Episode 81: [Tax Liens] Investing in Tax Liens and Tax Deeds

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Show Notes

 

Ted Thomas, best-selling author and publisher is best known as America’s Tax Lien Certificate and Tax Deed Authority. Thomas has sat for more than 200 radio and TV interviews, most recently on ABC, CBS, NBC and Fox and he has been recognized in Newsweek, USA Today and the Wall Street Journal. Ted Thomas is the go-to guy when people want to discover how to invest in secure government certificates that pay 16% and 18%.

Ted’s best selling Home Study Course titled, Quick Start to Buying Government Tax Lien Certificates & Tax Deeds, is considered the benchmark standard for the Tax Lien Certificate and Tax Deed industry. Thomas also conducts live tours of Tax Lien Certificate and Tax Deed auctions.

Houses with tax liens are a safe, secure investment because you won’t run the risk of losing large sums of money.

Ted’s number one suggestions is this: Start out buying vacant residential land. Most mentors won’t suggest this, but Ted does for this reason. He wants to make sure his students are staying conservative in their investments. Buying land is a low risk investment, and sell for 10 – 20 cent on the dollar. If you sell it for 50 cent to buyers then you’ve made a profit! Ted’s suggestion is to go slow, stay conservative, and watch your income build.

There will never be a shortage of properties. There are 100 million properties in the United States alone, and 2 – 3% of that will go into tax lien territory. Ted’s point is that there’s no reason to try and rush your business. Let it grow steadily. You’ll always have properties to buy and sell.

Ted answers these common questions:

Q: What is a tax deed auction?

A: A Public auction where real estate is sold on property that is delinquent in taxes. A deed sale happens after a tax certificate applies to the tax collector for a tax deed after the certificate has been held for the statutory period.

Q: What is a tax lien certification?

A: Tax lien certificates pay you guaranteed fixed rates of return interest per year.

Q: Which states are tax deed states?

A: Tax Deed States:

  • Alaska
  • Arkansas
  • California
  • Connecticut
  • Delaware
  • Florida
  • Georgia
  • Hawaii
  • Idaho
  • Kansas
  • Maine
  • Michigan
  • Missouri
  • Nevada
  • New Hampshire
  • New Mexico
  • New York
  • North Carolina
  • North Dakota
  • Ohio
  • Oklahoma
  • Oregon
  • Pennsylvania
  • Rhode Island
  • South Dakota
  • Tennessee
  • Texas
  • Utah
  • Virginia
  • Washington
  • Wisconsin

Q: Which states are tax lien certificate states?

A: Tax Lien Certificate States-

  • Alabama
  • Arizona
  • Colorado
  • Florida
  • Illinois
  • Iowa
  • Indiana
  • Kentucky
  • Louisiana
  • Maryland
  • Massachusetts
  • Mississippi
  • Montana
  • Nebraska
  • New Jersey
  • New York
  • Ohio
  • South Carolina
  • Vermont
  • Washington DC
  • West Virginia
  • Wyoming

Books

Relentless

Big Money in real Estate Foreclosure

Links

YouTube.com/FlippingJunkie

FlipPilot.com

TedThomas.com

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Episode Transcription

Danny Johnson: This is Flipping Junkie podcast episode 81. [music] Welcome to the Flipping Junkie podcast. The podcast for flip pilots everywhere. Flip pilots are the house flippers that work more on our business instead of in our business by keeping a 30,000-flip view. You’re now part of a small group of house flippers that considers themselves flip pilots that strive to build the life of financial freedom and time freedom so that we can spend more time doing what we love with who we love. In this podcast, I give you a glimpse of the daily life of a flip pilot so let’s gets started.

All right. Hello everybody. Welcome back to the Flipping Junkie podcast. I’m excited today because we’re going to be talking about investing in tax lien certificates and tax deeds, something I’ve personally never done. So I’m very interested to find out more from Ted Thomas who is a best-selling author/publisher that’s best known as America’s tax lien certificate and tax deed authority. That’s why I’ve got him on the show. And he sat for more than 200 radio and TV interviews, most recently on ABC, CBS, NBC, and Fox and has been recognized in Newsweek, USA Today, and The Wall Street Journal. So this guy knows what he’s talking about. I’m really looking forward to finding out more about this exciting aspect of investing one that I think a lot of probably most investors don’t take advantage of. And so, I’m really interested to find out more. He’s the go-to guy when people want to discover how to invest and secure government certificates that pay 16% to 18%. And his best-selling home study course is titled Quickstart to buying government tax lien certificates and tax deeds, and it’s considered to be the benchmark basically standard for the tax lien certificate and tax deed industry. And he also conducts live tours of tax lien certificate and tax deed auctions which is very cool. But let’s just get right into it. I want to welcome Ted to the show. Welcome, Ted.

Ted Thomas: Thank you. Nice to be here.

Danny Johnson: Great. And thank you so much for taking time out of your schedule to talk with us. I really do appreciate. Go ahead.

Ted Thomas: No, I was just going to say it’s fun to kind of educate people so we’re going to have a lot of fun together. You can ask me any question you want. Just get right down to the nitty-gritties whenever you want.

