Investing in tax liens may sound scary and complicated. But as you’ll see from today’s podcast interview, with a little bit of research upfront, it can be as easy as buying toilet paper on Amazon. And the capital required to invest can be as little as a couple hundred bucks, making it a low-risk way (compared to buy-and-hold real estate) to try a new investing strategy.
This week, I deep dive on tax lien investing with Phil Kessler, a prolific tax lien investor who has extensively researched the tax lien investing laws of multiple states. He also creates a lot of educational content about tax lien and tax deed investing online.
- How tax lien investing works + how to make money from it
- Differences between tax lien vs. tax deed investing
- How tax lien interest rates are set + realistic rates you can expect
- What makes an ideal tax lien investment
- Due diligence checklist for analyzing tax lien deals (and how it differs from typical real estate investing due diligence)
- Tips and tricks for evaluating physical property condition, environmental risks, etc, when you can’t access the house
- How tax lien auctions work + winning bid strategies
- How tax lien investment funds work + tradeoffs of investing in a fund
Have you ever invested in tax liens? What’s been your experience? What other questions do you have about it? Let me know by leaving a comment.
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Links mentioned in this episode:
- Summary PDF of state-by-state rules, interest rates, and redemption periods for tax lien certificates and tax deeds
- Nationwide Environmental Title Research (directory of public records websites)
- Velocity REOs (drive to any property, take 10-15 photos for you)
- National Association of Counties (find tax sale info on county treasurer site)
- National Tax Lien Association
- Grant Street Group
- Schedule a private 1:1 consultation with me
- HYW private Facebook community
Read this episode as a post:
Andrew Chen 01:22
My guest today is Phil Kessler.
Phil is a tax lien investor who has extensively researched the tax lien investing laws in states including Florida, Maryland, Arizona, New Jersey, Colorado, and Texas.
He’s been investing in tax liens since 2013, focusing primarily on Florida, but also investing in Arizona, as well as Maryland, where he’s originally from.
Incidentally, Phil says he originally learned about tax lien investing from his mother, who practiced law as a tax lien foreclosure attorney.
Phil also creates educational content about tax lien and tax deed investing for propertyonion.com, a website that provides information about foreclosure and tax deed auctions. He’s known on the website as the “Tax Deed Professor” for his expertise on the subject.
Phil, thanks so much for joining us today to share insights and tips on tax lien and tax deed investing!
Phil Kessler 02:08
Yeah. My pleasure, Andrew. Thanks for having me.
Andrew Chen 02:11
I would love to start out just by learning a little bit more about your background. We were talking earlier that you developed this interest first from seeing your mom’s law practice. But how did you get interested in tax lien investing and really get into it?
Phil Kessler 02:26
It’s interesting. My mother was a tax lien foreclosure attorney in Baltimore City, so the term had been thrown around my house growing up. It was something that I was familiar with, but I didn’t really take an active interest in until much later.
In about 2010 or 2011, I had a friend named Jay, a good friend still to this day, who was buying tax liens, and I would see these checks when I was over his house, from counties, and I always wondered. So it came full circle and he started teaching me how to do it.
Interestingly enough, the first tax lien I ever bought, I did no research on, no due diligence, and it was six plots in a graveyard. So I showed him what I purchased and he was like, “Yeah, you’re SOL on this one.” And it was still, to this day, the fastest I’ve ever been paid back on an investment.
Andrew Chen 03:31
The irony of that. So, before we jump into the meat and bones, I have a lot of questions I want to ask about this asset class.
But high level, just to level set for folks, how does tax lien investing work? How do investors make money through tax lien investing?
Phil Kessler 03:47
I try to have people think of it like you’re a bank lending money. People use the terms “tax lien” and “tax deed” interchangeably, and they’re not. They’re completely different things.
We’re going to focus on tax liens for a second.
A county has a budget. A county needs $50 million a year to pay salaries, to pave roads, and they earn most of that money through property taxes.
Let’s say they budget for $50 million in property taxes coming in. Come March 31st when everything is due, only $35 million has come in, so there’s this outstanding $15 million that they need to get paid on. So what they’re going to do is sell the tax debt.
As a tax lien investor, you are essentially paying the tax debt for the property owner under certain terms and agreement that are preset. The term may be two years, and the agreement would be 18% per year for two years. The property owner can redeem anytime in that time period, pay you back your money plus interest, or they are putting the house up as collateral.
So you’re essentially just a bank lending money in the amount of taxes that are due.
Andrew Chen 05:03
Got it. So the return that investors make is that interest that the homeowner is paying. Is that right?
Phil Kessler 05:11
Correct. And taxes are usually about 3% of the home value, so you’re looking at best case scenario is walking away with the house for maybe 10 cents on the dollar.
Andrew Chen 05:26
Got it. You alluded to this a moment ago. What is the difference between tax lien and tax deed investing?
Phil Kessler 05:32
Tax lien, the word that should always come to mind is lending. You’re lending money to the county for x amount of period, for x amount of percentage. A tax deed, you are buying the property.
So when you hear deed, you think dirt. You’re buying the land and everything that sits on it. It’s just a cash purchase of property.
Andrew Chen 05:53
Is the basic structure and mechanics of what the investment is the same, though? In one case, you’re taking title; in the other, you’re not?
Phil Kessler 06:01
Yeah, sort of. There’s basically two schools of thought.
There’s the tax lien school of thought where they’re getting their money now. The tax deed: California, for example, they will let someone tax default for five years in a row, and after five years, they’ll auction the property off to get paid back on everything.
The problem you run into with five years of tax default is that’s five years that a county is not hitting their budget. Orange County has filed bankruptcy numerous times as a result. You’ll see that in tax deed states where counties will be filing BK because they are just not meeting that budget requirement.
Andrew Chen 06:46
Got it. So if I think about tax lien investing, to your analogy as bank lending, you’re just acting as a little mini-bank, but you expect to get paid back plus interest.
In the case of tax deed investing, you’re buying the property outright. Is the purpose to own the property, or is the purpose to have the homeowner pay you back the owed taxes plus interest and then you hand over the title back?
Phil Kessler 07:09
You take immediate possession of the property and title. So that is your property immediately.
There are some states that call it redemptive deed states (Texas, Tennessee, Georgia), where you are buying the property. They give you something called a sheriff’s title or a sheriff’s deed, but there’s a six-month window where the property owner could pay you everything invested plus a certain penalty back.
Andrew Chen 07:40
And then they would be able to, no questions asked, reclaim title to the property?
Phil Kessler 07:46
Andrew Chen 07:47
But that’s state by state, it sounds like?
Phil Kessler 07:49
It’s so funny. I was talking about this yesterday. When people ask questions about liens and deeds, to give a general blanket answer is really difficult because the answer almost always depends on the state.
Andrew Chen 08:04
Yeah, got it. So it sounds like with tax deed investing, that’s just like a foreclosure auction. You’re actually looking just to get a cheap property.
