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Tax Liens and Deeds Series – Part 6

Doing Your Due Diligence

This is the sixth installment in a series of Rich Dad Education articles on the topic of tax liens and deeds. Tax liens and deeds are just one of the many subjects covered in Rich Dad Education’s Elite Training. Rich Dad Education’s Elite Training classes have been designed and are taught by experts and offer students of all experience levels an opportunity to dive into the investing world in a quick, efficient, and profitable manner.

In recent articles in this Rich Dad Education series, the differences in the auction format, redemption period, and other aspects that differ from state to state have been discussed. While there may be different rules, procedures, and offerings from state to state, there are many aspects in your approach to tax liens and deeds investing that remain constant. First and foremost among the constants in your tax liens and deeds investing is due diligence.

Due diligence is a popular phrase in real estate investing and simply refers to the care you should take before committing to any investment. While tax liens and deeds investing is widely regarded as an extremely safe and conservative investing strategy, there are still steps you need to take to ensure that you are protected.

Protecting Your Investment

While perhaps the least exciting step, doing your due diligence is arguably the most important task in the tax lien and deed investing process. While tax deed investments are normally higher as they are directly acquiring title to the property, both tax deed and tax lien investors should approach their due diligence in similar manners due to the potential liabilities that may exist once you acquire the property. While the vast majority of tax lien investments simply result in the payment of your investment with appropriate interest, the savvy investor makes sure to conduct their due diligence to ensure that they are not potentially inheriting a property that is worthless or has far too much liability to make it worth the small risk involved. Remember to never buy a tax lien on a property that is not worth the investment as the property is the security on your tax lien purchase

Here are just a few items that you should be sure to investigate as part of your due diligence process.

Determine the Property Value – Future Rich Dad Education series will include in-depth articles on how to calculate property value, similarly to the Rich Dad Education Tax Liens and Deeds Elite Training. A quick shortcut you can use for smaller tax lien investments is to look at the tax assessment data used by the county as this gives you a ballpark with what you are working with. If the information is not available online, then contact the tax assessor’s office.

Determine Zoning Restrictions – This is especially important for vacant lots as zoning laws could lay waste to great plans you may have in store for your newfound land.

Physically View the Property – This is an essential step on larger purchases as it will be required to help determine property value. View the property to assess the condition of the home and to ensure it is even there! Being able to visit the area is a huge advantage but you should at least find a service that offers satellite photos of the area if it is for smaller investments.

Environmental Risks – For commercial properties you may inherit substantial liability for previous environmental contamination.

Utilities – Are water and electricity accessible? If not, how close are the nearest utility sources? If they are not available, is the city or county going to be expanding to that area soon?

Bankruptcy – Determine if there is a pending bankruptcy associated with the property and its   current owner. If there is, simply move onto the next potential investment.

Other Property Liens – While your tax lien will take precedent in most cases, find out if there currently are other liens on the property. If you find the property currently has liens against it and are not sure how that applies to the specific jurisdiction, it may be wise to consult an attorney to help answer applicable questions.

This is just a small sample of elements that should be included in your due diligence checklist. While performing your due diligence can take some time, it is time well spent as it can protect you and weed out potentially risky investments. The next Rich Dad Education article on tax liens and deeds will explore the most common mistakes tax lien and deed investors make.

Tax Liens and Deeds Series – Part 5

Rich Dad Education’s fundamental mission is to help Rich Dad students achieve their financial objectives. Rich Dad Education’s elite trainings, such as their Tax Liens and Deeds class, offer Rich Dad students the ability to learn a tremendous amount of material in a short amount of time. This is the fifth article in a series of articles on the topic of tax liens and deeds and while it is impossible to replicate the unique and dynamic setting that a Rich Dad Education class offers, it is the goal of this series to provide you information that you can put into practice in your quest to escape the Rat Race.

In past articles in this Rich Dad Education series we have discussed:

  • Favorable outcomes of tax liens and deeds
  • How tax liens and deeds work
  • Differences between tax liens and deeds
  • The auction process
  • Different auction formats

Auction process will vary from state to state, including whether a particular state offers tax liens, deeds, or both. One of your first tasks as a tax liens and deeds investor is to learn the rules, procedures, and offerings for the state and county that you are looking to invest in. With online auctions appearing in more locales each year, it is becoming increasingly easier to find tax liens that meet your investing criteria.

