Successfully Invest with Tax Liens and Tax Deeds

Mike: Hey, it’s Mike Hambright with FlipNerd.com. Welcome back for another exciting, incredible Expert Interview, where I interview successful real estate investing pros and entrepreneurs in our industry. Today I’m joined by Arnie Abramson, he’s a friend of mine. We’re actually both Texans here. Arnie has been a real estate investor for around 25 years and really quickly found his way into buying houses at the tax sale.
Arnie has also been a landlord, a speaker, a mentor, an educator, and a number of things. Very well known in our industry. But he’s probably best well known for his knowledge with tax and deed sales. Especially tax sales in Texas. In fact we call him the Sheriff. Today we’re going to talk about how to be successful with tax liens and tax deeds with Arnie Abramson.
Before we get started though, let’s take a moment to recognize our featured sponsors.
RealtyMogul.com is an online marketplace for real estate investing, connecting borrowers and capital from accredited and institutional investors. Get a rehab loan fast and close in as little as 10 days with rates starting as low as 9%. For more information call 888-296-1697.
B2R Finance makes loans tailored specifically for rental investors. They can help you unlock equity from existing properties so you can get cash to grow your rental portfolio. That’s huge and it opens up lots of opportunities previously not available to rental investors. Need a loan? Call 855-819-4412 or visit B2RFinance.com today.
National Real Estate Insurance Group is the nation’s leading provider of insurance to the residential real estate investor market. From individual properties to large scale investors, National Real Estate Insurance Group is ready to serve you.
We’d also like to thank Crestar Funding, MidAtlantic IRA and Renters Warehouse.
Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers, or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.
Hey Arnie, good to see you.
Arnie: Thank you, thank you. It’s a pleasure to be back.
Mike: Yeah, welcome back to the show. That’s right, you were on almost 190 or so episodes ago, so very happy to have you back. And to be honest, we’ve seen a lot of interest in learning about tax sales and stuff. So, happy to have you back and talk about it again.
Arnie: Well thank you very much. It’s been an interesting time since I was here last.
Mike: Yeah.
Arnie: There are a lot of changes.
Mike: Yeah, yeah.
Arnie: Wow.
Mike: Before we get started, Arnie, with talking about tax liens and tax deeds and your area of expertise, why don’t you tell us how you got started in real estate investing. I know you didn’t start in real estate. You found your way there like many of us. So, tell us your story.
Arnie: In my former life I was a financial planner. When I moved out of that, I kind of reflected back on investing and the investments I saw overall and I’m like, “Where was real estate?” In one part, at one point in the former life, I worked for a company that put syndicated limited partnerships in real estate on a national basis. I was a regional guy who would go around to the brokerage firms and seminars to teach them about it and talk to their clients.
So in 1990 when I moved to Dallas I got involved in real estate. I ran into a guy who had just moved to Dallas from San Antonio, had a lot of experience in tax sales, but had moved here to get into the dot-com business and didn’t have the time. I had the time and didn’t exactly know what to do. So we partnered up and we did a joint venture and over the next 12 months, first 12 months we bought 10 properties. So I actually learned by having someone that mentored me.
Mike: Okay.
Arnie: That was really great and I remember at one point he told me, “You know, one day you’re going to outgrow this deal and you’ll do it on your own.” And I said, “Oh no, no I’m depending on you.” He was right. We did and went on to other things.
Mike: Yeah.
Arnie: That was back before there was a lot of information on the internet about non-tax sales. So we could really, at that point, only work one county and it was Dallas and after awhile, the market kind of deteriorated. We had a lot of out of state investors coming in and building, bidding up the prices and so we stopped doing it. But I stayed in the foreclosure business. I started doing HUD foreclosures and I did VA foreclosures and over the years just became a buy and hold kind of person.
When we, in 2007-2008 when we started seeing changes in the market, that’s when I kind of said, “You know what? It’s going to be time to get back involved in the tax sales.”
Mike: Yep.
Arnie: The way this is going, that’s going to be a great market because there are going to be a lot of tax foreclosures. So I sort of rededicated myself and went back into reeducate and see what the changes were and get more involved. What I started doing at first was just to teach people how to do it. It was so complicated and so much work. Most of the people wouldn’t do the work. So the next step I took was, I said, “Okay, I’ll mentor you. I’ll take you by the hand.” And they still wouldn’t do all the work.