Maybe you’ll rehab it; maybe you’ll rent it out; maybe you’ll flip it or whatever. But your goal, it sounds like, is not really to try to get the taxes owed paid back to you. Your goal is to actually just own the property.
Is that the right way to think about it?
Phil Kessler 08:24
Yes. You’re paying cash for the property.
Andrew Chen 08:28
Got it. So, when it comes to tax lien investing, then, our original topic, why would an investor invest in tax liens to get real estate exposure versus just investing in buy-and-hold real estate or even doing hard money lending where you can get really nice interest rates just by taking a first position on the property as a hard money lender?
Why do investors invest in tax liens for real estate exposure?
Phil Kessler 08:54
You had said the word “exposure,” and I think that’s minimal exposure. You are getting invested in real estate for pennies on the dollar.
And again, depending on the state, let’s take Arizona for example, you might have a one in 10 shot of acquiring a property for just what the back property taxes are. Say it would be three or four years of property taxes that you’d have to pay.
If you are looking for steady interest, this would be good for a retirement account, like a self-directed Roth or a 401 solo. That is something that might be really good to use for tax lien investing. You can predict what you’re going to be earning.
If you’re in a self-directed Roth and you acquire a property, you’re not going to have to worry about capital gains. It’s all about investing strategy.
I think for most people, one of the bigger problems is just cash flow. “I don’t have $300,000 to throw at a property, but I have $1000 that I can throw and earn some guaranteed interest on.”
Andrew Chen 10:04
I see. So, is your philosophy around this that this isn’t so much real estate investing; this is just like bank debt loan investing? Real estate just happens to be the collateral?
Is that how you think about it? This isn’t really real estate investing in your view?
Phil Kessler 10:23
Correct, yeah. After all these years, I’ve taken a step back and basically you’re just lending money. So it is almost like hard money lending but just for property taxes.
And there is always a chance that you can acquire a property, but most of the time, you’re just getting your money back in interest.
Andrew Chen 10:44
I see. So, as between an investor who is investing money as a hard money lender versus investing in tax liens, are there tradeoffs for why an investor should consider one versus the other?
Phil Kessler 10:58
With a tax lien and a tax foreclosure, one of the huge benefits (and this is something that people have probably heard; you hear buzz words about tax liens throughout the years): in a tax foreclosure, in most cases, any private lien is wiped out.
If there is a mortgage on it, if there is any sort of HOA claim, all that stuff is wiped away. So it would be a free and clear property, with some exceptions. If you do end up acquiring, there are some benefits there.
It’s predictable. It’s just a really predictable investment. I don’t know if there’s much more to the tradeoff than that.
Andrew Chen 11:43
I see. So the lien position supersedes everything else, it sounds like?
Phil Kessler 11:47
It does. There are a couple of liens that are equal, like an IRS lien, but there are ways to get those taken off. So there’s a small group of liens that are equal to a super priority lien like a tax lien.
Andrew Chen 12:01
Got it. How are interest rates for tax liens set?
Are there maximums? Are they statutorily set?
Phil Kessler 12:10
It is state by state. Florida offers 18%; so does New Jersey. Arizona is 16%.
The highest you’re going to see for tax liens would be Maryland. There’s a county there that offers 24% for six months. The lowest is probably 8%, which is also in Maryland.
Maryland is the only state where each county does their own interest rate. But it’s usually set by the county.
Andrew Chen 12:40
I see. So that’s a fixed interest rate? That is the rate you will get if you purchased the lien, or do these things get bid down by an auction?
Phil Kessler 12:50
Good question. We have different auction types.
You have something called a premium bid auction. A premium bid is where you’re bidding up the dollar amount.
Let’s just say a general example: Colorado. Colorado’s interest rate is pegged to the Federal Reserve interest, the primary, so nine points over whatever primary it is. So to purchase a lien in Colorado, you are paying a premium for that lien.
If it’s a $300 lien and you’re willing to go 6% over, then you’d be going to $318. That would be your maximum bid on that. So you’d be paying up.
Now, in other states, you are bidding down the interest rate that you’re willing to accept. They offer 18% in Florida, but that doesn’t mean that’s what you’re going to get.
In fact, we’ll probably get into this later about how banks just dominate the Florida auctions. They bid everything down to one quarter of 1% interest, and there’s a reason they do it. So, they’re very competitive in Florida, but bidding down interests is another big one you’ll see.
Andrew Chen 14:10
I see. So it sounds like there’s a statutory rate, but that rate is probably not what you’re going to get. It’s probably going to get either bid down or you’ll pay more for the lien, which effectively bids down the interest rate as well.
Is there a place where investors can see a list of the statutory rates, at least the book of values of the state by state or county by county rates? Is there some resource that they can look up what the rates are?
Phil Kessler 14:38
I think the National Tax Lien Association, the NTLA, might have it. If not, after this, I can send you. I have a reference guide that breaks down every state’s interest rate, redemption period, and general foreclosure rules.
I can send it to you. You can put it on your website.
Andrew Chen 14:58
Got it. Yeah, that would be helpful. I would love to link to that in the show notes.
So, during auction, investors, it sounds like, are competing to see who is going to accept the lowest rate or bid the highest premium. What are the typical yields that investors can actually realistically expect in terms of upper and lower bound? Does it vary from county to county, state to state?
Phil Kessler 15:22
It does. Maryland, for example, does something interesting too where they do a premium, but the premium isn’t paid on the front end. You are buying the tax lien.
If someone owes $1000 in taxes, you’re buying $1000 taxes and you’re getting 24% on that money. However, what you’re bidding on is if that property were to go to foreclosure, how much you would pay for the property to foreclose on it.
So, you can get straight up 24% for the back taxes. But if it gets to foreclosure, and I’m willing to pay $40,000 for that property and you’re willing to pay $55,000, you’re going to win that tax lien and you’re still only going to pay $1000.
Andrew Chen 16:08
I see. So there are different structures. What drives the differences between actual rates of return between counties and states?
I imagine if there’s large differences between two states, for example, or even two counties, investors will quickly flock to the one where they can get a higher return. Tax lien investing isn’t new. Over time, I would imagine these things more or less smooth out, so you can’t find really rich arbitrage opportunities.
Is that not correct, and there actually is a lot of inefficiency where there is arbitrage opportunities?
Phil Kessler 16:49
It’s interesting. People actually chase the better real estate market.
For example, in Arizona, Maricopa counties were phoenixes. They may have $1 million at that auction and they bid down the interest rate, and everything of significant value goes for 1% or 2% or something like that. But then you go out into rural Arizona, to a place like Apache County where there’s nothing there, and you can get 6%, 7%, 10% on your investment and still have it be on a really secure property.
So, again, it’s one of those things that state by state is the best way that I can answer it. If we focus on a specific state, it’s easier to give a more exact answer.