Here are some pros and cons of the different aspects that may vary in the state you invest in:

Redemption Periods and Tax Liens States

The redemption period is the amount of time that the property owner has to pay back the lien (plus any interest or penalties). The redemption period can be less than a year and up to four years depending on the state. For states with longer redemption periods, the biggest con is that you can tie up your money for a lengthy amount of time. In these states many investors may set the minimum return they require higher to compensate for the lack of access to their investment capital.

Since the maximum rate varies from state to state, Rich Dad Education investors should focus their energies at first on states that offer the highest returns. While you might not live in one of these states, online auctions may give you access where in the past you could not have easily attended live auctions.

Interest rates reflect the maximum rates allowed by law. While these rates may be uncommon, it does give you a good sense of which states are investor friendly.

State – Interest Rate – Redemption Period

Alabama – 12 % – 3 Years

Arizona  – 16% – 3 Years

Colorado – 9% – 3 Years

Florida – 18% – 2 Years

Illinois – 36% – 2 Years

Indiana – 25% – 1 Year

Iowa – 24% – 1.75 Years

Kentucky – 12% – 1 Year

Louisiana – 17% – 3 Years

Maryland – 6%-24% (Varies by County) – 6 mos to 2 Yrs

Massachusetts – 16% – None

Mississippi – 18% – 2 Years

Missouri – 10% – 1 Year

Montana – 10% – 2 or 3 Years

Nebraska – 14% – 3 Years

New Jersey – 18% plus penalties – 2 Years

New York – 14% (NYC does not offer) – 1 Year

South Carolina – 8%-12% – 12-18 months

Vermont – 12% – 1 Year

West Virginia – 12% – 17 Months

Wyoming – 18% – 4 Years

District of Columbia – 18% – 6 Months

Some of these states do not pay interest on the overbid and other states not listed―such as Texas―offer high interest rates on deeds.

There are pros and cons for tax lien investing, just like any other form of investing. While tax lien investing fits the profile of the average Rich Dad Education investor nicely, be sure to see if it meets your personal investing criteria. Some of the questions you should ask yourself are:

  1. How much time am I willing to commit?  If time is a resource that you are in short supply of, then tax lien investing may be for you. There is a relatively low time commitment in tax lien investing versus tax deed investing or other forms of real estate investing.
  2. Are you limited in your initial investing capital? While having an abundance of capital does not preclude you from tax lien investing (in fact you may find it preferable), not having capital can limit you in other areas of investing. Tax liens are available and can be picked up for a few hundred dollars. These can be a great place for a beginner to get their feet wet.
  3. Do you have a low risk tolerance? While all investment carry risk, tax liens carry very little risk due to the regulation by state and local governments. Some investors are very satisfied with a solid rate of return with the peace and comfort that tax liens offer.
  4. Are you willing to tie up your investing capital? This is perhaps the biggest drawback of tax lien investing. For some investors it is a nonissue as the high rate of return, coupled with the low risk, outweigh their money being tied up. It is a factor you should consider.

In the next article in this Rich Dad Education series, due diligence will be discussed in relation to tax deeds. Rich Dad Education prepares their students to face the many scenarios that can occur in investing and the next article will prepare you to avoid some of the pitfalls facing tax deed investors.

Tax Liens and Deeds – Part 4

This is the fourth article in a series of articles on the topic of tax liens and deeds. Rich Dad® Education’s Elite Training offers numerous classes that can help you achieve success in the area of real estate investing. Taught by Rich Dad Education Elite trainers, tax liens and deeds class offers students of all experience levels, an opportunity to dive into the investing world in a quick, efficient, and profitable manner. The fundamental goal of Rich Dad Education is to put students in a position to financially succeed, and tax liens and deeds can do just that.

In past articles in this series, the multiple favorable outcomes of tax liens and deeds have been discussed. In addition, how tax liens and deeds work has been discussed in addition to the difference between the two. Several times, the auction process has been mentioned, as that is the means that is often used to purchase tax liens and deeds and that will be the focus of this article.

The Auction Process

Like so many things with tax liens and deeds, there will be different processes depending on your location. Each county will have a registration process in place that will allow you to bid. For some counties you will be able to:

  1. Register on the same day as the auction or
  2. Be required to register several weeks before the auction or
  3. Anywhere in-between

It would behoove you to make sure that you know the rules of registration for the particular county you are interested in, in order to not miss out on potential great investments. When you register, ask if the county has any printed preregistration material that they can send you or if similar material can be found online. This material can help you become familiar with the rules and procedures of that particular county in addition to whether or not there are any fees or deposits involved in the process, what types of payments they accept at auction, and how much of the payment is due if you are in fact the winning bidder.

