Steady Eddie... 18% return per year

Is it possible to rake in 18% returns year after year? Too good to be true? I thought so too.

But after some due diligence, I found out that this is totally possible and well within reach of the common man. This is not some pie in the sky, nor is it reserved for the bourgeois. The investment du jour I'm talking about is tax liens. What exactly is this and how can you get a piece of the action?

Let me explain. If you are a property owner, be it a residential home or commercial building, you are required to pay property taxes. Such is the reach of the municipality in which you reside. Most cases you pay a quarterly tax. What happens when you stop paying your tax? The municipality is in deep doo doo if it doesn't have enough cash flow coming in to pay for the $1000 toilet seats, nor enough to pay for services such as policemen, librarians, etc. How does it raise this cash if it can't collect the money from you, the home owner? It sells a lien on your property to the highest bidder. What this means is that if/when you can cough up the cash to pay your delinquent tax (plus interest/penalties of course), you are paying the person that owns your lien. The investor is basically giving the municipality the taxes owed by you upfront in return for future payment of the taxes owed plus interest/penalties.

As a purchaser of a tax lien, you are entitled to receive the amount of taxes that are delinquent plus interest. How much is the interest? Well it depends on the state where you are purchasing a tax lien from. What generally happens is that the state will have an auction at least once a year where they will try to sell tax lien which have been delinquent for 2-3 years (again this depends on the state). You can 'bid' on any particular property's lien that is being offered at the time. The bidding process varies from state to state. In Florida, for example, bidding starts at 18% and is bid down. This means you can receive as much as 18% interest on the delinquent tax amount. Bidding down the interest means investors of these tax liens are willing to accept less than 18%. The more bidders there are for any given tax lien, the smaller the return. If you happen to win the bid, you are required to pay the delinquent tax to the municipality in as little as one business day. When the municipality is paid the delinquent tax by the homeowner, they will forward the cash to you.

Now, what happens when the homeowner never pays the taxes? This is the great thing. Their property is collateral. Again depending on the state, you can force the property to be liquidated within a certain number of years and you will receive your money back plus interest assuming the property is worth more than your investment. In some states like TX, you actually receive the deed to the property. It is yours for keeps - you get the house that was attached to the lien. WOW, that would be an incredible return... But alas, this seldom happens as the majority of the time the lien is paid in full before this ever happens.

I have really just touched upon the basics of the entire process. You should do your own due diligence and see how viable this strategy is for you. There are obviously some risks involved, but if you do your homework, those risks are mitigated. Each state has their own rules regarding purchases. Hopefully, this has sparked some interest in you for you to start your own tax lien purchases.

Here is a link to wikipedia about tax liens.
http://en.wikipedia.org/wiki/Tax_lien