juicy. A lien redeemed just a few days after you purchase it will still pay the full 5%!!! Say you get your money back with the 5% penalty in one month; you could claim you made a 60% annual return. Another positive spin you could put on this is that a 5% return over two years is still a lot more than you can make on a CD right now.

Arizona Update: Subsequent Tax

Got a letter from the Mohave Count Treasurer a couple of weeks ago. A bill, actually: $2,216.40 for subsequent taxes covering two of the three liens I still hold, plus $5 for fees. So what are subsequent taxes? My liens cover taxes due for year 2010. If the property owner does not pay taxes for 2011, I have the right to pay for that to keep my certificates “current.”

Here are details from the Arizona tax codes:

42-18121. Payment of subsequent taxes by certificate holder; fee

A. On or after June 1, if a person who holds a certificate of purchase desires to pay subsequent taxes, accrued interest and related fees due on the property, the person shall exhibit the certificate or receipt of registered certificate to the county treasurer. The treasurer shall enter the amount of the payment on the certificate and on the record of tax lien sales. The amount of subsequent taxes bears interest at the rate stated in the certificate of purchase from the first day of the month following the purchase of the subsequent tax lien.

B. The county treasurer shall collect a fee of five dollars from the holder of the certificate for making the entries.

42-18121.01. Subsequent purchaser; assignment

A. If a person who holds a certificate of purchase does not exercise the option to pay subsequent taxes, accrued interest and related fees due on the property pursuant to section 42-18121, the county treasurer may require a person who desires to purchase a subsequent certificate of purchase on the property to acquire by assignment all currently outstanding certificates of purchase previously issued on the property. The county treasurer shall process the sale as an assignment on behalf of the previous holder of the certificate of purchase.

B. An assignment made pursuant to this section vests in the person all the right and title of the original purchaser with the lien date effective from the original lien sale date.

So, I had an option:

A.) Pony up the money to keep my rights and keep earning the interest rate set when I bid for both the original outlay and the new outlay, or

B.) Give up my rights to forclose in another two and a half years and just let the next lien purchaser pay me off (I guess that would be next February).

I decided to pay up. I had the money from my Tax Lien bankroll sitting in a bank account earning something like 0.25%, and I am not sure I will be participating in any other auctions until next year. I did consider paying one and not the other (one is 6%, one is 5%) so I would learn both sides, but in the end, I wrote the checks.

Next month: Unless some other news pops up, I plan to cover the Florida 5% rule in detail.

Florida 2012 Tax Lien Auction Results

Florida was the state I was most interested in investing in as it seemed to provide the simplest way to get a great return from interest only. An 18% maximum interest rate and laws that make it easy to recover your money where what attracted me. A foreclosure is a home-run in some states, but it would require you to hire the right lawyers to go through the process. I wanted to keep it simple to start off.

I looked at the results of some prior years and saw something disturbing. Was it really possible that one to two million bids at the minimum rate of 0.25% were being submitted for every lien on my radar? This did not seem reasonable to me. First, are there really that many people competing? Second, why in the world would someone accept a 0.25% return when you can easily find a 0.75% return at an online bank? Florida does have a 5% minimum rule that I have heard about, but I was not sure how it works. I had set a goal for myself of getting a better return in Florida than I did in Arizona, so I was aiming to get a little better than a 6% return. If the past history was correct, it did not look like I would meet my goals.

I put another $7,000 into my tax lien bankroll. With the money left over from my original $6,000, and the money from the redeemed Arizona certificate, I now had about $9,500 to invest in Florida tax liens. I knew I wanted to participate in the Citrus county auction as I have access to a house there, and based on the fact that it was the earliest internet auction, I also signed up for Pasco County auction. I figured I would buy up to $5,500 in Pasco, and save the rest of my powder for Citrus. If things went well in Pasco, I was even thinking of augmenting my bankroll prior to Citrus.

The Pasco auction was on May 15^th. Pasco uses “Direct” bidding instead of “Proxy” bidding. I'll get more into those details in a later post, but in theory, Proxy bidding is better. I took more of a “cast a wide net” approach than I did in Arizona due in part to the differences in the state laws, so I bid on over 500 liens. My bids ranged from a low of 6.25% up to 7.5%. I checked the results after the first four of a total of ten batches were finished, and every lien I had bid on had gone for 0.25%, and there were over a million bidders on each of them! I did not know enough about the 5% rule to feel completely comfortable counting on it, but if everybody else was jumping off a bridge, I figured maybe I should too. I dropped 60 of my remaining bids down to 0.25%. Considering there were over one million bidders at 0.25% on each, not surprisingly, I was shut out.

The Citrus County auction was June 1 – 3. I put in 425 bids at 0.25% for single family homes, and another ten bids at 6.75% for multifamily homes. I did some more reading on the 5% rule first as I was convinced this could be the only reason why the rates would go so low. I was still not comfortable enough with my understanding of the 5% rule, but I figured the best way to really learn it was to experience it first hand by winning at least one bid.