Danny Johnson: Awesome. Well, first, I always like to find out a little bit more about people’s backgrounds and I wanted to find out how you got into the business of investing in tax liens and tax deeds and then moved into teaching other people about it if you wouldn’t mind sharing.

Ted Thomas: Okay. I’m happy to do. First career was as an airline pilot. As a matter of fact, I mentioned earlier that took I flew for Aloha Airlines in Honolulu, Hawaii for a number of years. That’s a good career and it’s a lot of fun, but it gets a little bit boring doing the same thing up and down the airplane. Actually, the only reason I left the airlines was I found out how much money there was to be made business. And so I said, “Oh. Wait a minute. I want to be in business.” So I resigned from the airlines and I started a real estate business and that was in California. I left Hawaii and I moved to California, and I bought a lot of apartment properties. Now, the smallest apartment I ever bought was a 50-unit apartment and then we grew to 300, 250. We did a lot with that.

In 1986… you can see I got a lot of gray hair here. And so in 1986, the markets reversed just like they did in 2005 and 2006. You got a red-hot market and it crashed, and we lost everything. At that point, we had 250 million in property lost. Oh, it was a real crash. And so at that point, I said, “I’m going to become a conservative investor. I don’t want to do this again.” You put 25 years in, and you don’t lose all that money. So sure enough, I started over except this time I started out with tax lien certificates and tax defaulted properties. And so I found out if I could buy tax defaulted property for 10 or 20 cents on a dollar, I have a lot better chance than those guys that were buying foreclosures or doing wheeling and dealing in the other parts of the market. So I’ve been in the business for the past 25 years. And so, it’s good stuff.

Danny Johnson: Wow. How did you find out about that business? Was there somebody teaching at the time that aspect of it and then you stumbled upon their seminars? Or how did you find out about it?

Ted Thomas: Well, I wish that was the case because at that time we didn’t have any computers to do it with then and of course nobody was teaching it. It was kind of a hidden market. But I had heard a couple of guys that were doing it that were actually buying in Baltimore, Maryland. Now, where’s Baltimore, Maryland, right? In Baltimore, Maryland, you could buy a tax certificate there which is just a piece of paper and you could earn 24%. I said, “How could you earn 24%?” It was like a 6% market in those days. And so, I called Baltimore and I got a woman on the phone and I said, “Look. I would like to buy these certificates. Can you tell me about it?” She said, “Sure.” And so, she told me about it. And I said, “Well, can I get a list of them?” And she said, “I’ll send you a catalog.” Now, I didn’t believe a catalog and she actually sent me a big book. It had 11,000 tax certificates I could find just in Baltimore and that was just one county.

Now, there’s 3000 counties in the United States, over 3000. And so, every county either sells a tax lien certificate or a tax defaulted property, one or the other. And so, I started checking and I found about New York where they actually sell a property then I found about Texas. In Texas, they sell a certificate and in one day you could earn 25%. One day. I said, “How could this be?” And so, obviously I got very excited about that.

Now, if you hear a little noise in the background, I live in a house with a tile roof and they’re spraying the roof today to make sure it’s nice and clean and always shiny and nice looking.

Danny Johnson: I don’t hear anything.

Ted Thomas: Okay. But if you do, well—it’s just the noise they’re making from that. That’s all. Anyway. So, that’s how I got in it and it’s been it ever since. And after I started telling friends about it, then you know what happened. Everybody wanted me to, “Can you write me a little note about it?” And then that became a book. The first book I wrote was in the 1988, and it ended up bookstore and stayed there for 12 years in the bookstore. So that was good. So that’s a little bit longer than you wanted to hear but—

Danny Johnson: No, that was actually shorter than it usually gets. What the name of the book? So it’s not in print anymore though?

Ted Thomas: No, that was not in print anymore. I took the books out of the bookstore not because I’m negative on education. If you’re an author in a bookstore, you make about a dollar a book. So that’s not very good. So now, I just create courses and video course. We do a lot. Right now, I’m talking into a camera that I’ll be talking into tonight. And I have a class that I do that I’ve done for the past six years. It’s a two-hour class and we broadcast it into Singapore. We broadcast it into Bangkok, all the provinces of Canada because it’s on the web and it’s a course we’re doing for a long, long time. We teach people all over the world how to do this now.

Danny Johnson: Awesome. So let’s just get right into it for people then. So one thing you did touch on was the fact that some states have the tax lien certificates and some have the tax deeds. Can you explain each one and maybe why certain states have one and not the other?

Ted Thomas: Right. Exactly. Well, first of all, a tax lien certificate is nothing more than a piece of paper. So if a person has a property—let’s say we’ll use Florida for our example. If a person doesn’t pay the taxes, what the local government will do is they’ll say, “Look. You haven’t paid the taxes. We have a choice. We can issue a tax certificate or we can take the house.” So what they do at very benevolent State of Florida, they issue a tax certificate. So anybody in the world can buy that certificate. Anybody can go to the list, buy the certificate, and pay the taxes on that property. Now, when they pay the taxes on that property, they now get a piece of paper. That piece of paper gives them rights in the property. Property can’t be sold. It can’t be mortgaged. Nothing can happen until the taxes are paid. So that makes that certificate for older investors a predictable certain secure investment, predictable certain secure. So older people—and that doesn’t mean young people shouldn’t do it too—older people really like that investment because they either get paid from the property owner so they can buy the certificate back. If they don’t get paid, they get the property. It’s one or the other. So it’s a very safe secure certificate. Now, half of the state sell those certificates.