Mike: Yeah.
Arnie: There were so many disappointments, even in just one county you look at 100 properties, you’d get them narrowed down to three or four properties that you, hey, I’ll take any one of these if I can go to the auction and get them. And none of them wind up going to the sale because they’re paid off at the last minute. It’s very disappointing and frustrating a lot of people…
Mike: Right.
Arnie: The next step we did was, we said, “Here’s what we’ll do. We’ll do all the work and you can pay us if you’re successful.” And that’s when it really took off.
Mike: Yeah.
Arnie: We eventually became, doing a complete turn-key program.
Mike: Yeah, yeah.
Arnie: So that’s kind of how it worked.
Mike: Yeah, so talk a little bit about, you talked about how in 2007-2008 you saw the opportunity to jump back into tax sales more heavily. Just talk about that cycle. I mean, we all know in real estate there are lots of up and down cycles and what’s actually interesting for me is, I came in, in 2008, so I had never seen an up cycle until the past 18 months or so. Not that it was ever that bad in Texas compared to other markets, but it’s a very different market right now as we sit here in mid 2015.
I had to think about what year it was. Mid 2015 compared to 2008, seven years ago. It was a very different market right now than it was then. There’s a lot, I can see it in myself, there’s a lot of learnings of going through cycles to see, “Maybe I need to sit on the sidelines for awhile and wait for this to happen again.” Or, “This has opened up some new door.” I think that’s pretty common for real estate investors to ride cycles up and down. Of course the key is to ride them the right way, right?
Arnie: Right, and you have to adjust.
Mike: Yeah, yeah.
Arnie: You have to adjust to these things. It’s really very funny Mike, because this reminds me very much of that 2007 and 2008. Where there’s like a frenzy atmosphere. And everybody and his brother is getting into real estate. It’s very fashionable. In 2009, 2010, 2011 it wasn’t.
Mike: Right.
Arnie: And now all the… coming out of the woodwork are all these high in the sky guys on the internet. I don’t mean to condemn everyone, but you see a lot of these guys that their only experience is selling the books and tapes and they haven’t really done it. You see a lot of that.
Mike: Yeah.
Arnie: Unfortunately a lot of people are paying a lot of money. They’re selling courses you can buy and you can’t do them here. So that’s… which sort of bleeds into, there’s a big difference, and big economy in the states. Out of our 50 states, about half of them are what we call tax lien states and the other half are tax deed states.
With tax lien states, when you buy at the auction what you’re buying is the actual amount… it’s a note, it’s the debt that is owed. If you owe $8,000 in taxes, that’s what you’re bidding on. I’ll take a less interest rate then the next guy. The guy who’ll take the lowest interest rate, he gets that note. Then if the guy defaults, then he has to start a whole foreclosure process.
Mike: Yeah.
Arnie: In Texas, it’s what we call a tax deed state. When you buy the property at the auction you get the property. You get ownership. You’re entitled to the right of possession, the right to collect rent, all of it. The owner who lost the property has no rights anymore, except for the right to redeem it.
Mike: And you said tax deeds are about half the states, is that right?
Arnie: Roughly, roughly half are tax deeds.
Mike: Okay, okay, so tax lien, just to clarify, a tax lien, effectively you’re buying that lien. That they’re going to owe you instead of owing the city and you’re… the city is selling it to you at a discount because they want to get something for it, right? Municipality or whatever it may be?
Arnie: Yes, yeah and they’ll start the bidding at, “Okay, by law we can charge 18%,” and somebody will say, “I’ll take it at 18%.” And the next guy will say, “I’ll take it for 16.” The next guy will take it for 12.
Now, if you get some big funds out there that want to get into the market, they can take it for 1 and blow everybody away.
Mike: Yeah.
Arnie: So that’s…
Mike: So with tax deeds you’re actually getting the property and every state is a little bit different in terms of the way redemptions work, right? So talk about what a redemption, I mean pretend like we don’t know what that is and tell us what that is.
Arnie: Yeah, in Texas, the right of redemption is that, the person who lost the house, and anyone who had an interest in that property, including the mortgage company has the right to redeem it. And that right to redeem it is for 180 days. Unless, unless it’s the homestead or has an agricultural exemption, or it is a free standing mineral right, and then it’s two years.
