Bottomfeeding off the housing market

I know I’m not the only one whose blood boils whenever some politician or other proposes hand-outs to the fiscally irresponsible. My personal favorite was “forgive the first $40K of credit card debt for everyone”. Made me want to go out and charge my fool head off so I could collect too. Some counties/states have put moratoriums on foreclosures for 6, 12, 18 months. I even know someone who’s fine with being foreclosed upon to get out of a mortgage that’s $100K above her property value, but in the meantime, she’s enjoying a free roof over her head for the next year, paying no mortgage or taxes. I think of that every time I make out my hefty rent check.

I realize most troubled homeowners aren’t as bad as that one, but there are more than a few who didn’t even bother to google “amortization” or do some basic research before making the biggest purchase of their lives. A team of people who work on commission told them what they wanted to hear, and they signed on the dotted line. My sympathy for those in this situation is minimal and why I wouldn’t feel bad about…

Investing in tax lien certificates, with actual hope of default

Not sure what tax lien certificates are? Basically, when someone doesn’t pay their property taxes, the county or state auctions off the tax debt because they don’t really want to foreclose and find themselves in the real estate business. Every state handles it differently, and some don’t even offer TLCs – might be done once a year, once a month, at county level, at state level, fixed interest but discounted debt, bid on interest, etc. So you pay their property tax bill and get an annual return that can be anywhere from 8 to 20%, minus an admin fee to the for collection and distribution.

I’ve never done this, but I almost did a few years ago in partnership with a friend. I let the idea drop because a single TLC would have sucked up nearly all of the money I had to invest, and I wasn’t comfortable with that. I really feel you have to know the local real estate market and maybe even drive by the properties in question because if the borrower defaults on their repayment, you get first dibs on foreclosing – yes, usually ahead of the banks. You assume the mortgage note (check out transfer fees and options from their lender), so you need to do your research to make sure the amount owed is comfortably below the current market value. Otherwise, should they fail to repay the tax loan, you’ll be choosing between two losing propositions.

And of course, you have to have the stomach to enact a foreclosure. You might not need to do it – you could just get your principle + 15% back and feel really smart for making 7x the average interest rate on savings accounts. But then again, you might find yourself in a position to legally scoop a $250K house with $50K remaining on the note – a hassle, but arguably worth it.

Apologies if any of this information is out-dated or imperfect in any other way – I read The 16% Solution several years ago, and just resurrected the idea in my head this morning. The book makes things sound a lot easier than they are.

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3 Responses

  1. Hey Kate! This is my first comment on your blog, so I thought I should introduce myself and say hi! I’m Cathy and I just started blogging recently, still getting the hang of it 🙂

    It totally isn’t fair that people can be completely irresponsible and then get bailed out. It definitely makes my blood boil 😦

    I don’t know about investing in tax liens…I always have part of my brain that gets tempted by investments like that, but ultimately, I think it is difficult to make good decisions about investments unless you really know what you’re getting into.

  2. I don’t know anything about tax lien certs but I do recall that Suze Orman advised her caller to stay away from them. I wish I could remember why , but I think the gist of her response was that it was because it’s too risky. Cathy Quik makes a good point that Warren Buffett often makes: don’t invest in something you don’t completely understand. So I shall stay away from them.

  3. Cathy – welcome! I haven’t been at the whole blogging thing very long myself, but I’ve already benefitted from the input and experiences of average folks like you and me.

    Shtink – I think the risk is that it’s too easy to overlook some detail that could mess things up. Since the debt is secured, I imagine the risk is for those who just want their money back and have no interest in taking the house.

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