Danny Johnson: Now, is it true that they take precedence over any other lien against the property? So even the first position mortgage, the tax, anything to pay the tax. I’m not sure. I’ve never done any of the tax investing, so I’m not exactly sure.

Ted Thomas: Well, now you’re right no track. Everyone says the first lien—actually, if you check a title report on any property, the first lien is always the taxes. But most people pay their taxes so everybody says the mortgage is the first. But the mortgage or the deed of trust is really the second lien on the property. The first lien on the property is the property tax lien. It takes precedence over an IRS lien. An IRS lien is a junior lien. A tax certificate is always #1. A mortgage or deed of trust is always #2, #3, or #4.

Danny Johnson: Nice. So that makes it a little bit more powerful then.

Ted Thomas: Secure. The government at the local level has the power and controls the property. All right. So we learned a little bit about tax certificates. About half of the states sold what’s called a tax deed. Now, a tax deed means the property is going into default same as the other one did except now the government is not so benevolent. The governor says, “Look. We’re going to take your property.” So let’s use California’s for our example. So in California what they will do is they will take the property. In other words, if you’re going to visualize it, they’re going to seize the property. They’re going to take it away from the owner. They’re going to throw the owner out of the property in most cases. They take the owner out and then they will sell that property. And the reason people like that investment is that investment, the starting bid on those properties is the back taxes. So the government doesn’t try to make money on the deal. They just want to get rid of the property and get it back on the tax roll. So those properties will start at back taxes.

Now, there’s all kinds of extremes. Go to a place like Miami. They’ll have 65,000 to 85,000 tax lien certificates every year. Sixty-five thousand property owner didn’t pay just in Dade County. All right. Now, let’s go to Los Angeles County. In Los Angeles County, they sell the tax defaulted property—I send my students to auction then we teach them how to buy there. I’ve never seen less than a thousand properties in Los Angeles County, but usually it’s 1500 or 1800 property with starting bids of just the back taxes.

Danny Johnson: Nice. So when you’re looking at these, when you’re looking with that many different properties facing that issue and you go to these auctions to do this, how do you determine which ones? What’s your process for buying these? How are you teaching people to go in and pick out the ones that they should be bidding on?

Ted Thomas: Well, there’s dozens of ways. Now in the old days, pre-10 years ago, everything, you had to go there. You had to go to the county to get the list then you had to drive around and check all the properties. Now, because the computer systems are coming on rapidly. The past two years more come on than 20 years before. They’re coming on rapidly. These counties are coming online and you can actually subscribe to the county, and they will send you an auction list. If I showed you one, I have here on the desk. But to give a listener a book from Los Angeles with the properties in it would be the same size as a telephone book for like Cleveland or Boston. It would be about two or three inches thick. But you can get that online and look at it. Scroll through that. So you can locate every property that way. You can also subscribe to systems. We have every county in the United States in the system. And then what we can do is we can go onto—as you already know, Google has maps. Zillow does a lot of that. But the satellite system, the GIS mapping systems, that the government has will take you right down. You can tell if there’s a geranium on the front porch. So you can do the research which is very much a part of the business now. It wasn’t a research business before. Before when I started, it was like, “Go and look at the property. What’s my gut feeling? It needs roof. It needs this. It needs that.” The old traditional real estate. So you still use that you, but you can do a good 90% of the work online now whereas you couldn’t do that before.

Danny Johnson: And these houses are mostly occupied so you wouldn’t be able to get into them and see inside anyway, right? You’re only going to be able to look at the exterior.

Ted Thomas: Right. Only the exterior. And some counties now like—I happened to buy in New York State. I do a lot. Even though I live in Florida, I buy at New York State. Some of those counties have now made arrangements with local auction companies and they open the house up one day before the auction. People are going to look, and they all have—I attended an auction two weeks ago. I bought two properties, and they had 330 properties that are auctioning in one county, 330.

Danny Johnson: Wow. So in those cases I guess, people are going inside because they’re really kind of fine-tuning and getting down to as much the most that they can pay based on what’s needed; whereas if you just go outside, you have to assume the inside needs more than maybe it needs so that you don’t end up losing out. But do you have any formulas for determining what you’re willing to bid on these properties?

Ted Thomas: Well, I have to teach one thing but sometimes I do something a little different myself. So I’m teaching people. I teach them to be conservative investors. I don’t want to lose money. So I do two things. First thing I do—and it’s not commonplace—is I say, “Start out with buying vacant residential land. I want you to buy vacant residential land. I want you to be conservative.” Other bidders will not bid on them. They don’t know anything about residential land, so they won’t bid on them. But you can easily figure out a value. If you get a house at the end of the street and another house in the middle of street and there’s a vacant land between it, those houses both have values so the land has value. So now, you can figure out with that.