Andrew Chen 17:40
Yeah. I guess I’m trying to just understand, maybe even in your example that you just gave, or maybe more broadly, if you could comment on why this happens, why this phenomenon occurs where, either way, it’s a super secure investment; why wouldn’t capital chase the higher return?
Phil Kessler 18:06
That’s a great question. They do. They invest everywhere.
I’m just going to use banks as an example. Banks invest practically everywhere. Banks are really fond of Florida because there are certain laws in Florida that help them make sure they’re going to get their investment back.
In Florida, no matter what, if you bid anything above 0%, you’re going to get a 5% penalty on your money. The majority of tax liens pay back within 90 days. On single-family residential, the majority of them pay back within 90 days.
So, if you or I take $10,000 and we go to this auction and we win our tax liens, we might get a $500 return on our investment in a Florida auction. But banks have significant capital to throw. They can throw $100 million at these auctions.
I think last year, there was over $1 billion in tax liens in Florida for 2020. So they can throw $100 million at one of these auctions and still earn $5 million in 90 days. So it’s just the quantity of money that they’re getting versus the rate of return.
Andrew Chen 19:26
I see. I want to talk about the bank thing in a moment, though.
But is it accurate to say that in the large metro areas where you have quality real estate assets, there just tends to be higher volume of tax liens at auctions? So it’s like going to a supermarket rather than your corner grocery store? Is that the right way to think about it?
Phil Kessler 19:51
Yeah, absolutely. Think of it, they can get more money invested in one tax lien.
A $20 million property might have a $300,000 tax lien. One click of a button and they can get $300,000 invested instead of buying all these smaller investments.
Andrew Chen 20:10
Makes sense. Why do banks invest at such scale?
They’re in the business of making deposit loans and issuing mortgages. It doesn’t strike me that tax lien investing is their core competency. Why do they do this?
Phil Kessler 20:27
It’s just because they can get so much money invested, get a quick turnaround on it. There’s a couple of banks that are really big in tax lien investing.
Capital One is huge. Capital One offers a pretty good interest rate on their savings account relative to the standard.
Maybe the standard is 0.02. I believe they give half a point a year, which is not very much, but they’re able to get 5% on all this money that they’re investing in, say, Florida. So they can put $150 million in every year.
And it’s not their money, and there’s no limit to the money that they use. While they are giving out loans and they’re doing this, they’ve still got more money to invest. So it’s just another avenue to make money.
Andrew Chen 21:17
Got it. What is the typical payback period or duration that the homeowner has to pay back taxes and interest? I think you mentioned an example: 90 days.
Are the payback periods statutorily set, or are they negotiated or auctioned?
Phil Kessler 21:30
They’re statutory. On average, I’d say 18-24 months is the maximum. That’s where after that period, you can initiate a foreclosure.
On average, you’ll see it around there. The shortest is six months. The longest is three years.
Andrew Chen 21:48
I see. And is it typically the case that the lien actually gets paid back faster than the statutorily allowed amount, or is it all over the board?
Phil Kessler 22:02
I’d say it is all over the board, but in general, they usually pay back rather quickly. And the higher the value, typically, the faster they’re going to pay back.
There is a lien. I found one on Equestrian Center on Palm Beach County this year. It was a $400,000 tax lien.
The property is assessed at $30 million or something, and they paid back within 24 hours. They had to pay that 5% penalty, so $20,000. They had to pay for a 24-hour period that they were late on their taxes.
Andrew Chen 22:35
Is the penalty or the interest rate not pro-rated by day? Is it just the amount it is?
Phil Kessler 22:47
Penalties are on day one. Penalty is attached to day one, and then, in another column, you have this interest rate that’s accruing.
Let’s say it is pro-rated annually. If they were getting 18%, it would be 1.5% a month.
So you have the 5% penalty in one column, and then you have 1.5%, 3%, 4.5%. And then when you get to month four and you’re at 6% interest, then that penalty is wiped out. So it’s whichever is higher at the time.
Andrew Chen 23:14
Got it. I see. I was curious of the payback mechanism.
Is the payoff of a tax lien always done in a lump sum on or before the due date, or are there periodic coupon payments along the way? And what determines the payment structure?
Phil Kessler 23:34
This is state to state, but I believe they can make payments along the way. You’re not going to get a partial payment from the county.
The county won’t pay you until you’re paying full. You’re going to earn interest on the full amount until it’s paid in full.
Andrew Chen 23:47
Got it. But it sounds like whether the cash you collect is all in a lump sum or spread out over time, that would be state by state?
Phil Kessler 24:00
It’s always going to be in a lump sum.
Andrew Chen 24:03
Phil Kessler 24:06
I’m thinking from the property owner’s standpoint, they can maybe put money towards it over a period of time, but they are not going to stop charging interest on the full amount until it’s paid in full.
Andrew Chen 24:18
I see. You as an investor would get your money all in one lump sum?
Phil Kessler 24:22
Andrew Chen 24:24
I see. When you buy the lien, though, isn’t your relationship directly with the homeowner, or is there some intermediary servicer that would collect periodically from the homeowner but then withhold the payment to you until they can pay it all as a full lump sum?
Phil Kessler 24:47
It’s done through the county. In fact, in most places, it’s illegal to reach out to the property owner, for you to have any contact with them. In some places, it’s done completely anonymous.
So it’s always done through the county. They have to pay the county, then the county cuts you a check.
Andrew Chen 25:04
I see. I’ve also heard that tax liens do expire. It would be great if you could comment.
Why do these things expire? Do all your lien holder rights expire as an investor once the lien itself expires?
Phil Kessler 25:19
Yeah. You’ve done some research. Like any other laws, there’s a statute of limitations.
Maryland, it’s only two years. That’s always just the fastest: two-year statute of limitations. It can be as high as 15 years in, say, Colorado.
But you do. If you’re invested in a tax lien when it expires, then you are losing any rights that you have to foreclose on that property, to ever get paid back.
The biggest thing that you want to do when you purchase a tax lien is make sure, “If I’m given the opportunity, will I pursue a foreclosure on this?” And if the answer is yes, then you can purchase that tax lien.
Andrew Chen 26:03
I see. The expiration date, I think (please correct me if I’m wrong), should necessarily be after the due date that the homeowner has to pay, because you need some time to be able to foreclose if they miss the due date, right?
Phil Kessler 26:17
Correct. You usually have a significant amount of time to foreclose.
Andrew Chen 26:21
Got it. So counties imposing expiration dates on investors, is the purpose of that just to make sure that these cases close out, that they’re not lingering?
I haven’t heard of an investment like this where there would be an expiration; all your rights expire. That’s what I’m trying to understand: the motivation behind it.
Phil Kessler 26:43
That’s a good question. As to why they have a statute of limitations, I can tell you what’s so fascinating about those statute of limitations.
Let’s say I own a property in Florida, and every year I don’t pay my taxes, and every year somebody buys the tax lien on my property, and that cycle continues. It will continue like that for the next 100 years, and I will never have to pay a penny in property taxes.