Mike: Okay.
Arnie: Two years. Now, the homestead is not just whether or not they have a homestead exemption, it’s whether they were living in their house as the primary residence when the suit was filed. And that’s sort of a technical thing that came about by case law. But the reality is it really doesn’t matter whether it’s six months or two years because most investors are unable to get a title policy for two years. Even with the six month redemption because there’s another law on the books that says someone who wasn’t notified properly can contest the sale for up to two years. Although it almost never happens, the title companies are going to hang their hat on that.
Mike: Sure.
Arnie: They’re very reluctant to give title policies prior to two years.
Mike: Right.
Arnie: Therefore, in our opinion, what you should do is… In Texas, you buy the property, is if you have to keep it for two years and so you want to have cash flow. So you should not buy for the right of redemption. By the way, the frequency of redemptions, that’s another difference between the tax lien states and the tax deed states. In tax lien states, you’re talking about smaller amounts at most. Most of those do get the deed, maybe even as high as 90% of them.
Mike: Wow, okay.
Arnie: It’s the exact opposite in tax deed states. Statewide in Texas about 10% of them get redeemed. Now our average happens to be 20 because we don’t buy vacant lots which almost never get redeemed, brings your average down.
Mike: Right, right.
Arnie: Still, one in five is not a reason to go buy a house. I mean, that’s 200 batting average. That won’t make it in the majors. This is the major league.
Mike: Yeah.
Arnie: My opinion is you buy for cash flow. If it gets redeemed it’s a home run, but meanwhile you’ve got good, solid cash flow.
Mike: So the key is with a… in a tax deed state like Texas, for example, is you want to be able to buy a property that you can, you just have to kind of wait out that redemption period. Do you typically know, would you know at the time you buy it if there’s a homestead exemption on that person that might redeem it? So do you know if your redemption period is six months versus two years or…
Arnie: You really don’t there’s no, there’s no rule of thumb. But as I said before, it doesn’t matter. You can’t sell if for two years in most cases anyway.
Mike: Right, right.
Arnie: So, if it does have a mortgage on it, we’ve found it’s more likely to be redeemed, but that makes sense because the mortgage company may own 80% of it and you own 20% of it. They have more skin in the game, they have more to lose, so they are more likely to redeem if there is a mortgage on the house.
Mike: I see, I see. So typically… so one of the, I think myths, because I think you’ve told me differently before, is that people who are letting their house go to a tax sale are just in the lowest dollar areas of town. In the hood, if you will, because the houses are probably not worth a whole lot anyway, but explain that.
Arnie: Well actually you remembered part of it.
Mike: That’s the story of my life, Arnie. I always remember a part of something, but never the whole thing.
Arnie: It’s a two tiered system. There are the lower price houses that you’re talking about and then the higher price. Now there are more of them in the smaller areas. In those, you probably never will be able to fully get a retail price for them. Because generally the people in the lower price houses can’t qualify for a loan two years from now and if they could, who’s going to loan them a $30,000 mortgage. So it’s less likely. So on those you should really go for a higher percentage cash flow. If you do need to sell at some point, you can sell it to another investor who’s going to look at cash flow.
Mike: Yeah.
Arnie: Now, of course, you could do owner finance on it also and perhaps do well. In the higher end, and those are the ones that everybody loves, because you not only have good cash flow, but you have a great potential for jump in gain two years later. Especially if you’re buying at a discount and even without any appreciation.
Mike: Right.
Arnie: But when you have the discount and the appreciation and the cash flow while you’re waiting, it’s really high on…
Mike: Sure, sure so how do you… there’s always, I guess probably a fear of people who might get the house redeemed. Of course there’s a good return on it if it happens. Talk about the situation of… because the name of the game is you want to try to not put a lot of money into the house to redeem that right? Or can you get reimbursed on improvements to the house?
Arnie: Well, good question Mike. I should have brought this up earlier. The way it works is, if they should redeem it, they have to pay you back all the money that you bought it for and some other funds that fall under the three magic words, maintain, preserve or safe keep the property.