But the average bidder, the average person coming in the business wants to make a killing. Everybody wants to make a killing, and I get it. I get it. Now, there’s a place to make a killing. It’s all in the high end right now. It’s not in the low end because every television channel that you can look at has got a course on flippers right now. So everybody thinks that they’re going to flip and get rich, and I don’t know. I look at some of those guys rebuilding those houses. They put in a lot more money than I ever put. But you get the point.

So you got residential land. So now, nothing can go wrong so I can teach someone in Canada or Bangkok or Australia, “Buy that residential land.” What’s going to happen to it? Is it going to burn? So what? The land is still there. So you’re not going to have a high risk situation. So I buy those. They all have a tax value. You know what the value is. When they sell at auction, they sell for 10 or 20 cents on the dollar. I’m answering your question the long way. But if you sell 20 cents on a dollar, can you sell it for 50 cents and be happy? Well, of course you can. Now, did I make you rich by Friday? I’m sorry. It’s Thursday and I can’t get you rich by Friday, but I’ve got a system now that will work. Now, do you want to grow that system? Yes. And we can start buying houses. So I’m going to be way – I am guy that lost millions of dollars. I had 200 million dollars in real estate, lost it all. Everything went 200 million dollars in the hole, so I’m going to be conservative. The other guys are going to strap on their six guns and say, “Let’s go to the auction.” They’re gun slingers. I’m just a very conservative investor. I buy houses, but I want to try to get them 20 or 30 cents on the dollar. I compare that with the foreclosure market or a bank repo market. I’m way under those guys. So who do I want to sell to? That’s who I want to sell to. If I can’t, I want to sell it to the fixer-upper guy.

Danny Johnson: Nice. Right. So basically, you’re wholesaling those properties over too, right?

Ted Thomas: If I can. I always continue to do that. So I have to be prepared to fix them up too.

Danny Johnson: Why do you think it is that the numbers—? Or when the deals are different between the tax liens, the tax deeds versus foreclosures, why do you think it is different that there’s not as many people going after them?

Ted Thomas: It’s just an educational process, but don’t think that there’s not a lot of people. There’s plenty of competition in both markets, but foreclosure is so well known. Now, I’ve written books about foreclosure and they’ve been bestsellers. There’s nothing wrong with the foreclosure market, but you’re going to have to pay in the foreclosure market today somewhere between 50% and 70%. Some people I understand pay more than 50% and 70% to make a profit. We’re going to try to buy 20 and 30 cents and then make a profit from there. So that’s what the big difference is. And it’s just a matter of learning it. In your life or mine—and you’re considerably younger than me—in your life or mine, there’ll never be a shortage. Because in the United States, there’s 100 million properties. Between 2% and 3% are going to tax default every year. Now, 2% or 3% of 100 million is 2 to 3 million. So 2 or 3 million properties are going to go every year into default. So there’s plenty for everybody. You’re never going to find a shortage. There’s always going to be there.

Danny Johnson: Like you said, that one auction for that one county with 300 and something properties—how do you narrow down which ones you are looking at bidding on?

Ted Thomas: You’re making money in the business of buying it, but you better have a market to sell it. Every city you can find a part of the city that’s not very good. What people do is they think they’re going to buy a junker and suddenly make it into a palace. That’s not going to happen. So I tell people, “Find where there are good neighborhoods. Buy the neighborhood. Don’t buy the house.” Buy the neighborhood first because you can fix the house even if you had to bulldoze it and put a modular. You bulldoze it and rebuilt it. So buy the neighborhood first. Just to slow down and find those.

There’s always a part of the country going through an economic upheaval. So past 10 years, Phoenix has been upside down as an example. But Phoenix in the last 18 months has comeback by like 50%. Now, my numbers are probably inexact but they really come soaring back. And Phoenix will always be good long term. But short term, they overbuild. They massively overbuild Phoenix and then it goes into a slump. Then they come back and do that. Las Vegas is the same kind of market. So you’ll find that wherever you’re going. If you want to come to the East Coast, you’re going to find the same kind of thing at Miami or at Fort Lauderdale or at Jacksonville. They’ll overbuild and then they’ll come back. So you need to just think about a little bit about market timing. That’s what a person needs to think.

The way investing is depicted on television is you buy, you go in there, and start tearing walls down. You put roofs on, you fix this, and you’re rich in two weeks. You’re not rich in two weeks because you’ve got all your money sunk in that house and you’re going to have to wait until it gets sold before you can do the next one. So it’s not easy.

Danny Johnson: We teach to be pretty conservative as well and you do make your money on the buys. So to make sure that you build in enough room for profit mistakes to where you still have some profit when you make those mistakes because everybody will and does make mistakes. So I think we’re okay on there. But you personally like whenever you were looking for the ones that you—so you’re buying all over the country. You weren’t really focused in your backyard. You are buying more. How are you even determining which markets you are interested in buying these in?