It’s not until someone initiates a foreclosure that I’m in any real threat of losing my property or having to pay. And I’ll only have to pay, the maximum would be, the last seven years, because everything after seven years would expire in Florida.
So, it’s a really weird situation. And again, it is state-dependent.
But as far as why they do that, I don’t know. I couldn’t tell you why.
Andrew Chen 27:34
Got it. But if you’re a lien holder and the homeowner has failed to pay the lien by the due date, the investor will foreclose. They won’t miss the opportunity to foreclose, right?
Phil Kessler 27:49
You’d be surprised how many I see go unforeclosed. But it’s a really simple process.
In Florida, there are two types of foreclosures there. There’s an administrative foreclosure, which is paperwork. You pay a couple of fees to the county, and they just do it through the county clerk’s office.
A judicial foreclosure is a little bit different, where you’re hiring an attorney. They have to appear before a judge, etc.
So, depending on the foreclosure type, an administrative foreclosure, I could foreclose on a property in 30 seconds on my computer, or at least initiate that foreclosure. There are certain steps they have to take, but it’s usually a pretty simple process.
Andrew Chen 28:33
Why would an investor neglect to foreclose? Is it just forgetfulness, or is there some coordination cost they’re trying to avoid?
Phil Kessler 28:42
There could be some due diligence that they didn’t do prior.
For example, let’s say we found a vacant lot that we liked and we said, “We could see maybe building here.” The tax lien on it is $200, and that’s what they have to pay in taxes every year. Maybe the assessed value is $10,000.
When you foreclose, you have to pay all outstanding taxes on a property. When we get to that foreclosure two years later, we see that there’s four years of prior taxes outstanding.
And there was a single-family residence there, and the taxes were $3000 a year for those previous, say, five years of taxes. Then all of a sudden, our foreclosure cost is going to be $30,000 for a lot that might be worth $10,000 or something like that.
That is an example. It’s an extreme one, probably pretty rare.
The only other thing I could think of is maybe natural disaster. You’re paying $3000 for a tax lien. Maybe your total cost of your foreclosure might be $10,000, but a hurricane came by and wiped out the house.
Andrew Chen 29:50
It’s just not worth it then.
Phil Kessler 29:51
Right, exactly. It just wouldn’t be worth chasing it. But in 99% of cases, it absolutely makes sense to do it.
Andrew Chen 29:58
Gotcha. I’d love to shift gears and talk a little bit about the due diligence process. Could you explain and walk us through the checklist of how you analyze and do due diligence for a tax lien deal?
For example, what kind of analysis do you do on the property itself, the neighborhood, the environmental risks, existing liens on the property, recent tax sale comps, the expiry date, etc.?
Phil Kessler 30:24
That’s pretty good. First thing I’m going to do is I’m going to go to the property appraiser. You want to learn to navigate public record like it is second nature.
There’s a website that I use called netronline.com. You click on Public Records and it shows you a map of the United States. You click on the state, and then it lists all the counties, and then it pulls up all of the public record websites for that county.
The property appraiser or assessor is the one that’s going to tell you their tax on square footage, beds and baths. Something that’s really important to look into is the sales history on a property, because you can get to some weird title issues if you just look and you see the last five sales have been quitclaim deeds. That could be shady; it could be a clouded title.
Mainly, what I’m looking for, and you can use search criteria when you get into an auction. You can apply search criteria to the properties that you’re looking for.
I want to find single-family homes. I want them to have no outstanding prior taxes. I’m looking for an assessed value maybe starting at $100,000 and going up.
And I want there to be a certain ratio, which in most cases, it’s something that’s just standard. But I want there to be a certain ratio of outstanding taxes to the value of the home. I think outstanding taxes for one year should be no more than 3% of the value of the home.
As far as physical due diligence, for an investment like a tax lien (and again, this is state-dependent; I don’t want to say this as a general blanket rule), in Florida, you don’t really need to get eyes on the property. The property appraiser is going to have pretty current information.
Andrew Chen 32:26
I see. So it sounds like, from what you described, that the analysis process is not similar to how you would analyze buy-and-hold real estate where you’re really going into the property, inspecting the bones. It sounds like that’s actually not as important.
You’re looking at these metrics and ratios. Is that accurate?
Phil Kessler 32:48
That’s very accurate. Deed investing is the complete opposite. It’s exactly what you were saying, complete opposite side of the tracks there.
Andrew Chen 32:57
Yeah. I guess if you’re a deed investor, so that you’re actually to acquire the property, then you would put on your buy-and-hold hat or your fix-and-flip hat.
Phil Kessler 33:09
Andrew Chen 33:11
Do you ever do physical due diligence, try to do a drive-by over the property, even if you can’t get in the house, or usually not?
Phil Kessler 33:19
I do. I pay people to do it. Another website that I use, I’ll use a service called Velocity REOs.
And what they’ll do is, for $15, they’ll drive to any property, take 10-15 photos of it, and they’ll upload them to your account. You can do a damage inspection from those photographs. Now, for $15, that’s easy, right?
If it passes that first test and everything is okay, then I’ll have a realtor go out there. I do all this remotely: buy and sell properties in Florida without having to go there. So I’ve built a system on how to do this.
So then, I’ll have a realtor go, and I’ll pay $100 to a realtor to go out there and do a full inspection of the property. Usually they can’t get in. I’ll try to have them look in the windows.
And the deal that I always make with the realtor is that you pay me back the $100 out of closing. When we close on this property, you pay me the $100 back and that’s the deal. So they’ll work for it.
Andrew Chen 34:26
I see, because they actually want to represent you if you foreclose?
Phil Kessler 34:33
If I acquire the property, I don’t rehab. I might put some lipstick on it or something like that, but I’m not rehabbing. I’m wholesaling it to someone else who wants to do a rehab.
And I’ll take 20% on my money. We try to look at 90- to 120-day hold time at max. You have to go through quiet title action, and that’s going to take a period of time.
In that time period, maybe carpet, yard work, things like that. But that stuff is pretty cheap. So the realtor is going to represent me there.
Andrew Chen 35:11
I see. It’s a relatively low chance that they would, though, right? Because most likely, the lien will be paid back.
So I guess the way they’re thinking about “Should I go do this drive-by for Phil?” is they’ll either make the $100, which is going to be the most likely scenario (they’ll just end up with $100), or there’s a small chance that you’ll end up foreclosing, in which case, they could actually get a bigger payday, but they’ll refund you the $100. Is that right?
Phil Kessler 35:37
Yeah, with one exception. When I had them going out there, this is maybe three days from the actual deed auction, from the foreclosure auction. We’re three days from that property being sold at auction.
That’s when I’m sending them out there. I’m trying to minimize the chance that someone does pay back any fees, taxes, so they get taken out of the auction.
Andrew Chen 36:04
Yeah, that makes sense because I hear that those can actually get paid back quite rapidly as the auction date approaches. Is that right?