Auctions are increasingly becoming available online. For Rich Dad Education students that don’t reside within the state, there is the ability to purchase online, outside of your jurisdiction. If the auction is live or online, your registration materials will inform you of the location and time that the auction will be held.

At the Auction

Auction time lengths will vary depending on the amount of properties that are available so check with appropriate personnel before the auction to see if they can give you an estimate of how long your particular auction will last. The bidding process at the auction will vary depending on the location but here are some of the most common bidding systems:

1) Premium Bidding – A minimum bid is announced and an auction proceeds as you normally view an auction. The highest bid will be the winner. At live auctions you likely hold up a card and during online auctions a click of the mouse. Once bidding stops, the highest bid gets the deed. With premium bidding auctions, Rich Dad Education students should be aware that:

  1. Due diligence should be conducted on the property in question if any substantial bid is made.
  2. Make your calculation to what your maximum bid is before the auction and never go over that price. It is easy to get caught up in the excitement of the auction so be disciplined beforehand.
  3. If it is a tax lien sale, you may only receive interest on the minimum bid so be sure to make your calculations beforehand with this in mind.

2) Interest Rate Bid Down – This type of method only applies to tax lien auctions. In this type of bidding system, the highest interest rate is offered and that rate is bid down until no one is willing to go lower. Let’s assume that a Rich Dad Education student is attending an auction and the opening bid is 12%. The increments will go down usually by a ½ percent rate until it stops. Have your minimum acceptable rate of return known beforehand.

3) Rotation or Random Bidding – In these systems there is no auction process per se. Either sequentially or randomly, you or another investor will have a turn. On that turn a lien with an interest rate will be presented to you and you can either buy or pass.

There are other bidding systems less popular so, as always, check with the specific jurisdiction before the auction. Tax liens and deeds are just one way for Rich Dad Education students to get ahead. In  upcoming Rich Dad Education series, many other strategies and principles will be taught. The Rich Dad Education series next week will take a look at some of the pros and cons of specific states.

Tax Liens and Deeds Series – Part 3

This is the third installment in a series of articles on the topic of tax liens and deeds. Tax liens and deeds are just one of the many subjects that are offered through Rich Dad Education’s Elite Training. Rich Dad Education has gathered some of the brightest minds and experienced investors to teach and create the subject matter for these intense and rewarding elite trainings. It is the hope of Rich Dad Education that the information contained in this series offers the reader practical information that they can apply to their investing and gives a small taste of the quality education that Rich Dad offers.

Multiple Favorable Outcomes

In the last article in this Rich Dad Education Series, the multiple favorable outcomes of tax liens and deeds were discussed. Once you own a tax lien, essentially one of three things can happen:

  1. The property becomes yours (due to the prior owner not paying off taxes)
  2. The property is sold at auction and you make the full amount of interest on your investment (due to the prior owner not paying off taxes and state law dictating that an auction be held, your lien and resulting interest will be paid off as part of the auction proceeds)
  3. The owner of the property pays off the lien and you receive your original money back, plus interest and, depending on the location, sometimes even an extra early redemption penalty

It is due to these positive outcomes that Rich Dad Education regards tax liens and deeds as a favorable investment strategy, one that can eventually help you get out of the Rat Race.

Tax Liens or Deeds

As with any new investment strategy there is a bit of terminology that must be learned, but fortunately it is minimal with tax liens and deeds. There is no universal method that states across the country use to enforce the collection of property taxes. Each state has different methods and allows for different levels of interest and penalties for their enforcement mechanisms.  Numerous states use tax liens, others use tax deeds, and some states offer a combination of the two. In the past, a state’s particular set of rules might have limited an investor’s options due to the state they resided in. However, online auctions have dramatically opened up the options that investors have today. Online auctions will be discussed in an upcoming article

Tax Lien Certificates are offered in approximately sixty percent of the states. When you purchase a tax lien certificate you are not granted the title to the property, you simply have a first-priority lien on the property. A first-priority lien simply means that your lien must be paid first, ahead of mortgages and other liens. Depending on state law you may also get the rights of foreclosure, which would give you the ability to own the property, or the property would go to auction and your lien plus interest would be paid as part of the auction proceeds.

Tax deed auctions provide the title of the property to the winning bidder. These auctions usually occur approximately two to five years after taxes become delinquent on a property. Because some states have certain conditions that might conditionally transfer the title, it is important to know the specific regulations of the state you are dealing with. Because the majority of states issue a non-warrantee deed (there is no warrantee to the condition of the property) your knowledge of other real estate investing areas will come in handy. Fortunately, Rich Dad Education and future articles will cover many of these topics.