Well, that would include, that would include insurance cost. That would include fixing up anything wrong. If the carpet’s worn out, you replace the carpet. There’s a hole in the roof, you fix it. What it doesn’t include are upgrades.
Mike: Okay.
Arnie: Anything you put into the house to maintain, preserve or safe keeping, as what? As a rent house, that’s going to be okay.
Mike: Right, right.
Arnie: So very often… well we had one case not long ago where one of our investors found a house for $8,500. He bought it. He was all in for $8,500 and had it rented for $500 a month, to the owner who redeemed it a year and a half later for $20,000.
Mike: Wow.
Arnie: So it wasn’t just his $8,500, it was all the insurance he paid since then, some fix up expense and all that, plus in the second year it was 50% over and above. See, I probably forgot to mention that. You get all your money back plus 25% in Texas, if it’s redemptions in the first 12 months and 50% if it’s in the second 12 months.
Mike: Okay.
Arnie: And it’s not prorated. So if it’s 1 year and 1 day, it’s 50%.
Mike: Oh wow.
Arnie: Yeah, so it’s a…
Mike: So in other tax deed states is that similar, or is Texas unique in that regard?
Arnie: There are similarities. Texas has the highest. Twenty-five percent is the highest for the first year….
Mike: Okay.
Arnie: Most of them are not prorated. And in some states even though they have the 20% redemption rate, for that first year you can’t make improvements and you can’t collect rent.
Mike: Oh wow.
Arnie: Yeah. Texas is very, very friendly, investor friendly in the tax scene here.
Mike: Sure, sure. Well, talk a little bit about the… we kind of talked about, why Texas, so that makes sense. Talk a little about what keeps people from getting… kind of moving into this space. I know that you said that some people just don’t want to do the work. There’s a lot of little things to know, but what keeps people out of this space. What are some of the typical things that keep people from getting started in this space?
Arnie: Well, first of all you can’t go look at the house that you’re going to buy.
Mike: Right.
Arnie: If it’s occupied because it’s trespassing. This is Texas, if your house is on the list and 50 people keep coming up to your door and ringing the doorbell and saying, “Hey, your house is going to go on the sale block. Can we come look at the house?” This is Texas, how many times does that have to happen before you come to the door with a shot gun, I mean you know?
Mike: Yeah.
Arnie: So you’re not supposed to do that. There are people who do it.
Mike: Yeah.
Arnie: But you’re not supposed to do it, number one. It’s difficult to… if you can’t get in the house it’s difficult to estimate, “What’s it going to cost to fix it up? To rehab it if it needs it?”
Mike: Right.
Arnie: So that’s the tough deal there and there are other due diligence things that you really have to do. For example, if there are mortgages on it, great, it gets wiped out. But not every lien on there gets erased. Government liens do not get erased. So you have to do a little research to find out if there’s some liens on there. In addition to that there are post judgment taxes, in other words this. If you go to a foreclosure sale when the trustee, where a mortgage company is doing the foreclosing… You stop making your mortgage payments, they can foreclose right away.
It’s not true about taxes. They have an obligation by law, statutory, they have… it’s a judicial process. They have to notify you and then they have to notify everyone who has an interest in that house. Then they have to get a judge and set up a court hearing and get the judgment. That can take a period of time. Once you do that and you get that judgment, it may now take anywhere from six months to six years to find all the errors and everybody who has an interest and notify them that its going to go to sale in the tax sale. During that time the taxes don’t stop. The judgment was as of that date, so all those accrued taxes since the judgment date are inherited by the buyer at the tax sale. They don’t tell you how much that is, you have to do your own research to find out if it’s there and how much and all that. We call those post judgment taxes.
Mike: Wow, yeah.
Arnie: So there’s so many little nuances and things like that, that there’s nowhere to go to learn these things. There’s no school that teaches you. Now, we have meet-up groups and we have classes, it’s open to everyone. We don’t even charge for it because we want people to know. In fact, it’s interesting too because the property taxes pay for half… half of what’s collected in statewide property taxes goes to public education. The rest of it goes to police, fire departments, all these essential things. So I say it’s our civic duty to go buy these properties at the tax sales so we have the tax revenues and they don’t have to raise our taxes.
Mike: There you go.
Arnie: So that’s my banner.