Phil Kessler 36:13
It is. On average, if a county has got 50 properties that they are scheduled for auction, a week before, they might have 35, and then the day before, they’ll have 20. And then maybe five will redeem after the sale.
They have until 4:00 p.m. the day of the sale to pay taxes. Out of 50, there might only be 15 or 20 that go into auction the full way.
Andrew Chen 36:40
You mentioned the realtor, you might have them peek in the windows. But the properties, they generally are occupied, right? Do they ever get confronted?
Phil Kessler 36:50
At this point in this process, everyone in that property has been served by a sheriff. They’ve been told to leave. There’s notice posted on the property.
In most cases, they are gone. Occasionally, there are still people in the property.
If you do purchase a property and someone is in it, you can’t evict unless you’re in a landlord-tenant relationship. You’d have to file something called an unlawful detainer.
You do have immediate ownership of this property, and you can just show up with a trash bag and say, “Get out.” But I think there’s a much more tactful way of doing this where “Listen, I have to quiet the title anyway.”
If I give them three months here for free, I say, “If you are paying rent, if you’re renters, stop paying rent. Don’t pay anything.”
“I’ll give you the next three months to just save your money. I’ll pay you for a moving truck and I’ll give you $1000 for the keys.”
So, you try to treat people as you want to be treated, and you do this under the agreement that they’re going to take care of the house for you in that time period. Obviously, they’re going through a rough time, so you don’t want to make it worse.
Andrew Chen 38:02
Phil Kessler 38:03
I’ve had positive feedback on that.
Andrew Chen 38:05
Yeah, makes sense. How do you analyze things like environmental problems or foundation problems? You can’t get in.
As I mentioned, these could drastically impact the property’s value, and in turn, the max you’re willing to pay for the lien certificate, not to mention that if you end up foreclosing, it might create a liability for you if you’re then stuck with being responsible for the costly maintenance or cleanup.
Phil Kessler 38:30
Environmental, that stuff is public record. The biggest thing that I’ll come across is flood zone, the FEMA flood zone stuff. So getting a property insured could be difficult.
Environmental issues are one thing. The biggest challenge, the biggest thing that I’ll see is going to be something structural.
Recently, we had a property where the septic tank was just completely ripped open. It was wide open. Someone dug it up in the yard.
And it was in a place that we couldn’t do it. It was a big property. It was a couple of acres, so we couldn’t see the whole property.
The realtor wasn’t very willing to do it because this was in a rural area.
So, when you’re buying these properties at auction, when you’re looking at tax deed auctions, let me put it this way: If a property is tax defaulted, it is safe to assume there’s not a mortgage on that property. Most people’s property taxes are paid through an escrow account in their mortgage.
If there’s no mortgage on the property, then you can make one or two more assumptions. Either (a) they paid cash for the house, or (b) they’ve owned this property for maybe 30-40 years and have paid off whatever purchase money mortgage they had on it.
It’s usually the latter. These properties are usually older properties. They’re going to have some sort of issue.
As a result, in these tax deed sales, people are only willing to go up to, say, 60 cents on the dollar of what the property is worth, just to leave this cushion. In case there is something drastically wrong, they’re not going to be that far under the water.
In most cases, you’re going to end up okay. In most cases, there’s nothing wrong with the property whatsoever. They’re just minor, cosmetic.
The very first deed I did on my own was a huge error. I didn’t get eyes on the property before I bought it, and that was my mistake.
And someone took a pickaxe. It was a mobile home, and they took everything out as far as the floor, the walls, everything. It was just a shell of a mobile home.
So now I just have people drive by the house not once, but twice, and during the day, during the night. I ended up getting lucky on that and breaking even, but you take as much precaution as you can, and you have to get creative. What could be wrong based on what you’re seeing physically on the outside of the property?
Andrew Chen 41:10
Yeah, that makes sense. Is it accurate, then, to say that you’re not looking for the property to be a great property; you just want to make sure that it’s not totally destroyed? Is that what you’re looking for in the physical due diligence?
Phil Kessler 41:24
Pretty much. I’m looking for something that is marketable. Everybody needs a place to live.
Again, the majority of these are going to be older properties, mid-century. That’s what you’re going to see a lot of. And if it’s rentable, sellable, livable.
It doesn’t mean you want to live in it. You’re not looking for that four-bed, three-bath. It’s going to be a 3-1, 1000-square-feet in Jacksonville, and you might pay $30,000 for it, resell for $45,000.
Andrew Chen 41:59
I understand that after you buy a tax lien (please correct me if I’m wrong, if this is inaccurate, but I was reading online a little bit), you’re required to buy any subsequent liens because new tax liens take precedence over old ones.
Can you comment on why or how this would happen? Is it due to a failure of initial due diligence? And how can you as an investor avoid this unpleasant surprise of having to pay up more capital to cover subsequent liens?
Phil Kessler 42:24
It is state by state. What you just referred to is New Jersey and Arizona specifically.
In New Jersey, any subsequent liens, you are going to pay your “roll-up.” As the subsequent liens come out, the county will send you (and I can send you an example of one) a sub tax letter.
They say, “The subsequent taxes are available. Do you want to buy them?”
You go online. You literally pay the taxes as if you were the property owner, and you can note it as a sub tax payment. Any money that you put in, you’re earning the full statutory interest rate on that money.
There are certain penalties in New Jersey too, depending on the size of your investment, either 2%, 4%, or 6% penalty on your money.
And it’s cumulative. The 6% you get when you break that $10,000 threshold, if taxes are $4000 a year, when you pay that third year, you get the 6% penalty. So you’re effectively earning 20% on your investment.
Andrew Chen 43:34
I see. That sounds like it’s not due to a failure of due diligence. The way you described it almost sounds administrative.
Phil Kessler 43:43
It’s the standard. When you think of the foreclosure process, you have to pay all the outstanding taxes. So, instead of paying them two or three years later where someone else is earning the interest in all that money, you might as well pay them as you go, so that the foreclosure process is seamless.
You don’t have to send out multiple checks, and you don’t have to worry about anything. You’re paying those taxes so when you get to the time where you can foreclose that instant, you don’t have to really do anything else.
Andrew Chen 44:12
And did I hear correctly that as you pay along the way, you’re actually earning interest on your own money what you paid in? Did I hear that correctly?
Phil Kessler 44:20
You are earning interest on any subsequent payments, but you’re earning the full statutory amount on those subsequent payments. So if it were New Jersey, you’d be earning 18% on any follow-up payments that you make.
And you reminded me of something else. There are ways to compound your interest one time. In certain states, when you file to foreclose, you compound all of your interests once.
Let’s say we had $1000 in taxes in Florida and we’re earning 10% a year. After three years, on our $13,000, we’re at $1300. When we file to foreclose (they call it the tax deed application), we start earning the full interest rate, which is 18%, on $1300 now, plus any other taxes that we pay.
