Lien Certificates Have Something To Offer For 'Poor Man' and 'Rich Man'

One of Many Lien Certificates

We made some pretend lien certificates today - this is one of them.

Lien Certificates - Yielding Two Forms of Return That Couldn't Be More Different!

Recently, in my post "Tax Liens: What Camp Are You In?", I showed you how lien certificates produce one of two very different results.

Most of the time, quality liens will redeem. A much smaller percentage of the time a quality property is obtained.

In this 3-post series we'll meet 'Rich Man' and 'Poor Man'.

Rich Man may not be fabulously wealthy, but he has several hundred thousand dollars that he won't need to use for several years.

He's looking for a better return on it than he's getting in the bank. However, he doesn't want to have to spend a lot of his time dealing with the investment.

'Poor Man' isn't really "poor" in the usual sense of the word. He may even own some properties and be building wealth at a fast pace. He just doesn't have a lot of idle cash that he can tie up in a large investment.

Poor Man wants bargain properties, and would like to get them by purchasing lien certificates.

However, he'd only be able to only buy a few with the small bankroll he currently has. Those few lien certificates would probably not result in a property being acquired.

Why? The fact is, large numbers of lien certificates must be purchased before one can expect to get occasional properties as a result of their investment. 95% of these lien certificates will pay off.

Rich Man loves this aspect of lien certificates, however. He's just looking for high interest on his money, and "hitting the jackpot" with a bargain property is really not part of his gameplan.

He would actually love it if 100% of lien certificates paid off.

All he wants is a payoff so he can invest again. He would buy dozens of liens if it weren't such an active investment. He'd love to just earn 10%-15% on autopilot.

It's a simple fact. Most people want to either earn passive interest on their money, or they want to take an active role in the investment for potentially huge returns.

It's rare that someone wants to be a "wheeler dealer" AND tie their money up in something that usually just pays interest at the same time.

The "Poor Man's" Lien Certificate Quandry

We have someone here with smarts, energy, and ambition. The only problem is, he doesn't have the kind of cash needed to really profit from lien certificates.

Even 15% return from lien certificates isn't going to be appealing to him. He wouldn't be able to invest enough money to earn more than a few thousand dollars from the liens he would buy.

That would represent the interest earned on his lien certificates when they inevitably paid off.

Lien certificates interest him highly nevertheless. He'd love to be on the receiving end of one of those tax sale deals you sometimes see on TV! While rare, they really do occasionally happen.

Maybe there is a way for him to improve his odds.

In my next post, we'll see what Rich Man's goals are, and how he and Poor Man might strike up a fabulous partnership. It turns out each has something to offer the other, and cannot make the investment without the other.

{ 13 comments… read them below or add one }

Thomas Quinlin January 24, 2012 at 2:04 pm

I've also worked with tax lien certs in the past in Nevada and Arizona (Nevada is a tax lien certificate and tax deed state) but it but the auctions are very time consuming, especially in Arizona where the interest rate gets bid down by large insurance companies (from the starting rate of 16% to 9% or lower). There is an after market inventory but one needs to complete some sort of due diligence on the properties. Looking forward to seeing your future comments.

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Rick Dawson January 24, 2012 at 3:22 pm

Great observation. This is why the investment is really unsuitable for people who just want to park their money. It's time-consuming and specialized knowledge is required.

This is why teaming up with a hungry investor and letting them do the work in exchange for the chance to buy any properties received, is the perfect solution.

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pkal January 31, 2012 at 5:34 pm

hi, thanx for the education, it seems like the bank has walked away from the property in order to get the deed auctioned, so how to close a deal with the owner in these situation( a morgage exist but the deed is being auctioned)

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Rick Dawson January 31, 2012 at 5:59 pm

You're assuming there's a bank involved - usually there isn't.

If you do run across a deal with a bank involved, see what the mortgage balance is. If it's not very low, move on!

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Bill McVicar Jr December 12, 2012 at 7:10 am

Hi Rick, on the one hand you say the bank will usually pay off the mortgage but when they don't doesn't the mortgage get forgiven at the tax deed sale? I have heard others say that is does! Or does it depend on whether the bank gets notice or not?

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Rick Dawson January 5, 2013 at 12:09 am

The bank will not pay off the mortgage, they will pay the taxes before the sale. Otherwise they will be wiped out and it's well worth paying a few thousand dollars to avoid losing, say $50,000, the amount of their mortgage.

The mortgage gets wiped off the property for the buyer at the sale, who was not involved in the mortgage. However, the owner stills the mortgage company the money under the note.

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Tarique Malik February 21, 2013 at 5:16 pm

I am in real estate for long time, but relatively new for Tax lien properties, what do you suggest to new people who are interested in buying Tax Lien property for personal and investment purpose. What is the safe approach and right way of getting into this kind of deal?

Please guide me with your vast knowledge and experience in this field.

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Rick Dawson March 5, 2013 at 10:39 pm

Tax lien investing requires a large amount of capital in order to produce any kind of real profit. Even at $100,000 invested you're looking at only $10,000 - $14,000 per year in return so not really a living wage. And keeping $100,000 safely invested at all times throughout the year is NOT a passive affair. By blinding choosing properties and hoping they won't redeem, you could be waiting a long time.

Tax liens typically serve people well have large amounts of money to invest and thus the interest becomes worthwhile and the preparation work pays off.

You may determine ways to buy liens that have a lesser chance of redeeming, and be able to work with less money and get more properties.

The safe approach is to take your time to learn the rules and obligations of the sale, and only invest in liens that are secured by properties worth several times the investment. And if possible, invest in a dozen or more liens with your capital so if one goes bad you're not wiped out. For instance, it's beyond anyone's control if a house burns down or the market tanks while you're holding the lien.

Then, don't depend on receiving properties regularly but be thankful when you occasionally do. If you followed step 1, it will have a nice built-in profit.

Whatever you do, never go to a sale feeling like you NEED to buy something or invest the cash you came with. As long as you don't make a big mistake by losing your investment on a bad property, it's a pretty safe endeavor.

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Quentin March 1, 2013 at 6:35 am

Hi, I am interested in redeemable deed transaction before the property is brought to the lien status. I know the the home is about to be foreclosed on, but I do not have the cash to bid on the property. How do I approach the owner as a deedgrabber and negotiate a deal.

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Rick Dawson March 5, 2013 at 10:22 pm

Set a price with the owner, find a buyer willing to pay more, and be the middleman.

Or find abandoned homes that the owner has walked away from, pay a token amount like a few hundred dollars, and find a buyer before the final deadline to pay the taxes. Those are a couple ways.

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Brenda May 31, 2013 at 3:37 pm

I'm fuzzy on how buying Liens work, does your book explain this in detail or is there somewhere I ca go to research this more ?

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Rick Dawson June 10, 2013 at 12:18 pm

I don't recommend buying liens for most people so I don't go into that. I show you how to buy the property from the owner which is usually much better.

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Amanda June 22, 2013 at 9:16 am

My brother and I are closing my mothers probate He is dead set on me working on spending the inherentance on buy tax lean certificates But with all the information I have read even with a few hundred thousand is this really a safe investest to support the remaining 4 in hour family my ancestry lived on their interest for many year I am scared to make the wrong decision with the money they worked so hard for

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