Posted by: ajith
12/08/2003, 14:16:00
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Hi Joey,
My impression is that you really are a novice tax lein investor, or you are experienced but are using the newbie ploy to unload a certificate. Lets assume you are new to the game.
Let me begin by saying that I've been doing lots of research on IL tax leins, and that i bought my first lein this year. $3000 @18%. Maybe beginners luck, but luck is where opportunity, skill, and knowledge converge. The best resource for the IL statutes, the notification requirements, and other procedures is Bill Hardin's ebook. Its really cheap($10). If you want more tax lein resources, you can email me. Also, the "Take" notice is what needs to be sent. My county(Champaign) sends the take notice for me and adds the fee for that service to the cost of the investment. The language of the notice is pretty legal sounding, and is available in the bill hardin book. If you don't want to buy his book, i can email that to you too.
I don't know what you had in mind when you bought the lien for 0%. 99% of all tax leins are redeemed eventually so getting a 0% return is pretty poor. The reason the other buyers were bidding so low was becuase they have lots of money and have a long term game plan. In IL, when you buy a current year's tax lien, you get the right to buy the "subs," which are the subsequent taxes at a fixed rate of 12%. These investors are satisfied with a respectable return for this year's lien(as it is comparable to the risk-free rate 1-2%), and a good rate(12%) next year. It also means that they have to put up more cash for the next year. And this all assumes that the tax payer doesn't redeem the certificate AND is in default on his taxes next year. So your situation is such that you paid $1800 for a 0% investment. You gave the tax-payer a 0% loan for 2.5 yrs. If you get the chance to buy next years lien, then thats another $1800 you will need to put up. The good news is that the penalty rate is applied twice a year on the principal amount. So, assuming that the tax-payer pays the first lein before you can file for a deed, and waits till the last minute to pay your second year lein, and you consider the initial $1800 as part of the total investment(like it was the option price for the second year), then you make about a 4-5%APR that you get to collect in Jun 2007. But sureley you could have found a better way to invest that money for that long. I don't know how big your auction was, but i bet you noticed that a small group of people bid on pretty much everything and bought as much as was possible. Its not uncommon for these guys to buy several hundred liens every year. What this does is pipelines the cashflow, and statistically, they get 2 or three properties. Further, the really smart ones buy all the leins from thier self directed IRA's or pension plans so that all the capital gains from the sale of houses, and the interest income from the leins is collected tax free in thier IRA which they use to buy more next year. They also use sneaky SEP and SIMPLE retierment plans though thier own companies to avoid personal contrimbution limits. So the moral of the story is that you should only buy a 0% lein if you have some inside info on the property, and the likelihood of its redemption. Investor tip: At the auction you might notice that sometimes, a property does not get bid on. It might be very tempting to throw out an 18% bid. The second you do, you lost your chance of buying this lein becuase everyone who was on the edge of bidding will now jump in. They weren't sure if this one had any value, but by bidding, you signaled to them that there is value there. Eventually the treasurer who is calling the auction will say something like "trustee" and proceeds to te next property. Many counties have outside companies or a trust buy the tax leins that didn't sell at the auction. The trust acts just like a regular tax buyer and automatically gets the 18%. What you need to do is keeep track of which properties were bought by the trustee, so that you can approach the treasurer immediately after the auction and ask him if you can buy the ones that were not bid on. As a new investor you can just strike up a brief conversation about how you are just starting out in this business and ask him what happens to the properties if they aren't bid on. "Oh really? Would it be okay if i bought a few of those instead of the trustee?" And thats it. Thats how i got my $3000 lein at 18%.
Related link: Bill Hardin's book
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