It’s a minefield to try and use a general statement. Like I said, using a general statement for any one state or for all states is really difficult.
Andrew Chen 45:23
Got it. So if I synthesize the due diligence analysis process, to your mind, what are the attributes or markers of the ideal tax lien investment in terms of things like property type or condition, characteristics of the lien, some of the metrics you alluded to earlier, maybe even rules set by the county or state?
What’s the ideal tax lien investment? Or you couldn’t get better than this?
Phil Kessler 45:52
Ideal tax lien investment for me is going to be an older home, probably mid-‘90s or earlier, retirement community, preferably. So I’m thinking areas in Arizona, retirement communities, maybe 30 years old. These are things where you spend $1000 on taxes and you might be able to convert that into a property.
So we’re looking at the age. We’re looking in the middle range of quality.
We don’t want a dump. We’re not looking for a mansion, just something middle of the road. Like I said, three-bed, maybe one and a half bath, 1300 square feet.
So you’re looking just for an average house. If you’ve seen that the property is in an estate or in a trust, that’s usually a good thing because some people aren’t prepared to deal with an estate. Someone passes away.
There’s a really significant difference between the estate of John Smith versus the John Smith Estate. If it’s the estate of John Smith, that means it hasn’t gone through probate. That can be a good thing.
Or even the other way could be a good thing too. It’s multifaceted. You just take a swing.
The best thing to do is take a swing at a bunch of different liens. It’s like a scratch-off ticket where, when you lose, you’re getting your money back with maybe a little bit of interest, but if you win, it really is like a jackpot.
Andrew Chen 47:40
What about some of the lien characteristics or even rules set by the county? What are the ideal markers for you as an investor: the specific metrics, the size of the lien that you would want, the ratios that you described?
Phil Kessler 48:01
I usually like that 1000-2000 mark. When you start getting over that, the houses start getting into a class of home that someone is going to be able to draw a loan against it to pay the taxes in the worst case scenario, and you wouldn’t be able to convert that.
And this is recent for me. I’ll tell you, my investment strategy has changed over the years. When I started doing this for years and years, I went solely after the interest.
I would try to find a $200 tax lien on a $250,000 home because I felt that it was more secure. I’m definitely going to get paid back.
And I would search for what they call over-the-counter certificates. Over-the-counter certificates is if a county has $50,000 tax liens and maybe $40,000 of them sell at the auction, here’s this $10,000 that didn’t sell at auction and they’re going to offer the full 18% or 20% or whatever it is on those tax liens.
First come, first served. You just buy them straight from the county website. There’s a lot of good stuff in those tax liens.
You had asked me about metrics, what I’m looking for. I would bet on the person. In other words, I’d look at someone’s tax payment history.
So, if someone has had a tax lien on their house for seven out of the last eight years, and every single one of them was paid within 300 days’ time, I would buy that ninth year because I would feel confident I’d be paid back within 300 days. So I’m betting on the person.
And this could be a vacant lot even. It wouldn’t matter. That would be a metric that I would look for.
Andrew Chen 49:44
I see. Interesting. Are there any specific state or county rules that you particularly like or don’t like?
Phil Kessler 49:53
If you’re looking for interest, Florida, they have really neat rules. When you get to the end of the redemption period in Florida, instead of just foreclosing on the property, what you’re doing is you’re initiating a foreclosure. You’re filing something called a tax deed application.
And what they’re doing is they’re going to take all of the money that you’re owed, every penny, any penny that you’ve come out of pocket, all the interest, and then they are going to sell the property at auction and they’re going to start bidding at whatever that number is.
So if there’s even remotely any value in the property, you’re almost guaranteed to get paid back. Somebody is going to be willing to buy that property for back taxes to make sure you get paid back. So, if you’re looking for interest, Florida is really good.
On the other side of that coin, if you just want to buy properties for cash, Florida is also really good. Florida is really neat in that regard. It’s really an investor-friendly state.
I do like Texas. Texas is something that’s been growing on me more and more.
They’re starting to move online. It’s something they’ve never done. But just this past year, there’s been six counties that have come online full time.
And you buy a property for cash at auction. You’re buying the sheriff’s deed or the treasurer’s deed. And they give the property owner six months to pay you back your money plus 25%, or you just keep the property.
There’s the foreclosure. All that stuff is already done. So you’re just either keeping the property or you’re getting 25% on your investment in six months.
Andrew Chen 51:38
Two things you mentioned earlier that I’d love to clarify. You mentioned, ideally, it’s a retirement community, and also ideally, it’s a middle-of-the-road home. Obvious why you don’t want it to be a dump.
But you also said not a really higher-end home. Why is a retirement community ideal, and why not the higher end?
Phil Kessler 52:01
This is very cold-blooded, but you’re thinking in terms of where are people most likely to pass away, in a state that’s going to be able to pay off mortgages and property taxes and all that. And that’s a middle-of-the-road home in a retirement community. So what’s most likely to convert to a property from a $1000 tax lien?
Andrew Chen 52:23
Got it. When is the ideal time to do due diligence on a property?
You mentioned many of these will be paid off even before the auction. If you go do it too early, you might actually invest due diligence resources where the property is already gone by auction.
When is the ideal time to actually pull the trigger on due diligence?
Phil Kessler 52:42
There’s two sides to this. For tax liens, the due diligence should really take no more than 5-10 minutes. You don’t really need to look into title defects or anything like that for tax liens, and it’s all done from your computer.
For tax deeds, ideally, because that’s where you’re seeing a lot of them redeemed prior to the auction, they give you about 30 days to look at a list. I create my list of likely properties two weeks before. I’ll revisit it a week later and I’ll start doing work on the title.
I pull my own title searches. Also, I’ll go into the county clerk, a recorder, and just search everything I possibly can related to the property owners, any previous property owners, depending on the previous sales of the property, if it was a quitclaim or a warranty deed.
I’ll do that work maybe a week to about three or four days before physical inspection. It’s going to be about two days before the auction.
Andrew Chen 53:49
I see. So when you were talking about hiring somebody to go take pictures, hiring a realtor for $100, that was all in the context of tax deed auctions, not tax lien auctions. Is that right?
Phil Kessler 53:59
Andrew Chen 54:00
Got it. What happens if there’s a mortgage in the property and you have to foreclose? I know you mentioned usually they won’t.
But if there was, and if you foreclose on the property because of failure to pay back the taxes owed, do you as the new owner take titles subject to the mortgage and are therefore responsible for paying it off?
Phil Kessler 54:21
No. Believe it or not, any bank, or really any lien holder, whether it be a bank or an HOA, they get notice of this tax sale. They’re given notice of the sale 90 days before the sale happens, at minimum 90 days.
They are given the opportunity to pay the taxes to become a first position lien, or they are forfeiting their right to have a claim to that property. So, those mortgages, those liens are wiped out completely.
Andrew Chen 54:51
So it sounds like, then, if you’re a mortgage lender, you have a very strong incentive to pay the tax lien. Is that right?