Many investors settle in on tax liens as an initial investment due to the low cash requirements (you just need the amount of back taxes owed and other fees) and because of their relative ease to acquire. These investors often target homes in nice neighborhoods looking to get nice rates of return on their investment with relative ease.  It is this type of passive income that Rich Dad students are always trying to find. Other investors with the available capital focus on tax deed sales because of the ability to acquire properties at sometimes dramatically reduced prices. They use their knowledge of real estate investing and put it to work at these auctions. Other investors use both tax liens and tax deeds to take advantage of opportunities presented.

Tax liens and deeds are one of the favorite strategies of Rich Dad Education’s students. In the next article in this Rich Dad Education series we will discuss the auction process.

Tax Liens and Deeds Series – Part 2

It is the goal at Rich Dad Education that every student that passes through its program is presented with an education that puts him or her in a position to succeed. This is the driving force behind the company, from when a student first enters Rich Dad Education’s Free Workshop all the way through Rich Dad Education’s Elite Training. These articles are designed for existing students to serve as a refresher and for those that may be new to the Rich Dad universe to see a small sample of what we offer students each and every day. This is the second in a series of articles on the topic of tax liens and deeds.

Before we get started exploring this wonderful investment strategy, let’s set some expectations regarding the potential profits you can make. Rich Dad Education offers education through numerous strategies, each of which has its own particular strengths in getting you to where you want to be financially in your life. While there are situations where tax liens and deeds investors hit that proverbial home run (i.e. acquire a $300,000 home for a few thousand), you need to approach tax liens and deeds investing from a more tempered vantage point. Now, even that toned-down vantage point results in an incredible and steady return on investment (ROI) that can eventually lead to your escape from the Rat Race, and escaping the Rat Race is what Rich Dad Education is all about.

Let’s build on our tax liens outline from the first article:

How Tax Liens and Deeds Work – The Super Succinct Version

  1. Governments tax properties
  2. If the property owner doesn’t pay by the due date each year, then the government places a lien against the property for the amount of the defaulted payment
  3. The owner is given time to pay taxes
  4. If taxes are not paid by a certain date, the government will hold a tax sale and auction off either a tax lien certificate or a tax deed
  5. You purchase the tax lien or deed

State and local governments do not want to be in the speculation/investing business. They create budgets and count on property taxes as a large part of their revenue. When taxes aren’t paid they don’t care how they collect—as long as they collect—and the selling of tax liens to investors allows them to collect the revenue they have projected to collect.

Why do Potential Investors Care?

Since nobody is going to help the government out just to be nice, governments have to find a way to incentivize investors to buy the rights to the tax lien from the government. Governments do this by setting an interest rate on the tax lien that is guaranteed. Thus the investor who purchases the tax lien sits back and collects a nice interest rate on the tax lien (interest rates vary from state to state, but some states have rates as high as 24%).

The concept should be very appealing to those who have read Cash Flow Quadrant by Robert Kiyosaki or students who are familiar with the Rich Dad philosophy. One of the goals of all Rich Dad students is to reach the point where the passive income from their investments allows them to escape the Rat Race. Income produced in this manner can allow you to truly reach a degree of freedom that so few achieve in life, which is one of the many reasons tax liens and deeds investing is so special.

Once You Own the Tax Lien – The Super Succinct Version

In future segments, the process of purchasing tax liens will be discussed. For now, let’s focus on the conceptual part of what happens once you own the tax lien.

  1. You purchase the tax lien from the government
  2. The owner of the property is required to pay the original taxes, interest, penalties, and fees
  3. If they do not pay in full, the tax lien stays
  4. If they do not pay in the redemption period (redemption period is the term describing the amount of time the tax payer has to pay their taxes, interest, etc.), then the property will either:
    • Become yours (depending on the particular state)
    • Be sold at auction (with your tax lien, including interest being paid by the new purchaser of the property)

So effectively one of three things happens once you purchase the tax lien:

  1. The property becomes yours
  2. The property is sold at auction and you make the full amount on interest on your investment
  3. The owner of the property pays off the lien and you receive your original money back, plus interest, and depending on the location sometimes even an extra early redemption penalty

Tax liens and deeds investing is truly a fascinating way to invest. The Rich Dad Education online series will continue in a few days with a deeper look at how to purchase tax liens and deeds.

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