All Forum Posts by: David Piqueira

I understand that a lot of people prefer to structure their rental entities as LLCs to provide added liability protection. This can be mostly useful in the event of a tenant injuring themselves and trying to sue, as lawsuits related to healthcare can be very expensive.

It also looks like most people investing in paper structure their entities as LLCs. From what I have read, it looks like lawsuits are a part of this business as well, but they are generally comparatively small. It's not like people are going to try to sue you for your entire net worth because you didn't follow the proper foreclosure proceedings (or whatever the lawsuit might be). I am having a tough time thinking about when the liability protection would really come into play in the world of paper investing, so why does everybody form LLCs? 

@Gail Greenberg If there is a lot of equity in the property, and you need to foreclose, what is stopping you from setting the minimum bid unreasonably high to ensure that you will get the house, and get to 'keep' the borrowers equity?

I agree that you should talk to a CPA. Though there is nothing stopping you from directing your tenants to make out their rental checks to your LLC name. Doesn't matter how the property is held. You can view it just like being a property management company at that point.

Why would the deed only be in one of the members names? That would make me uncomfortable. I would submit a quit claim deed to have the property titled into all of the members names. Or into the name of the LLC. This is pretty simple and it shouldn't take very long.

For what it's worth, I asked a RE attorney about triggering the due on sale clause if you transferred the title of a property into the name of an LLC. He said that he's only seen that happen once in his 25+ years of practicing, and in that case the bank demanded the borrower put their name back on the deed within 30 days (of course they complied). He certainly made it out to seem like having the deed to a property in an LLC name, while there is a mortgage in your personal name is no big deal. I still wonder about that though...

@Ned Carey Yes, the boulder county treasurer website clearly states that (1) the premium is not part of your investment, (2) you will not earn interest on a premium, and (3) premiums are not refunded or returned. Maybe I just don't live in a very favorable place place for tax lien investing.

@Kent Braaksma  I'm going to run with your example, but substitute in the CO numbers. You buy the 2 liens ($1000/each) at a 6% premium (typical from what I saw) at the auction in December 2017. The first lien redeemed 3 months later, while the second get redeemed 23 months later (November 2019). For the second lien you buy the endorsement of $1000 in July 2018, and another $1000 in July 2019). On the first one you lose $33. The second one you get $173 from the original lien ($233 interest on principal, minus $60 premium). On the first sub tax you earn $168. On the second sub you earn $47. Overall that is $355/$4000 = 8.8%

I guess that's not too bad, but it still feels a bit like a gamble since you don't know when they will be redeemed. Diversifying your investment across multiple liens helps, but it still doesn't feel like they will do better than performing notes. At least not from what I see. 

How does the bid down for % ownership work in Iowa? Do you split the interest with the county? And then if it goes to auction then you split the money from the sale as well? That's interesting. Also, 24% interest is huge! Maybe I should look into Iowa, it's not that far of a drive, but it's also not the most interesting drive...

@Ned Carey The interest rate is really 9.16% compounded monthly. You only earn interest on the principal. So let's say the tax lien is worth $1000, and you buy it at a 6% premium (for a total of $1060). If they pay their taxes after 1 month, then you only earn 1 month of interest ($9.16, so you would have a net loss of roughly $50 on this purchase). If they pay their taxes after 6 months, you would get $56.28 in interest, so you would just about break even, but still a slight loss. 

I like your approach. I am definitely trying to figure out how I get to the point of using other investor's money through either performing notes or tax liens. Finding people with money to invest is the easy part. The part that I have been struggling with is finding returns that are high enough in order to attract the interest of investors. With an ROI of 15% I think I would have no problem finding people that want to invest with me (I could set up something where I get 25% of the realized gains; or I could split profits 50/50). However, it seemed like the tax liens I was looking at would return maybe an average of 6-8%, and the performing notes I am able to find right now are returning 9-10%. There is just not enough of a margin to attract other investors and still get a percentage for myself.

Regarding the tax liens in Iowa, what does that 24% usually get bid down to? Do they still typically wind up in the double digits? Also, you typically do research every asset behind the lien that you are bidding on? How do you manage to do this effectively? Do you hire virtual assistants? Are there websites out there that can do this efficiently? Or is it just a grind?

Thanks for any insight!

I went to my first tax lien sale yesterday (Boulder, CO) and wanted to write about my experience. The interest rate this year was 11% and if the account owner doesn't pay for the following year you get the first opportunity to purchase those outstanding taxes as well (also at 11%). After 3 years of delinquency you have the opportunity to apply for a treasurer's deed.

A couple of days before the sale I came up with my strategy.

1) I was taking a purely investment approach and completely discounting possible homeownership. From what I understand, actually getting a house from a tax lien sale is extremely rare, and happens less than 1% of the time. 

2) I was planning on spending up to 15k since this was my first auction. I was only going to bid on liens that were in the $1000 to $3000 range. My thought process was that since I wasn't planning to spend a ton of money I wanted to diversify this money across several liens.

