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The Silver Lining in the Real Estate Thunderclouds

May 12, 2011 12:38 PM ET
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Seeking Alpha Analyst Since 2011

Joseph McBrennan is the Editor of Wealth Legacy Advisory and a regular contributor to free financial market e-letter Taipan Daily. Editor Joseph McBrennan comes from at least five generations of investors and traders on both sides of his family, dating back more than 150 years. He brings to Taipan Publishing Group over two decades of experience in the investment banking business.
I've written several times about the housing market and its potential for another drop. Last year I saw very credible estimates that our residential market could see an additional 30% plunge.
And yet, in today's Taipan Daily, I'm going to tell you to consider buying real estate.
In fact, I'd like to dedicate this to a reader (and new Millionaire's Circle member) by the name of Vincent M. He joined about the same time Japan had its rumbles. In other words, the world (including the Earth) was correcting and he was stepping right into the mix.
So, Vincent M., while equities have been less than kind to you and everyone else over the past 60 days, let me point you in the direction of real estate.
Even as I write that last line, I think, "Buying property? That sounds nuts."
From experience, though, I know that all disasters have a silver lining -- often far greater than the problems at hand. One need only search for it.
Real estate definitely qualifies as a disaster. Here's the silver lining.
What I'm recommending is for you to investigate tax-lien certificates. Sometimes they are called tax deeds or even sheriff sales. These little gems allow you to profit from the delinquencies of others.
The majority of counties sell these at an auction, and some even sell them online.
Almost all people I've met think they understand how their local county handles collections. The reason few people actually do know what goes
on is that most folks pay their taxes on time.
We assume that if a property owner doesn't pay the taxes on their home, then after a year, sometimes two, the county sells it to repay the amount owed.
That explanation is nearly correct. There is one piece missing from this puzzle though. It is this lost bit of knowledge where we'll find our profits.
What really takes place in most locations is the county sells a lien against the delinquent property owner's home for the amount of taxes, plus any premium (not the actual property).
If you've purchased one of these liens, you'll have the right to take the property after a certain amount of time. In the case of the three certificates my wife bought last August (first time she ever stepped foot in this sort of thing), the time to redeem for the property owner is fast approaching the one-year mark.
If they choose to pay what they owe, I'll get the taxes I paid for them and the penalties the county charges, plus any fees I may have incurred. In Missouri this amounts to 10% on the past taxes, and 8% on any taxes I paid this year for the owners.
I know of no real estate investment that offers so much upside with so little downside.
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Every county can handle things differently. You'll have to do some legwork. However, with a little digging, you should be able to find the state statutes that cover these regulations, and most now have websites outline everything.
My experience has been that about 90% of the property owners finally repay their taxes and you'll get your money back,
with the penalty (that is profit to you) of somewhere between 6% and 18%.
Not bad for a one-year loan.
If you're lucky enough to have someone not retire their obligation, however, you'll end up with the property. This can be a good thing depending on how much you paid.
In a falling real estate market, trying to pick the bottom is like trying to catch a falling knife. The key to this opportunity is to never pay too much for a tax lien. The first reason is that you may not get any return on the level of premium you bid to win at the auction.
The second, and more important, reason is that we're not intentionally trying to become real estate investors. We're seeking to lend money to counties to cover delinquent taxes that are well collateralized with real estate.
If you've not paid too much, and the taxpayer chooses to walk, then you'll become the proud owner of some piece of property for what amounts to pennies on the dollar.
For me, this upcoming August, I hope to find myself the owner of a 40-acre farm and two residential lots in a quaint little antebellum town my wife and I love to visit.
For the lots, we paid exactly what was owed on them: Less than $500 each. If the 90% repayment stat holds true, we'll have picked up 10% in a year.
On the farm, we bid a premium of about $7,000 over the taxes owed. Why the premium? I wanted the agricultural land. I was also seeking a mega-profit.
Prior to bidding, I drove around the area. Most farm properties nearby have an asking price that is $4,000 per acre. Which works out to be a piece of property worth $160,000. Even if I place it at fire-sale levels, say $2,000 an acre, I'll still have a remarkable profit.
With any potential reward of this magnitude, there is usually an equal or greater amount of risk. My downside on this, as far as I can see it, is less than $700 in potential earnings on my seven grand, because it's not sitting in my bank account drawing nearly no interest.
A risk of about $700 to make potentially more than $100,000 sounds like a deal only available to Hillary Clinton trading the futures markets. But in fact, it is available to most anyone with a few bucks in the bank.
I'm a big believer in the saying, "if something is too good to be true, it probably is." And this definitely fits that category. But sometimes the deal really is that good. So, before you think, "this is not for me," visit the website for a few counties in the state of Arizona. I've linked one county here.
P.S. As usual, any comments or questions can be directed to me at joseph@taipandaily.com.
Editor's Note: U.S. homebuilders have staged a remarkable recovery -- propped up by government stimulus and a rising stock market. But these companies are about to take a major hit!
And in this special report -- yours absolutely free -- I'll show you how you could protect and grow your money when it happens! Get all the details from Taipan's Velocity Trader.
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Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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