Danny Johnson: Well, I can’t buy my backyard anymore because I’ve been doing the same thing for 25 years. Everybody knows where I am. So they’re at the sale. I meet them there. I did a three-day event in Phoenix and all of a sudden I got all these guys in my backyard. So wherever Ted goes, they’re going to go. So I don’t tell anybody where I’m going until I bought there a few times. But there’s plenty of markets to look at.

So what I look at is I look at what is the economy of that area, what is the reputation of that area. And once I’ve got that, I say, “All right. What can I do for the future? What’s available?” So I’ll get all the auction information. Let’s use New York again because that’s 1500 miles where I’m talking right now. I will get many different counties. So there’s going to be like 60 counties in New York. So I say, “Wait a minute. Do I want to get involved in farm properties where there are open land? Or do I want to get stuff within 100 miles of the city?” Because people there will commute for long distances. So I find places that there’ll be a lot at the auction. I just joined an auction that had 300. The same auction last year had 550. So there’s an abundance there. So now I know if I go to the auction, you might be there and I recognize that fact. But once you’ve used up your quarter or half a million or whatever it is you’ve got, then okay. Now, there’s going to be something for me. I’m a patient investor. Now, it can happen to the other one. That last auction I went to was two days. Now, on the first day, nobody was bidding so I got both of my properties before 11 o’clock in the morning and I stayed all way until five and they had it auctioned all the next day. On the next day, all the properties went for 40, 50, or 60 cents on a dollar. So everybody showed up the second day. Don’t ask me why. You just have to be a patient investor. And I did that sitting at my desk here in Florida. I did the whole thing online.

Danny Johnson: Nice. So what is the process then for registering for the auction? Do you have to show proof of funds or anything? How does the whole process work for bidding in these auctions?

Ted Thomas: I’m really glad to hear you say that because you said proof of funds, so you’ve been going to foreclosure sales and you do have to do. Believe it or not, at a tax sale, they don’t ask for proof of funds. I’m shocked. But now that you know that, it your tells me a sophisticated investor. So here’s a good strategy for you. Go to the auction. Register for the auction. Have your funds available. And they’re going to require you to make deposits or something like that. Watch the auction. What they will do at a tax auction is they will sell the property. If the money isn’t there—in other words, it’s not coming through in a credit card or the money isn’t moving to the auctioneer immediately, if it’s not immediate, they’ll re-auction the property and within minutes. Now, if you made that bid, I can tell you right now the sheriff is coming to get you. If you made the bid and you don’t produce, the sheriff will be there. If you’re at the auction, he will physically pick you up if they have to and two sheriffs will action. You make an exit, and you’ll never be able to go back. They’re serious about it. They try to scam the auction. You’re not going to scam them. If you try to scam them, you’re going to have a visitor.

Danny Johnson: So do you have any strategies for people that maybe don’t have that amount of cash? Like you said, you’re finding some things at 20 to 30 to 40 cents on the dollar. I don’t know. Do you teach any kind of investing strategies were you partner up with people or anything like that?

Ted Thomas: In the old days, I used to do a lot of partnerships. But you’re a real estate guy. You understand this. Let’s say you did a fixer-upper. You get it all fixed and then you show them the picture. You got all fixed and now we’re going to put it on the market. They expect it’s going to be sold at—it’s like television. Thirty minutes later, it’s going to be sold. You might take three months to get it sold, right? And they call you every day. I don’t need all that. I got enough money and I live in a paid-for house and paid-for cars and stuff. I don’t want them anymore. They call me, and I say no.

Danny Johnson: So it’s doable, but you’ve got headaches to deal with.

Ted Thomas: Well, I think anybody can learn real estate and do an admirable job and make a good living for the future. I think what people have trouble with is when people start saying, “Why isn’t it done? Why isn’t there?” Constantly questioning you. So a real estate investor in the world, you could be the Warren Buffett of real estate, but you can’t tell me when that property is going to sell. You just can’t tell me. The market just is the market. And in some days, the market is: We have four investors today who wanted property, and tomorrow nobody will even talk to you. It’s just the nature of the beast.

Here’s what the small guy can do. I bought two properties last week to give you the perfect example. One property had the value, round numbers 200,000. I paid 40,000.

Danny Johnson: Nice.

Ted Thomas: Now, the other one came up surprisingly a few minutes later. The other one was a mountain cabin surrounded by pine trees. It looked good. It’s a little cabin. The value was only 45,000. The auctioneer couldn’t get a bid. He couldn’t get a bid, so I pushed the button at 5000. Sold. So I paid 5 grand. Now, that isn’t probably the best investment I ever made because what am I going to sell it for? I’ll probably sell it for 20,000 or 25,000. It’s a month’s pay. Yes. So you don’t know. But if you have money and you did your homework, you’re going to make some money in real estate. If you don’t do your homework and you’re not prepared, I’m sure you’ll teach the same thing. You got to be prepared.

Danny Johnson: So with the difference again with the tax lien certificates and tax deeds, now when they—now when we’re talking about these auctions, we’re talking about the deeds, right?

Ted Thomas: Yeah.

