As you know I am a fan of investing in Property tax liens, but I ran across this sobering story which makes me re-assess my tax lien giddiness. This article from Newser.com illustrates, how each lien has a personal story. Sure, many property owners become delinquent because they decide they no longer want the property, er that is, the obligation to the property. This story though, this is a travesty, and it happens more often than gets reported on. You have to feel the pain for this man, a 74-year-old retired marine, who seemingly had a great payment history. Anyway, this gentleman had paid his house note off in full over 20 years ago, and because of his failure to pay his tax bill of $134 and ultimately $4999 after all the legal fees and court costs had been assessed, he was foreclosed on and was forced to surrender his home to the city. Problem is, this retired marine suffers from dementia, so all the equity he built up over the many years of duly paying his bills, was lost.
How the Tax Lien Business has changed.
In the past, individual investors occupied the auditoriums of the tax lien sales with cash in hand, ready to score the next best lien. Fast forward 10 years and you’ll see a shift in the makeup of that investor. Now, the buyer is a representative of a bigger investor group who knows exactly what they are looking for. They buy the liens in bulk, leverage through the ‘other people’s money’ principal, and profit is the name of the game. They have a bevy of collection attorneys as part of their core inner circle, and they intend to collect or foreclose on the lien. The individual stories of those delinquent property owners have become faceless and ubiquitous. This pulls on my heart-strings, how can this fall through the cracks, who could foreclose on a man who owns his house outright and is suffering from dementia? Have you no sympathy? I understand business is business, but in order to get to the point of foreclosure, a process which takes a while, you would certainly have gotten to know this man’s situation.
Equity, to have or not to have?
After reading this story, I got to thinking; is having equity in a property more of a risk and a target for the 3 L’s; liens, lawsuits and looters? Maybe so, here are my thoughts on having equity, particularly in an income property, and please feel free to shoot holes in my theory! Whenever you have equity in a property, it is always at risk. Law suits, liens, forgotten tax bills, these all have the propensity to separate you from the ownership of your property. A highly leveraged income property however, which is a property without any equity, mainly bank owned, is a fantastic idea for many reasons. For starters, one of the greatest forms of insurance on a non-owned income property, is a high loan balance. Your high loan balance makes that lender a partner of yours who has a fiduciary interest in your making your monthly payments and ultimately seeing you pay the note off. Also, if you have a high loan balance the likelihood of you being foreclosed on is considerably lower. Lets look at this from a tax lien investors’ perspective. Would you rather spend your collection budget on a lien with 50% equity where you know there is built-in-value if you do acquire it, or one with 3-5% equity. My guess is it’s better spent on those with higher equity balances. I suspect, if this retired marine only had 3-5% equity in his home, he would still own it. When his lien went to the ‘market’, the investors either would have passed on purchasing it, or would have worked harder to find a way for him to pay the back taxes. Not to be, because of his completely paid off loan, his equity was a target, and because of that, he lost his home. My objective with regard to my rental properties is to never have more than 10% equity in them, I fully intend to cash out and refinance. I may never pay the debt off; in my eyes, it’s a safer wealth building strategy.
Ric Edelman’s Theory.
Watch this video by Ric Edelman who has been ranked the #1 financial adviser in the country…3 times! He makes a fantastic argument for having a long term mortgage even on your primary residence. Lots of great reasons here, maybe you will reconsider yours?
I discovered some great blogs this past week, made some new connections and I wanted to highlight them as a show of gratitude.
- Kevin over at outofyourrut.com. I am in awe of Kevin’s writing style and I love his subject matter, you have a new follower Kevin!
- Matt over at debtfreeadventure.com, a man of true conviction and Faith, who has taken the plunge into a full time internet entrepreneur! Congrats and good luck Matt, I am now a follower!
- Gary over at the dollar stetcher.com reached out this week to meet up at Fincon this month. I look forward to seeing you there Gary!
- Jason at redeemingriches.com has a great site, packed with everything you need to know to run a business, build and maintain wealth, debt management, and most importantly is a devout Christian!
My thanks go out to the bloggers who included my article in their Carnivals this past week.
Very interesting, Jim! Can’t wait to go and watch that video, and thanks too for sharing the new blogs that you’ve found. Will indeed check them out!
Thank you Laurie, I hope the video sheds some light! Debt aint all bad!
The flip side is that in some cases (e.g. – bankruptcy) the equity in your personal residence is protected (though I think that’s dependent on local laws). Like with a 401k, money in a personal residence has some protections. If not in equity, those funds would presumably be elsewhere…likely just as subject to their own set of risks.
I might be way off here: but is the risk of an unpaid tax bill for someone with a paid off home that likely to come to pass? In the case of the homeowner having a debilitating mental disorder, I have to assume that all his investments are going to be at risk, not just his home.
I believe they are at risk as well, unless his assets are in some sort of trust, I dunno! To answer your question about the risk of an unpaid tax bill; yes, that is a VERY real concern, it will be sold at auction and depending on who buys it, foreclosure could be the action taken.
Very interesting article. It’s sad what happened to that guy – though I’m sure that’s pretty uncommon. But it would definitely make me a little uncomfy being a tax lien guy.
I use to be much more of the “leverage to the hilt” mentality, largely for the math (leverage gives better returns) though lately I’ve been switching my mindset a bit more toward the idea of paying things off. It’s definitely a decision every investor needs to make on their own, and I see both sides, but for me, it comes down to one thing: My wife. She feels uncomfy with debt, because debt makes her feel like there is less security in her life. So, I’m forgoing my plans to leverage my life to billionaire status to, hopefully, help her feel more secure 🙂
Thank you Brandon! I understand your predicament, my situation is similar, as my wife is not a fan of our rental property…that is until we visit the accountant and get to experience the tax savings! I am currently leveraged to the hilt now, kinda by default since I bought one property at the height of the market and the other was a recent purchase. Need-less-to say, I have little equity, but when I do, I intend to cash out and refi and up the cash-flow! That is if interest rates accommodate.
Excellent post. We totally agree with your advice. However, this strategy requires a fairly savvy investor to execute properly. I know that should go without saying, but still bears repeating.
Well said Mike, and you need to count on interest rates continuing their record lows, and home values increasing. I think we can count on the former, not sure about the later.