By Charles Sells
How would you feel knowing that some of the investments in your portfolio were acquired so cheaply (relatively speaking) that you would never have to worry about negative equity, managed with so little overhead that you would have near-total peace of mind even regarding vacancies, and collateralized so securely you would sleep soundly each night even if the bottom fell out of the local jobs market?
I certainly hope you would feel really, really good about that investment!
I also hope you have already recognized all the signs of a well-researched, well-maintained, and well-managed tax-lien or tax-deed investment property in my description of those wise investments.
When acquired wisely, renovated judiciously, and managed responsibly, a sound tax lien or tax deed investment can be one of the best real estate investments you can make. However, when acquired without a holistic view of the investment, including understanding how the location of your new asset affects performance, a tax lien or tax deed investment can quickly turn into a money-sucking, peace-of-mind-draining monster.
At PIP Group, we have spent decades researching the rules, regulations, and legislation governing tax lien and tax deed sales and redemption (or foreclosure, as the case may be). Ultimately, we realized that while there are a lot of places in the United States that may be OK for tax lien or tax deed investing, there are far fewer places that are truly great for tax lien or tax deed investing. Furthermore, while most investors can probably come out OK on their investments even if they hit a few snags in the road, some locales actually seem to be investor-unfriendly to the point of really making it a generally bad idea to consider using this strategy at all.
While every investor is different and every acquisition is unique, there are some characteristics that stand out as hallmarks of the worst places in the United States for tax lien and tax deed investing. Naturally, there are some investors who have very niche specialties who thrive in these areas. To those investors, we say, “Well done!” However, for most tax lien and tax deed investors, these markets are not just unfriendly, they are downright antagonistic. Take a close look at the following list of characteristics that make certain markets the worst in the United States before you make your first investment.
Extremely Localized Laws and Regulations
Tax sales are a local affair, and even the ones that permit online participation have their own quirks and peccadillos when it comes to how they operate. That being said, some states offer more consistent “rules of the game” than others. Generally speaking, we recommend tax lien and tax deed investors place their capital in areas of the country where the rules are at least somewhat consistent from county to county. For example, in Texas, although there are some unique rules about how tax liens earn interest and are redeemed, the rules are fairly straightforward and apply pretty much across the state. This enables investors to make more accurate predictions about the outcomes of their investments and prevents oversights during the acquisition, redemption, and (in some events) the foreclosure process.
Overtaxed Municipal Government
I know, I know. You probably read that header and thought, “Where isn’t the municipal government overtaxed?” That is a fair point, but in this case, I mean the city governments that have clearly fallen so far behind as to be mired down for years. These governments can make even a “sure thing” type of deal a near-miss or even a money pit if they fail to get documentation on record in a timely fashion, lose information about properties, or simply are wholly nonresponsive.
We recommend working in states where the regulations and the process for acquiring tax liens or tax deeds is simple and straightforward, such as in South Carolina, which has a solid one-year right of redemption and an easily calculated rate of return (3 percent per three months from date of your purchase) that makes it extremely easy for investors to know what they should expect from their investment and what is expected of them. States like Michigan, on the other hand, have some areas where the city governments are completely overloaded. Wayne County, where Detroit is located, is a prime example. While Michigan tax sales are a favorite for some investors, we find that the local government is so overloaded that if you do need to speak to a live person, it can be difficult to do so in a timely fashion.
Outdated Record-Keeping and Technology
There are some areas of the country that are more technologically advanced than others. I am not necessarily speaking negatively about county treasurer’s offices that still keep paper records, either. In fact, sometimes I think we would actually have an easier time if more things existed in hard copy rather than in “the cloud”! No, when I say you need to look out for areas of the country with outdated record-keeping and technology, I mean you need to look out for city governments or state processes that appear to be outdated in terms of the technology they are using. Outdated technology often represents a threat to your investment.
At PIP Group, we always check out the “tech track record” of an area where we are considering investing before we ever sink one dime of our own capital or our investors’ capital into a tax lien or tax deed investment in that area. For example, one reason we like the state of Georgia when it comes to investing in tax deeds is that the right of redemption period is short and the process of terminating redemption rights if the property owner fails to pay is relatively simple. We have also found that in most cases, if you need to work with a Georgia county treasurer, the offices are usually pretty responsive and can find the information you need.
On the other hand, we would probably be pretty hesitant to invest in an area like Baltimore, Maryland, where the city made headlines when a ransomware attack froze the housing market by locking down property tax records, utility bills and payments, and even online payment portals for city services. The resulting meltdown lasted for months, and the property tax issues it created are still ongoing for many property owners who attempted to pay via checks (which were sometimes misapplied or lost) or paid via portal as the freeze occurred and therefore were not able to determine if they were actually delinquent or paid up. While some investors might thrive in that type of environment if they have a unique strategy or specialty, the uncertainty is too much for us!
You Have to be There in Person
This final red flag comes with a big caveat that I want to put out there immediately. There are a number of cities and states that require investors to be present at tax sales in person in order to bid on tax liens or tax deed certificates. That can be a game-changer for an investor who does not live in one of these areas because it means they either must travel to the auction or trust another individual to handle their bidding and their investment strategy for them.
If you have the right person handling bidding and strategy, then you are in great shape. That is, in fact, a great deal of what PIP Group does for its own investors! We have a huge advantage in states like Illinois, for example, where we are very familiar with the system and attend those auctions in person (as required) because many investors do not even try to participate in Illinois tax sales because of the in-person requirement. It is a great edge for us when we are acquiring attractive investment properties. However, if you do not have a trusted party working with you, then it can be very difficult to make good decisions about where to place your capital and actually get it placed correctly.
Wise Investors Don’t Fit a Single Mold
You have probably heard it said time and again: “Real estate is local, and every market is different.” This is just as true for tax lien and tax deed investing as it is for real estate as a whole. Some investors may read this article and think, “That’s just plain wrong; I love the (fill in the blank) market!” However, that investor likely loves that market because of their unique skills or strategies that make the market a good fit for them and give them a competitive edge there. For most investors steering clear of markets that actually offer disadvantages or potential pitfalls is the best move – especially when there are so many great ones out there to choose from.
About the Author:
Charles Sells began his career investing in tax liens at the age of 23. Like many of us, he was enticed by the simplicity and profitability often conveyed in popular coaching programs and weekend workshops. However, experience taught him that success required more than a simple snap of the fingers. So, at 26, Charles kicked the pitchmen to the curb and started his own business, helping investors discover realistic profits investing in distressed real estate. The model was simple: use his growing knowledge, integrity and tenacity to help others grow alongside him, in experience and in profits. One investor at a time, Charles has built a reputable business helping individuals invest passively in everything from tax liens to the ever-so-popular fix-and-flip. Fast-forward 20 years and The PIP Group has transacted hundreds of millions of dollars in distressed real estate investments on behalf of nearly 1,000 investors worldwide. Charles and his team at The PIP Group have taken the stress out of investing in distressed real estate, by enabling investors to have their individual investments remain in their name and their control, retaining 100% ownership, with Charles and The PIP Group team at the helm to make certain those investments remain profitable. Learn more at www.PIPGroup.com.