Danny Johnson: And then from the tax lien certificates, what happens when the homeowner doesn’t pay?

Ted Thomas: So let’s take a state that sells tax lien certificates like Arizona. So in Arizona, they will have—let’s take Maricopa County, that’s Phoenix. Now, Phoenix will have a low of 20,000 certificates to high of 40,000 every year. Ten 10 years ago, they weren’t online. Now, they’re online. So they’ll put the certificate number up there, they put pages up there, and people can bid on the certificate. Now, a certificate in Phoenix, the most it will pay is 16%. Every bid after that will be less, 15-1/2, 15, 14-1/2. It will go down. You got a non-sophisticated investor. That investor is going to jump in there and try to bid 16. Someone is going to go to 14. Those certificates are now being bid down to 3% and 5% and in some cases lower. But in a 1% market, 5% is pretty good, 1% market.

There are ways—and it’s too complex to do in this short call that we—there’ll be leftovers, and they’ll buy the leftover certificates. So I teach people, “I’ll show you how to get the 16% every time or the 18%, whatever it is in that state.” So those certificates are safe and secure. That’s the beauty of the certificate. Most of the people that come into the business, if they’re older, if they’re 45 to 65, they’re looking at those certificates pretty close for an IRA or 401k and they know they’re going to paid if you’re doing real good, not a lot of work to do. The other side of it, the younger guys coming, they’re really eager beavers. They want property, so they are a lot more aggressive investors. Getting those people to be a conservative in somewhat of a challenge because everybody just thinks you’re going to get rich instantly and it’s not that kind of business.

Danny Johnson: So what is the strategy for them then? Because I guess what you mean is they’re going to bid for the lower rates to be able to pick up more of these certificates. And then, what is their strategy at that point?

Ted Thomas: There’s two strategies taking place here. One: They’re conservative investors. They just want to protect their money. So if they’re buying 3% and 5% certificates, they’re happy with that. They’re happy with that kind of return. They know they will not have to worry about it. They know they’re going to get paid from the government, and they know they can buy as many as they want. So you see, like a hedge fund, they’ll come and buy 10,000 certificates. Really bad mistake. I know it is because what happens to the ones that don’t pay? What’s the hedge fund going to do with the property? It’s a negative on their balance sheet. It’s a negative. So they will have to form another company to spin those off to and then they’ll sell the company. It’ll spin them off. But the person that’s buying tax certificate is more than likely a conservative.

Now, for the young guy that really want to do the work, what they can do is they can find out about the leftover market. And the leftover market is another whole market which they can buy the certificate and you buy it over the counter. You’re not in a bidding situation. That can be an aggressive market with high returns. Now, keep in mind, we talked about 16%. In Florida, it’s 18%. If you buy in Texas, you make 25%. So there’s huge numbers to work with.

Danny Johnson: So what happens if you buy the certificate and then the homeowner fails to make the payments on the tax lien certificate? What happens typically with those?

Ted Thomas: Let’s use Arizona so we don’t confuse people. In Arizona, you buy the certificate for this year but the certificate can come up again next year. So Arizona will allow them three years of defaults. At the end of the three years, you can just do the foreclosure yourself or you can hire an attorney for 750 bucks and they’ll—foreclosure is nothing more than paperwork. It’s not like you have to go remove people from property or anything like that. You send notices and then you take over the property. It’s all done. Actually, you can go to websites and see how to do the foreclosure nowadays.

Danny Johnson: So there is a way where you might have a point where you’re not receiving these payments and it could be something that’s dragged out over three years then? It just depends on the different—

Ted Thomas: That was a good question. First of all, you’re not going to get payments. What you’re going to do is you’re going to buy a certificate. No money will come back to you until the people pay the tax. No money comes back because people have to pay the tax for the government to have the money to pay you. So if the people pay the tax, then what you’re going to do is you’re going to pay the local government, the county. The county will say, “Send the certificate.” So you just send the certificate then you get your check.

Danny Johnson: I see. What is it called? Right of rescission? There was even movies about it where people have the right to pay something. I don’t know if that’s what the tax deeds are or what but where they have the right to pay off after they lose it. They even have the right to be able to pay it off with a high interest rate to get the property back. Is that—?

Ted Thomas: That’s really not anything that’s commonplace. Let me give you two examples of that. And first of all in California, when you go to the auction, when the gavel comes down and it hits the table, you own the property and there is no right of rescission. There is no right. You have lost your right as of that minute. Within 90 days, you’ll have a deed in your hand. You’ll have the deed and no one is taking that baby away from you. You’re going to own that property. You better get insurance on it. You better make sure it’s cleaned up. You better expect the guy is going to show up and say, “You haven’t cleaned up the yard. You get it cleaned up.” If you got violations, you better—it’s your property.

But right of rescission. Let’s talk about that. Let’s use Texas to use as an example. In Texas, they auction what they call “tax deeds.” Now, that deed is a redeemable deed. I didn’t say rescission. I said redeemable. So what happens is I buy the property in Texas. They give me a deed to the property. I take it home. I just put it on my desk and don’t do anything. I live the people in it to do whatever. Anytime in 180 days, the property owner can come back and pay 100% of what I paid plus a 25% penalty and then they get it back. So really a tax deed in Texas is just like having a tax lien. It’s redeemable.