Phil Kessler 54:58
Correct. And that’s why you see so many of them redeem the day before the auction, because the banks will wait until the last minute to try and scare the property owner, saying, “We’re not going to pay,” and then they’ll pay.
Andrew Chen 55:12
Wow. I see. Could you say that one more time?
You said that the bank will try to scare the property owner until the last day? What does that mean?
Phil Kessler 55:25
I’m thinking of the foreclosure sale, the actual tax deed sale.
Andrew Chen 55:28
I see. Okay.
Phil Kessler 55:31
Basically, the property is being auctioned off in four days, and the bank is like, “We’re not going to pay it,” and then eventually they’ll pay it. And these are usually HELOCs or maybe second mortgages.
Every now and then, you’ll see a purchase money mortgage in there where the property owner just chose not to pay their taxes through their mortgage and pay them themselves.
Andrew Chen 55:57
I see. It sounds like purchase money mortgage is rare.
Phil Kessler 56:00
Andrew Chen 56:03
I know it varies county to county, state to state, but what are some of the typical type of rules around communication with homeowners that investors should be aware of and make sure they understand in terms of announcing your tax lien certificate ownership when the expiry date is approaching, etc.? And where can investors get up to speed on such rules?
Phil Kessler 56:23
This one is going to be really tough to answer as far as where they can find it. But I can tell you, it is state-dependent.
In Florida, it is illegal to reach out to a property owner if you own a tax lien, because you could collude with the property owner or something. I don’t know what the real reason is.
In New Jersey, if you are foreclosing, you’re responsible for sending a letter to the property owner. Now, in places like New Jersey where you’re supposed to reach out to the property owner, or Indiana, you hire an attorney to do it. They know the timeframes that they’re supposed to do so, so you just hire an attorney to do all that stuff.
So, state to state. It’s totally dependent on the state. We can circle back to this later.
One of the things that I do is I do one-on-one trainings with people. Depending on where they want to invest, we can focus on a specific area and all of the laws there.
It’s hard. You can Google state laws. Honestly, if you’re willing to read the state tax statute, you can find all that information there; it’s just a dry read.
Andrew Chen 57:42
Gotcha. Fair enough. I’d love to talk a little bit about the auction process.
According to the National Tax Lien Association, I understand something like 2500 cities, towns, counties in about 30 states or so, plus D.C., they actually hold these tax lien auctions. Where can investors see the list of cities and counties and states that hold tax lien auctions?
Phil Kessler 58:05
There’s a website called naco.org, and it’s the National Association of Counties. New Jersey does it by township, and there’s 532 townships in New Jersey, so I don’t think you’ll be able to find that on NACo there. But NACo should be able to refer you to, say, a county treasurer’s site to where you might be able to find the tax sale.
The reality is that most of the tax lien or tax certificate sales are run by one of eight or nine companies in the country. They run most of them.
The two biggest that you’ll come across are going to be: Realauction. Realauction does Arizona, Colorado, Florida, Maryland, New Jersey, New York. There are a handful of them.
The other one is called Grant Street Group. There’s a handful of others, but between those two, I’d say they’re the most popular. But they’re a third party running these auctions.
Andrew Chen 59:13
I see. In that vein, where do the auctions take place? Are they physical, or are they only online?
Phil Kessler 59:21
Most of them are online. When I started doing this, I remember there were 15 counties that did this online. So it’s been interesting to see this progress.
You probably nailed it on the head. There’s maybe 2500 counties that do it. I’d bet 1500-2000 of them are online completely.
Andrew Chen 59:45
And is it like buying something on Amazon, or is there a competitive process where you’re seeing other people’s bids and then you have to up the ante?
Phil Kessler 59:55
Basically, there’s two ways. First of all, over-the-counter certificates, the ones that are not purchased at auction, that is like “buy now, check out.” That’s a really easy process.
The auctions, depending on the auction format… Let’s just say it’s a bid down interest format. You just put whatever your lowest interest rate you’re willing to accept is, and then they use something called proxy bidding.
If I bid 1% and you are also bidding on the same, I’m willing to go as low as 1% and you’re willing to go as low as 10%, I’ll win that certificate at 9%. So, one bid increment lower than the next highest bid or next lowest bid.
Andrew Chen 1:00:38
I see. Is it fair to say it’s pretty mechanical?
There is a competitive element, but it’s not like the way you would see in the movies, at art auctions where everybody is waving their flag. Is that right?
Phil Kessler 1:00:53
Right. Correct. You see that in the tax deed auctions.
But for tax liens, it’s “Everyone puts in a blind bid. We’re closing at 4:00 p.m. on this day, so have your bid in by then.” And then you just know if you won or you didn’t.
Andrew Chen 1:01:06
Gotcha. For tax deed auctions, are those different auctions than foreclosure auctions that happen on the county courthouse steps, or are they one and the same?
Phil Kessler 1:01:16
Foreclosures, that term is usually reserved for when it’s a bank initiating foreclosure. They typically work the same.
There’s this hierarchy to liens. Florida, for example, does tax deed, and they also do foreclosure sales. But you have this hierarchy to the liens.
Depending on what position that lien is in, if it’s in a super priority position, like a tax lien…that would be a tax deed sale. But a bank foreclosure would be a foreclosure sale.
However, in Texas, tax deed sales, they typically call them foreclosure sales.
Again, the terminology is murky from place to place. It’s hard to put a general…
But courthouse steps, that’s usually how it’s been done historically. A lot of places are going online, though.
Andrew Chen 1:02:09
Got it. If I heard correctly, a tax deed sale typically will be a different physical event than a bank foreclosure sale. Is that correct?
Phil Kessler 1:02:24
Yes, it will, with the exception. In Ohio, they do both at the same time.
Andrew Chen 1:02:30
Gotcha. Cool. I wanted to close by asking just a couple of questions about tax lien funds.
I was reading a little bit on the NTLA website that investment funds have become very active in tax lien investing. They’re chasing yield for large dollar amounts, so maybe they’re going after larger properties. But it is definitely making it more competitive for individual retail investors for it to be worth the return on investment, because there is a due diligence cost to doing it and the amounts may not be very large.
How do tax lien investment funds decrease the risk and effort required to invest in tax lien certificates?
Phil Kessler 1:03:20
Let me unpack that question. So, how do the tax lien investment funds decrease the risk in…?
Andrew Chen 1:03:30
I imagine that if you wanted to invest in a tax lien, you could do it yourself, or maybe you could just invest in a fund that is doing this. So I would think that funds have some built-in advantages because they have scale. Maybe they can diversify.
But I just want to get your thoughts on how they actually decrease their portfolio risk and how do they achieve due diligence economies of scale to reduce the overall effort?
Phil Kessler 1:14:06
This comes down to search criteria prior to the auction. You can apply a filter.
They can put a bid. And I’m not kidding, they make it so easy on some of these auctions where you can bid on a whole page. You just click the button and you say, “I bid 0.025% for every lien on this page,” and there’s 50 liens on each page.