Worried I would be shutout again (pretty good odds if there really were to be millions of bidders), I also looked into the Gilchrist County auction. History looked a little more promising here as past years showed winners in the 5-6% range. Gilchrist is a rural county, and seems to get much less attention. There were not many appealing liens, though. I ended up placing only18 bids. In the early batches, I bid 6.25 – 6.75%, but I also placed five bids at 0.25% in the later batches. I checked in at the end of the day only to find I was shut out again. It seemed a little fishy that my low bids were mostly two way ties (far cry from 2 million) and I lost them all. Especially fishy was the fact that one of them was “won” at 3.75% due to Proxy bidding. With a tie, it should have been awarded at 0.25%. I actually thought of writing an email questioning the results, but decided against it.

On Monday morning, I check the site again. It was now locked with a message that results were being audited. Hmm. Then I checked my email and found I had won three bids! The site remained locked all day Monday, though, so I was not sure if I won or not. The balance was due by the end of the day on Tuesday. By noon on Tuesday, I was worried I would lose my bids if I did not pay. I called online support and left a voice message. I followed up with an email. They did resolve the issue and called me back. I logged in and paid for my 0.25% liens:

0.25% $2,276.12

0.25% $1,969.49

0.25% $1,596.49

Totals: 3 $5,842.10

Now that I had “won” the right to collect 0.25% on my investment, I went back and changed my Citrus County bids to 5.75 – 7.25%. That auction was held from June 1 – 3. I was again shut out with all the liens I bid on going for 0.25% and having one to two million bidders.

Now that the 2012 Arizona and Florida tax lien auctions are over, I have three goals for the rest of the year:

First goal: really learn tax liens. By that, I mean learn the laws and strategies. Most of my posts for the rest of this year will be focused on technical and legal topics around investing in tax liens.

Second goal: find a better return. Let's say I am getting a 5-6% return on my tax lien investments. That is not so bad considering the current interest rate on other investments, but I am not sure yet I am actually getting that rate. Even if I am getting that rate, I am not sure it is worth the effort.

Third goal: find opportunities with less competition. This may mean other states, or counties not doing online auctions. I am not sure opportunities are out there, but I will certain look.

Arizona 2012 Tax Lien Auction Results

I had decided that I would concentrate on Florida tax liens for three reasons: the 18% maximum return, the fact that I could stay in my parents winter home if I needed to visit, and the fact that the laws in Florida seem to take some of the risk (and potential award) away form the tax lien investor. So why and I writing about Arizona? By law, Arizona tax lien auctions happen in February; Florida auctions happen in May. I was looking for the experience of going through an auction before the Florida auction season kicked off.

There seem to be two major sights covering most of the tax lien auctions for Arizona and Florida. I'll get into more details on them in a future blog post, but for now, here they are:

Grant Street Group

http://www.realauction.com/county-tax-lien/

It took me a little while to track then down. I first ran into this site which does give some good info, but is aimed as selling a product:

http://www.tax-lien-certificates.com/

From there, I started looking at official state county sites to make sure I was not being scammed. Some county sites are quite good, many are terrible. Most had a link to one of the first two links above, so I was convinced enough that they were legitimate. I do suggest you go to the site of the county you are interested in as some of them do have good information.

I decided in Arizona I would concentrate on Coconino County. I am no Arizona expert, but I have been there three times. With all the news of a real estate crash in Phoenix, I thought the Flagstaff area would be safer. As the dates for the Maricopa County (Phoenix) auction happened first, I figured I would just be a lurker for that one. After spending some time looking, though, the anticipation was too great. I put together a bankroll of $5,000.

I ended up placing five bids in the Maricopa County tax lien auction. The maximum rate in Arizona is 16%, so I placed my bids from 14% on a nice house in Phoenix down to 8% on a mansion in Sedona. I was shut out. Most properties went in the 5-7% range. Becoming a tax lien millionaire was going to take longer than I originally thought.

Coconino County was the next auction I participated in. I kicked my still untapped bankroll up to $6,000 and place 29 bids ranging form a high of 15% down to 6% on a real beautiful property. Again, I was shut out. This second strike caused me to really bear down. Although I started looking at Arizona as just a practice for Florida, I was now determined to actually win a bid in Arizona instead of just seeing how the auction process worked.

As a last ditch effort, and with less time to research, I jumped into the Mohave County auction. I only spent enough time to look through the first batch of properties, so I decided to cast a wide net. I bid on 43 properties in batch 1, and my bids were from 7% down to 5%. I won four bids (these bids were all ties, and I lost another five ties). Here is what I got:

FACE VALUE ASSESSED AT RATE

$1,672.97 $169,900.00 6%

$951.47 $150,200.00 5%

$1,254.61 $153,300.00 6%

$1,247.37 $150,400.00 6%

As you know from my first post, that first one was redeemed already for a small profit.

Currently finishing up the Florida season, so I will update on that in the next post.

What is a Tax Lien?