Danny Johnson: That was the question I had. So you’ve got to wait before you really want to do too much.

Ted Thomas: Well, if you do anything in a property—and there’s five redeemable states like that. Rhode Island is one. The other two I don’t remember. Georgia is another one. Anyway, if you do anything on the property, keep records of what you’re doing. Like if you had to go fix the roof, if you have a leaky faucet and flooded kitchen, whatever you do, take care of what needs to be taken care but keep records of what you’re doing and that will have to be paid to you also.

Danny Johnson: So anything you spend would also—for improvements.

Ted Thomas: Right. But in Texas, you should know if you drive around, the pickup trucks got guns in the back window. So don’t go kicking anybody out of properties. Not a good idea.

Danny Johnson: We’re a little bit more careful here. For years, I’ve noticed when buying properties—because we do market directly sellers to sell their properties to us. That way we then fix and flip. And I have noticed over the years, there have been times where I’ve noticed that people had loans for their taxes. People get all this direct mail from these businesses and companies that want to loan people money to pay their taxes with. And so, those loans that these other companies are making to people, this is before the default, right? Because it’s like they owe the money but it’s not defaulted yet and so they want to loan them this money. Are those loans then also in a better position than any other loan on the property because that was a loan for their property taxes?

Ted Thomas: No. They’re not in a better position. First of all, the first lien is always going to be taxes. The subsequently liens are going to be whatever they are. For example, if it’s the first mortgage or second mortgage and an IRS. Then whoever comes after that, they could put their lien but they’re in sequence.

Danny Johnson: The fact that it was paid for property taxes though doesn’t have any bearing. It was just a loan to them. They could spend that.

Ted Thomas: They don’t get a preference. It’s always in the order of who was first and there’s no way you’re going to get it from the county because the county, the day they draw the map, they gave it a tax number. That day, that property now has a number. And first in time is first in place.

Danny Johnson: So just loaning somebody money to then pay their taxes is not going to give you the same benefit as if you had bought that lean from—

Ted Thomas: Yeah. It’s high risk investment. No doubt.

Danny Johnson: That’s interesting. I never knew how it worked. I never bothered to really look into it, but we don’t really focus on all of those things. But after talking to you, I think I want to do a little bit more research and maybe get into your training and see if we can find how to take advantage of—

Ted Thomas: Well, you’re in a good area because you’ll find—see the beauty of Texas is if you go to the auction, you raise your hand up, and you bid, if you get that certificate, you’re going to either make 25% on your money which is what’s wrong with that? How many deals have you made that you didn’t make 25% on, right? So you’re either going to get 25% or you’re going to get the property. And how bad can that be? So I’m a big advocate. As a matter of fact, we just had nine couples go through the auction in Dallas and what’s one right at Southern Franklin and Collin counties. Those are all right around Dallas. So you’re in an area where you’re going to 25%. That’s the beauty of Texas. You’re going to find every county—there’s 250 of them—have an auction the first Tuesday of the month every month. How good is that?

Danny Johnson: Yeah, it’s nice. So what are some mistakes that you’ve seen newer investors make? Or is there anything that maybe you can talk about that maybe people should avoid that are common things that you see people having trouble with or making mistakes or anything like that?

Danny Johnson: This isn’t going to apply to you because you’re a professional, but it applies to your student because—let’s say you buy a property and you fix it and you basically call it a flipper and move it and you make a nice profit. You deserve all that because of your knowledge. You deserve all that because of the investment you made. So the investor—this the big mistake they all make—that doesn’t look hard—you really don’t look like you’ve been working very hard to me. You’ve just been kind of laid back. That’s how the investor thinks of you. However, here’s what the investor does. They think—because they went to one class—that they’re ready to go, and they’re going to stop bidding. So if you do this offline, you’ll notice there’s one set of people in the room and that’s the place to be if you can then you’ll notice online the bidding goes higher. And so the big mistake is they haven’t looked at the property. Now, when you look at a property, you have a critical eye. You can see a crack. You can see a bad roof. You can see where the hill has been hitting that roof. You can see the foundation is slanting. You can see that there’s a water problem. You can’t see any of that online, and so they bid these things high.

So I told you a few minutes ago and I’ll just back up what I’m saying. So the second day of the auction, I could see some new bidders came and I saw some new names coming up on the screen. And I couldn’t believe some of these people are bidding 60% or 70% and they were bidding against each other on the Internet. Who do you know who you’re bidding against? You don’t know. So the mistake people make is they paid too much. It’s the same as your business in doing flipping. There’s another guy that’ll pay 350 and you say, “There won’t be a dime over 225 for that.” Because you see something, but then you don’t. So on the Internet, those guys get themselves in trouble. Now, the county does not mind at all.

Danny Johnson: It’s what they want.