They apply a filter: single-family residential, greater than $150,000 assessed value, and no outstanding prior tax. And they can just really put those three things in. They’re minimizing risk by investing so much into these properties.
Andrew Chen 1:04:55
That they could afford to have a few go bad.
Phil Kessler 1:04:58
Exactly. And it is really difficult to get your money into one of these funds. There’s a couple of private funds.
5T Wealth Partners is one that is a private fund out of Florida that you could probably figure out a way to throw money into if you approached them. But most of them are institutional and they want to keep their money in there.
And that’s going to be Capital One Bank, Ocean Bank, U.S. Bank, Wells Fargo. These are the banks that we’re seeing really take down these auctions. And it’s not even worth participating in the Florida auctions anymore, to be honest with you.
Andrew Chen 1:05:35
The tax lien auction?
Phil Kessler 1:05:37
Yeah, the tax lien auctions. The over-the-counter sales, there’s some real treasures in there if you know how to search them efficiently. But the banks and hedge funds won’t touch that stuff because the amount that they’ll have to pay someone in man-hours to look through those liens is going to basically get rid of any profit that they would make by doing it.
So, you can really find some gold in those over-the-counter sales in Florida, but the tax lien auctions are not worth it if you don’t have a really deep bank account.
Andrew Chen 1:06:12
I see. So when you say that you invest a lot in Florida, are you mostly just doing OTC, then, not in the auctions?
Phil Kessler 1:06:20
Historically, over-the-counter was the only thing I did in Florida. Now, currently, tax deeds are all I do in Florida.
Andrew Chen 1:06:27
Phil Kessleri 1:06:29
I do tax lien certificates. All of the Arizona auctions closed out this month, and I was very active in those. I was active in Colorado this year.
Maryland is coming up in May. Florida auctions are coming up in May. So it’s an exciting time right now to see there’s a lot of states that are having their auctions right now.
Andrew Chen 1:06:50
You mentioned a moment ago that funds are not going to do the type of work required for over-the-counter lien investing because it will just whittle away their returns and profit. But the little guy who does that work, how is the little guy able to still eke out a profit from that?
Phil Kessler 1:07:14
The way I started doing this, and the way I’m sure a lot of people do, is I would buy one tax lien a week. If not one, maybe two. But I would try to buy $200 in tax liens every single week.
So, I was paid weekly 9 to 5. I’d get my check, I’d pay my bills, I’d put money in savings, and whatever was left over, that’s what I would buy tax liens with. So you’re able to earn 1.5% a month on that money.
So if you are investing $200 a week, you’re getting $10,000 a year invested at 18% interest. As that money comes back, you’re putting it out with more money.
Finding $200 worth of tax liens a week is not difficult. You can usually do it in one, maybe two, maybe three, depending on the county. But it’s a slow burn.
You’re not going to feel this 18% until you get to about year four or year five when it’s compounded a couple of times, and you say, “Wow. I’ve come out of pocket this much, but I have this much invested.”
And you’ll realize it a little further down the road. So it is a slow burn.
Andrew Chen 1:08:23
I see. At the end of the day, how can individual investors overall compete against the large tax lien funds that can afford to purchase in large volume, diversify their risk, accept a lower return?
For the little guy, do they compete just by focusing exclusively on one to two markets, focusing on smaller dollar size liens? What’s their edge?
Phil Kessler 1:08:48
That’s a good point. Smaller dollar size liens, you’re going to be way more competitive in those because, again, it comes down to what’s the most they can do with their money, and if they can buy a hundred $10,000 versus a million $100 liens. But they’re going after those $10,000 liens.
So if you focus on those $100-$500 liens, you’re going to be more competitive in that arena.
Florida, specifically, I’ll just tell you, it is really difficult to get a leg up. You’ll make 5% on your investment, but you’re going to have to bid down to a quarter of a percentage if you want to win a tax lien in that auction.
That being said, there are other states that are really attractive to someone if you have a couple of bucks. Maryland has the highest foreclosure rate in the country, really great state to invest in.
Maryland or D.C. It goes back and forth.
But really great state to invest in. They do it online. They give you, depending on the county, up to 24% in six months.
The downside there is that the foreclosure can be expensive because you’re saying, “I will pay $40,000 for this if it goes to foreclosure.” So if you have that kind of cash, Maryland could be a really good option to participate in.
If you are looking for property and you don’t really want to spend that much money, I would look at Arizona or Colorado. I would buy these $1000 tax liens once a year. You buy a handful of them.
And if one in 10 converts, then that’s great. One in 10 is about the average in Arizona converting to a property.
So if you can get $10,000 invested in the auctions and to 10 different liens, maybe you’re only getting 2% interest on it or something like that, but if one of those converts, then that’s just an absolute win. It doesn’t matter what you’re earning on those other ones. You’re going to get a property for back taxes.
Andrew Chen 1:10:58
For the price of back taxes, you mean?
Phil Kessler 1:11:00
Andrew Chen 1:11:01
Got it. And I assume that basically all states, out of county and out of state investors can invest across all boundaries. Are there any states or counties where there is a requirement that you actually be a resident of the state or be a resident of the county?
Phil Kessler 1:11:21
No, not that I can think of. If you want to invest in Texas, you can owe any property taxes in Texas. There are some laws like that.
I want to say Hawaii might have a law like that. I’m not 100% sure. They do a redemptive deed there, but you might have to be a resident to invest in Hawaii, or at least some areas of Hawaii.
Andrew Chen 1:11:46
Got it. All right. Well, Phil, this has been so incredibly interesting and insightful.
I’ve really enjoyed getting your perspective on this. This has been a topic I’ve wanted to do for a bit, and definitely more of those niche topics. So I’m so glad that we could have you on the show to share your wisdom.
Where can listeners find out more about you, your business, what you’re up to? And how can folks get in touch with you?
Phil Kessler 1:12:12
I work with a website called propertyonion.com, and we do one-on-one trainings. They focus on the Florida tax deed and foreclosure auctions.
They aggregate data for all of the auctions. They pull all the public record information. And it is a really great website.
What I do there, they call me the tax deed professor. I don’t even know what I think about the name. But really cool stuff that they do.
We will do, say, a four- or eight-week training where I do one-on-one sessions with individuals for an hour. We focus on either tax lien investing or tax deed or foreclosure investing.
So if it’s something that you’ve thought about dipping your toe into and you may have a question about it, feel free to go over there and just make an inquiry. I’ll reach out to you personally, call you, and answer any questions that you have.
Andrew Chen 1:13:07
Perfect. We’ll definitely link to that and the content that you’ve created there on Property Onion.
Thanks so much again for taking the time to chat with me. And best of luck with everything!
Phil Kessler 1:13:20
My pleasure. Thanks again for having me, Andrew.
Andrew Chen 1:13:22
Cheers. Take care.