3) I was only going to bid on tax liens that were backed by residential property. I didn't want to mess with any random weird lots of land in the middle of nowhere with no access and no utilities. I did some due diligence using the tax assessor's website, google maps, and redfin/zillow to look at the property backing the lien. My initial impression is that it takes forever to do this research. Even though my criteria was pretty narrow it still took quite a bit of time to go through hundreds of listings to figure out what actually matched my criteria. Does anybody have tips on how to optimize this task?

4) I was looking for around a 9% ROI, assuming that it takes the account owner a full year pay the outstanding taxes. Of course, if they pay off faster that number goes down, if it takes them longer that number goes up. But as a starting baseline I was assuming 9% after a year. I put together a quick little ROI lookup table that told the the percentage return at varying price points.

When I got to the auction I learned that we were actually going to be bidding on the premium amount (number of dollars over the tax lien value), not the total value you would be purchasing the lien for. This meant the quick ROI lookup table I had put together was garbage. No worries, I did some quick math to figure out my max premium bid for each of the liens I wanted to bid on, and re-sorted the listings to match the order in which they would be auctioned off. Basically, I was willing to pay a 2% premium and still meet my target of roughly a 9% ROI.

Once the bidding actually started it became abundantly clear that I wasn't going to end up with any liens. Everything was going for like a 6% premium. At that rate, if the account owner pays off their lien within 6 months they end up losing money on the deal. If it takes a year for it to be paid off, they are essentially getting a 5.5% return. If it takes 2 years, and they are able to buy the outstanding taxes for the second year as well, then it starts to approach a 9-10% effective annual rate of return.

Of course there were people bidding like 8-10% premiums on certain liens. And there were other people who were bidding on all of the really low value tax liens. They would pay like an $80 premium on a tax lien worth $40. I didn't really understand that at all. Why would somebody pay $120 to get a tax lien worth $40, backed by some 0 acre piece of undeveloped land in the middle of nowhere? 

My big take away was that I felt like I was missing something. I just didn't get what people's strategies were. The handful of people I talked to definitely had an investment approach and were realistic about how rarely you actually get the property deed. So it didn't seem like people were bidding in order to win deeds to the property. But still, at 6% premium you are making anywhere from a small loss on your money up to 9-11% return on your money, depending on when the lien gets paid off. It feels a bit unpredictable, a bit like gambling. 

This was definitely an older crowd, so I was half wondering if some of these people were just using the tax lien investment vehicle as an alternative to bonds. That could make sense, as your money is typically only on hold for up to 3 years, and the returns probably look pretty decent compared to bonds. It might not be such a crazy idea if you are looking to rebalance your portfolio and take money out of the market as you get older.

But I don't know... I kept coming back to just investing in performing notes. You can get these for a pretty solid return of 9-10%, which is the most you will be making on tax liens anyway. They are also backed by real estate, and they are pretty safe as well. I'm just not seeing the advantage of tax lien investing over note investing when I compare the two. I just don't think the returns are as good or as predictable. Regardless, I'm glad I went, as I definitely learned a lot.

@Jeff Copeland Yeah I was wondering if signing the loan paperwork actually amounted to 'promising' payment. Or if it was more like agreeing to particular scenarios (if I pay this thing happens; if i don't pay another thing happens). But you are definitely signing the paperwork with the written intention that you are going to pay. If you do this with no intention of actually paying that is in fact fraud. Crystal clear, thanks!

@Gail Greenberg I'm actually not looking to own property through foreclosure. My current plan is to buy a performing note or two to see how this works, and to determine whether or not I feel comfortable getting more involved with notes as an investment strategy. I'm actually in the middle of determining how active vs passive of an investor I want to be. I like how easy and hands off performing notes could be (however the returns aren't great, comparatively). On the other hand, the ROI from NPN seems outstanding, but it also seems like a lot of work and i'm not sure if I want this to become a semi full time job. Regardless, thank you for the idea, it's definitely a good one to pursue for the person who is trying to get cheap houses through foreclosure.

Okay, fair enough... 

1) I assumed that this would probably amount to fraud, but I still don't really understand why. You're not lying to the bank in order to receive the loan.

2) I was unsure of how difficult it would be to track down and buy the note at discount from the lending institution. I also wasn't sure on whether or not this would wreck your credit.

3) This is admittedly a TERRIBLE idea. As for why to even discuss this, well, I treat it more like a thought experiment than anything else. The intention is to explore potential consequences. I was definitely a bit hesitant to post this here, fearful that the intention of the post would be misconstrued.

I thought of this crazy idea and wanted to write about it just to see if other people think this could work in practice. I want to state that I have no desire, intention, or ability to actually do this. It was just something I was thinking of and wanted to throw out this wacky scheme for discussion. There's probably reasons why this wouldn't actually work in real life. Besides, it's a bit conniving and questionably unethical.

You buy a house, but never make any mortgage payments. Wait 12 - 18 months and have a friend contact the lending institution to buy the note at a discount. You pay the friend the value of the note and now you have a house that you bought at like half price.

Would this actually work?