Mike: Yeah, and talk about specifically in Texas, Arnie, when the sales occur. Because they’re at the county level, right? And they’re all pretty much the same day across the state right?
Arnie: Well there are 254 counties in Texas. If any of them are going to have a sale on a given month, they all have to be on the same day, the first Tuesday of the month. Now the reality is this, in a given month, anywhere from 40 to 60 counties will have a sale. Not all of them.
Mike: Okay.
Arnie: There are some counties in west Texas don’t have as many people that are on this call.
Mike: Right.
Arnie: So they don’t have great odds. But even some of the bigger cities, now your five biggest, the Dallas, Houston areas, San Antonio and Austin, Fort Worth, those are the five biggest cities and their counties have sales every month.
Mike: Sure.
Arnie: Even the county that Waco is in, is every other month. The county Abilene is in, is every three months.
Mike: Okay.
Arnie: So in any given month there are 40, 50, 60 counties. We cover them all by the way.
Mike: Yeah, yeah.
Arnie: Because that’s what it’s all about.
Mike: Yeah and I think that’s a challenge that some investors face. I know with just… not with tax auctions necessarily, but with foreclosure auctions is that for those that invest in the Dallas/Fort Worth area for example there’s four main counties and the sales are all happening at the same time and there’s multiple trustees so you… in order to cover all those sales, you have to have an 8 or 10 person team that’s effectively watching the auctions at all those locations at the same time and covering multiple trustees. So that’s some of the challenge, I think, that keeps people away is just the ability to be in more than one place at once to see what’s going on. Is that the same for tax auctions as well?
Arnie: It is absolutely true and it’s a great segue because we had the same problem. Now that we have the internet we can cover… we can look at the properties in all these different counties and how do we get to them at the same time because you have to have the money right then, at the sale.
Mike: Yeah.
Arnie: So we came… we found… invented something called the Learn and Earn program. We have investors who want to learn about the tax sales. So we teach them. One of the things we teach them is to go to the sales for us. To represent us. If we buy a house that they’re involved in, we pay them for doing that.
Mike: Wow,
Arnie: So that’s how we’re able to be in 10 to 15 to 20 counties on any give… the first Tuesday of every month.
Mike: All at the same time. Yeah, yeah.
Arnie: Yeah, yeah.
Mike: That’s great, great. Well Arnie if folks want to… I know you’re the authority for Texas tax sales. If they want to learn more about investing in Texas tax sales, where do they go?
Arnie: Well, our website has a lot of information on it. Including the story of how we got started and what we’ve done. What we’ve progressed. It’s very simple, it’s TX, like Texas abbreviation.
Mike: Yeah.
Arnie: Txtaxsales.com.
Mike: Oh, that’s very easy.
Arnie: www.txtaxsales.com and it’s a very friendly website with a lot of information. Anybody can call me or email me. My email address is [email protected]. Now, I’m happy to get emails, I get them all the time from people.
Mike: Okay, awesome. We’ll add the links on your email address even down below here for those who are interested in learning more about Texas tax sales with the Sheriff, Arnie Abramson. Arnie good to see you my friend. Thanks for your time today.
Arnie: Can I make one last comment?
Mike: Sure.
Arnie: This is not really… just so you know, our program is completely turn key. We have investors from in Texas, out of Texas. Out of the United States, out of the continent.
Mike: Yep.
Arnie: From all over the world, we have investors, so go to the website and learn as much as you can if you have questions.
Mike: Awesome, awesome. So you don’t have to be in Texas to benefit from investing in tax sales in Texas. Good thing.
Arnie: You know what? That’s a great topic for a seminar. You don’t have to be in Texas to profit from Texas.
Mike: There you go. There you go.
Arnie: Great.
Mike: I’m a burgeoning copywriter, Arnie.
Arnie: There you go.
Mike: All right my friend, have a great day.
Arnie: Thank you for having me.
Mike: We’ll see you, good to see you.
Are you a member of FlipNerd.com, the most robust real estate investing platform in existence? Where you can find off-market, wholesale deals and great vendors literally in your market. You can get access to advice from experts and learn about local clubs and events right in your backyard. If not, please visit FlipNerd.com and register for a free account. You can register in less than a minute. It’s pretty much the coolest site that’s ever existed in the real estate investing industry. So get on over to FlipNerd.com.