Ted Thomas: “Nice. Just bid it up. We’re going to keep the money.” They’re going to have a grand all the time. So the biggest mistake is people pay too much. And despite how good you are or how good I am, I don’t make every deal perfect. I don’t do it. There’s once I get in there and, “Oh my god. We’re going to have to spend 60 grand on this house. I thought we’re going to have to spend 25.” I’ve done it. Anyone says they had is just making a story. You get the idea.

Danny Johnson: It happens. That’s why you always have to be conservative and never start having that logic enter your brain that, “Well, I can do the rehab cheaper. And so maybe I can bid up more and do that kind of thing.” So when you were talking about online versus in-person and they were bidding against each other and they didn’t know who they’re bidding against, sort of like two new people don’t know what they’re doing, bidding against each other, thinking, “Well, that person must see the value because they keep bidding it up.” But they’re both doing against each other. Whereas in person, if you’ve been going to the auction long enough that you see who kind of has been in business for long time who knows what they’re doing and you see them bidding it, then that’s where you kind of say, “Well, this guy knows what he’s doing, and it’s not somebody that’s new here.” Is that what you meant by that?

Ted Thomas: Yeah. That was a good analysis. I think you would have a sense for it and I would have a sense for it. When a guy says, “Thirty-three thousand,” and another guy said, “Thirty-three thousand,” they’re two different people. The guy that knows what he’s doing is going to be strong in the room. He’s going to stand up. He’s probably not hiding at the back table. He’s probably sitting up. He’s got his bidder’s card. He’s ready to go. He came there for a reason. And if you didn’t know, why not go to two or three auctions and learned that. Just learn that one thing, but you can’t do that online. And so I told you I bought online, but I got to tell you. Before I bought online, I went to New York and I visited all the properties I want to bid on. And I looked at 40 properties. I have pictures of them, and I sat. I’m looking at you right on a screen. In front me is the screen. To my right is a big iPad, the big one, and I’ve got a picture of every property I’m going to bid on. Now, they’re showing me a picture of the property but I’ve got my own and I’ve got—Zillow said this. Somebody else said that. This is the value. And I’m looking at three different screens in front on me while I’m bidding online. I’m just watching what’s going to happen. Now, I only bought two of the 300. Now, I had money to buy more than but there’s another auction. There’s going to be 5000.

Danny Johnson: Smart. And I’m glad you said that because it’s like you had mentioned before. People hear about, “I got online. I did this auction online and bought two properties.” But the part they don’t hear is all the legwork behind the purchase of those two properties even though that was bought online. There was a lot of legwork, a lot of research, a lot of studying, analysis, and work that goes into it. We all do it. Like you said, when people hear us talking about flipping houses and they see the TV shows. There’s so much more. It’s not an overnight success. It took time to learn all of this and make mistakes and that’s why training is so important, especially from people that have done it like yourself for so many years. But is there anything else that you want to share before we end this the interview?

Ted Thomas: Yeah. Well, first of all, I want to thank you for having me on. I hope we get educated people a little bit. And if any of your people like to work with us, they can contact you and we can reconnect and find a way to help them. We do everything from just basic classes. Obviously, everybody’s got stuff on the Internet, but you’re not going to get rich in the Internet. Biggest thing I could tell, get a mentor, get a coach, get someone to help you. Put 10 grand in another deal, whatever it takes to you learn how to do it right. And then, go with those people that know what they’re talking about. This is not a business for amateurs. Unfortunately, a lot of people come in as an amateur and they lose a lot of money.

Danny Johnson: That’s good point. And so people can find you on your website at tedthomas.com. Is that right, tedthomas.com?

Ted Thomas: That’s right.

Danny Johnson: And I’ll have that on the show notes page. If you didn’t have a chance to write that down or anything, if you remember flippingjunkie.com/81, we’ll have the show notes with the key points from this episode along with that link to tedthomas.com for Ted Thomas. It should be pretty easy to remember for that one now he’s got a good domain name with his own name on it. Thanks again for taking the time to share with us today.

Ted Thomas: Good to talk with you. Good luck.

Danny Johnson: Yup. Thank you.

Ted Thomas: Bye.

Danny Johnson: Bye.

Ted Thomas: Thanks again.

Danny Johnson: All right, everybody. Thanks for tuning in for another episode of the Flipping Junkie podcast. I really enjoyed that one. It’s an aspect of investing that I really know very little about, so it’s great to get in there and find out more and hopefully ask some of the good questions that maybe you had or you were thinking about as we were talking about it. But just another note that if you haven’t joined the Flip Pilot Facebook group, I urge you to do so. Just go to flippilot.com and you get an invitation to that closed Facebook group. It’s been a great resource for a lot of people getting in there, communicating, helping. And the goal of it is to be able to have more than 30,000-foot view of your flipping business. And with that said, what I mean by that is working on building your business as more of a business with setting up a team to help you out with your flipping so you have more time to do the things that you want to do and that’s what we’re all about. And that group is helping with resources and helping people to be able to build those teams around them, to flip houses and get more information about what works and what doesn’t. So join at flippilot.com. You can get that invite to the closed Facebook group. You can also just look up Flip Pilots [music] on Facebook and find and request an invitation there if you like. Thanks again for tuning, and I’ll see you next week.

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