For many financial instruments, it is often better to answer the questing of why it exists instead of what it is. The what, after all, is just paperwork and record keeping. Below is my understanding of why tax liens exist. Most of my understanding comes form the Moskowitz book, wikipedia, and some other random Internet sites.

Counties and other municipalities create a budget for their spending for the next year. The size of the budget depends on how much money they expect to bring in through various taxes and fees. Which projects can be started, completed, and most importantly paid for depends almost entirely on how much they expect to raise. Property taxes are the most common ways counties bring money into their coffers, and the biggest consideration when determining a spending budget is how much money they will collect.

Municipalities usually rely on state laws to enforce the collection of taxes and provide for penalties to encourage tax payers to not be delinquent with their payments. These penalties include charging a fairly high interest rate on late payments, and they usually provide for the seizure of property if the taxes are not paid within a certain time frame. While these laws ensure most people will pay their taxes on time, not everyone can or is willing to do so. The municipalities can and do collect the late fees and eventually foreclose on the properties, but that does not solve their main problem. That problem is they have spent or promised payments in one calendar year, and they cannot wait the three or more years it could take to get the money through a foreclosure. Also, the municipalities are not in the real estate business. While the law in on their side, they do not necessarily want to invest in the resources to manage the whole process from start to finish. One possible solution to the issue is to get investors involved.
 

By selling tax liens to investors, the counties win by getting the money they need to pay their bills. This means the citizens of the county win as well. The investors win because they want the returns they get by investing their money. The property owners whose properties the liens are written against are no worse off they they were to begin with (well, unless they were counting on the inefficiencies of the municipalities to snag a couple of months delays in foreclosures), and they might actually catch a bit of a break if the municipalities pass on a lower interest rate that was bid down by investors. It is rare to have a situation where there are wins all the way around, but tax liens seem to fit that bill.

Tax liens are sold at auctions. The auction rules and dates are often dictated by state laws. The lowest bids from investors wins the lien with one random winner chosen in the event of tie bids. Any liens not sold at the auction can be purchased directly from the municipality at the highest interest rate allowed by law. In my very limited experience, I would warn you NOT to count on getting anything other than raw land at or near the full interest rate. I am guessing that Internet Auctions are what is really driving the winning bids down.

So, what do you do after you win and pay for your liens? No much. The municipalities eventually collect the money for the redeemed liens for you (principal and interest). If you have held the liens for the prerequisite length of time (as defined in the state's laws), you can request a foreclosure to redeem your money. This will take some action on your part, but if you choose your tax liens carefully, depending on the laws of the state the property is in, this is were you can really make some money.

Welcome

I'm excited: I just received my first check from investing in tax liens: $1,677.76. Of course, I purchased the lien for $1,662.97, so my profit is only $14.79, a return of 0.88%. The good news is that this return was in one month, so annualized, my return is about 10.67%. Not bad at all, but still short of what I thought was my conservative goal of 12% per year based on my naive expectations before I got into the game. I am happy that I did not lose my shirt on my first tax lien transaction as that was a concern I had. I still have a lot to learn about tax liens.

Welcome to my blog. In case you have not guessed yet, the subject of this blog will be investing in tax liens. I will be learning more about the world of tax lien investing through learning resources and through real world experience, and I will share that knowledge here. Instead of giving a disclaimer about not being a professional, I'll take it a step farther and admit to being an almost total novice in the field. Feel free to doubt my claims and laugh at my mistakes, but also feel free to educate and encourage me and any other readers I might pick up along the way.

I first heard about tax liens about twenty years ago, but I never followed up on the topic until earlier this year. In February of this year, I borrowed the old version (1994) of Joel Moskowitz book The 16% Solution from the library. It seemed like investing in tax liens was a no risk / nice reward endeavor. Of course that immediately made me suspicious. Some haphazard Google searches made me even more suspicious, but I decided to jump in anyway. My plan was to “specialize” in Florida tax liens for reasons I will discuss in a later post. I figured I would just browse the Arizona online auctions to get a feel of how things work. In March of 2012, I purchased four tax liens in an online auction for Mohave County, AZ. In April, one of those tax liens was redeemed for the paltry (or princely, depending on your perspective) figures listed above. I am now a tax lien investor.

In future posts, I plan to discuss my 2012 Arizona tax lien adventures and my future endeavors (Florida tax lien auctions happen in May). I will discuss lessons learned, research done, observations and plans. I also plan to learn more about the subject of tax liens and discuss the sources of information I find. I plan to track my failures and successes right here online as well as provide links to more information sources.

This is my first blog, so I will be learning that whole world as well. I do not plan to use much post space on blogging topics, just keep in mind that for a while I will have no set format/layout. I hope to get this site looking more professional soon. I am not sure how often I will be posting, but I plan to have a minimum of one post a month. I definitely want to invite comments, but I still need to find out how to manage that part of blogging. I do want to monetize this site (my goal is to earn one penny a month which I will add to my growing tax lien bankroll), but I hope to keep it not too obnoxious.

Hopefully we will both enjoy this ride and come out the other end a little wealthier.