Creating wealth in real estate may sound like an oxymoron since the real estate market has imploded since 2007, but savvy investors can still garner double-digit returns today – in the form of tax liens.

Here’s how it works:

1. County tax collectors invite investors to bid yearly at auction on tax lien certificates, which represent the value of delinquent property taxes. The investor who offers to accept the lowest interest rate wins the particular certificate.

2. Winning bidders purchase these certificates from the county, which helps local government pay for schools, police and fire departments, parks, road maintenance, and other services.

3. If the property owner finally pays his or her property taxes, interest is charged, which is the investor’s return. If the tax is never paid, the county may auction the property itself, but the lienholder doesn’t get first choice.

For educated tax lien buyers (which include banks, by the way), this investment provides both safety (liens are honored ahead of a bank mortgage) and excellent returns. Keep in mind that a year’s worth of property taxes generally runs about 1 to 2 percent of the fair market value of a property. Thus, if a property is worth $500,000, the property taxes would be around $7,500. As such, your security comes from the fact that your money is secured by an asset worth about 67 times your investment.

When I first started investing in tax liens in Florida in the early 1990s, I could easily get many small liens at 18 percent. Larger liens, such as a $1,500 lien on a typical house, usually went for 15 to 17 percent. If you were patient and willing to spend several days at the auction, you could place all of your savings or retirement account money in the 16 to 18 percent range. In those days, only one or two institutional investors were present (who would bid liens down to 10 percent). Everyone was happy.

As the years went on and the stock market soured, institutional investors rushed into the tax lien market. I know, because I often bid against First Union Bank (later purchased by Wachovia) and Bank Atlantic. Then some private equity groups joined in the fun. For the individual investor like me, the institutional investors ruined the market. They had so much money, and they were now bidding liens down to 7 percent. Then to 5. Then even less. I had to work much harder to get rates in the 13 to 15 percent range. I had to go to other counties. I had to bid on small liens.

Then in 2008, a strange thing happened. The real estate market tanked, and institutional investors fled from the tax lien market. Many counties all over the country had thousands of liens that went unsold. News spread fast. Now happy days for the individual investor are here again!

For the 2009 May/June Florida tax lien sales, I predicted that some of the institutional investors would be back but that rates would be good. I was hoping to get liens in the 15 to 16 percent range. As I expected, some, but not all, institutional investors returned. Still, the rates were far better than at any time in the last decade. For example, a $400,000 lien on a nice high-rise office building in downtown Orlando went for 11.75 percent. That would have been unheard of even three years ago.

How did I do? I invested $1.34 million at an average rate of about 17.35 percent.

As proven by my investments in this recent sale, if you learn where and how to bid, and what properties to pick, tax liens are a great investment for the investor who wants security, safety, and an excellent rate of return.

Larry Loftis (www.LarryLoftis.com) is an AV-rated attorney, a tax lien investor, and the author of the best-selling book, Profit by Investing in Real Estate Tax Liens (Kaplan, Nov. 2007).

Tags: auction, delinquent property taxes, tax liens

This entry was posted on Friday, January 8th, 2010 at 12:36 pm and is filed under INVESTING . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.