JF1198: Tax Lien & Tax Deed Investing Nationwide 101 with Ted Thomas
Ted lost everything early on in his real estate investing career. After that he wanted to find a way to continue investing in real estate, but minimize the risk. That’s when he discovered tax lien and tax deed investing. Now he still invests, but he also teaches others to do what he does. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Ted Thomas Background:
– Organization is the single largest “Source” of Tax Lien Certificate & Tax Deed Informational Products in the World
– Has sat for more than 200 radio and TV interviews, most recently on ABC, CBS, NBC and Fox
– Go-to guy when people want to discover how to invest in secure government certificates that pay 16% and 18%.
– Based in Merritt Island, Florida
– Say hi to him at: www.tedthomas.com
– Best Ever Book: The Art of War
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff.
We’ve spoken to Emmitt Smith, NFL Hall of Famer and real estate developer, Barbara Corcoran from Shark Tank, Robert Kiyosaki (Rich Dad, Poor Dad), and a whole bunch of others. With us today, Ted Thomas. How are you doing, Ted?
Ted Thomas: I’m doing fine.
Joe Fairless: Good, nice to have you on the show. A little bit about Ted – well, his focus is tax liens and tax deeds, and investing in them. He is based in — is that Merritt Island, Florida? Did I get that right?
Ted Thomas: That’s right, yeah. Everybody know what that is; that’s where the space center is.
Joe Fairless: There you go.
Ted Thomas: You can sit in my swimming pool and watch a space [unintelligible [00:02:46].28]
Joe Fairless: There you go, that’s pretty cool. And you can learn more about him at his website, which is TedThomas.com; that will be in the show notes. With that being said, Ted, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Ted Thomas: Sure. My first career was as an airline pilot, then when I found out how much money I could make in real estate, well, I changed all that real quick and I resigned from the airlines, and I started a real estate business. I was in the apartment business to start with. With investor money, we built a business up to a round number – 200 million – and I was doing very well. Then along came 1986, and that was the first huge real estate recession in the country – they have one about every ten years – and it massively changed the market in that the market went down about 70% or 80%. I had 2,000 apartments in Phoenix, and another 2,000 over in California, and we went bankrupt, we lost everything. Everything.
From there I decided I was gonna get in a business that didn’t have a lot of risk, so that’s how I got into the tax lien certificate business and tax-default property business, and I’ve been at that for well over 20 years. I’ve been teaching it, and I’m a practitioner. I teach it all over the world; I teach it in Singapore, I teach it in Australia, all the provinces of Canada… We even do Bangkok [unintelligible [00:03:58].20] People there wanna learn how to do it too, because we teach them how to do it on the internet.
So that’s a great business, it always makes money, it doesn’t lose money, and it gets you out of the recession of real estate going up and down all the time.
Joe Fairless: Always makes money, doesn’t lose money – usually, when I hear that I wanna run the opposite direction because it sounds too good to be true… So help me understand that.
Ted Thomas: Good perception on your part. When they sell tax lien certificates — first all, here’s what a tax lien certificate is… Every property in the United States has a tax; it doesn’t matter whether it’s an office building, a home… Anything that’s real estate has a tax on it; it’s called a property tax. In half of the states if you don’t pay your property tax, they issue a tax lien certificate.
Let me give you some comparisons here now. Florida, when they issue tax lien certificates, they issue them on people that didn’t pay their tax. A certificate in Florida, if you go in and pay someone else’s tax, they give you the certificate; now you own a certificate on that property, and that’s a certificate that’s issued by the government, and pays up to 18%. If the people don’t pay the certificate, you get the property. If they do commit and pay their taxes, then you get all your money back, plus up to 18%. Texas pays 25%. A place like Virginia, they sell tax deeds… All different states. So different states sell either tax lien certificates, or tax-defaulted property.
If you’re based in Cincinnati, Ohio is primarily a state where if the people don’t pay their tax, what the state will do is they’ll tell the county, “Alright, we want you to confiscate” – that means they’re gonna seize that property and they sell it for starting bid, back taxes, with no mortgage.
So there’s two businesses in one – one is tax lien certificate. The only way you can buy a tax lien certificate is you give your money to the government, you get a check back from the government. That’s about as safe as you’re ever gonna get. The other business is buying tax-defaulted properties for 10 cents, 20 cents, 30 cents on the dollar with no mortgage. That’s what’s exciting for people. If they’re entrepreneurial, like your clients probably are, they wanna be buying tax-defaulted property; the starting bid is usually the back taxes. A place like Los Angeles will have 2,000 to 4,000 properties — just one county, not the state… They’ll have approximately 2,000 properties at every auction, all starting bids are at the back taxes. That kind of gives you a nutshell view of what that business is. It’s been around for 200 years. Anything that comes out of my mouth is 200 years old.
Joe Fairless: The 20%+ you mentioned Texas does – that is on a tax lien certificate? Is that correct?
Ted Thomas: It’s called a tax-defaulted property, and they issue a certificate. You actually get the deed in Texas, but it’s redeemable at the client. So you get a deed to the property, the client comes in and pays, they have to give you back all your money that you invested, plus 25%, and they have to do that within 180 days. If they don’t do it within 180 days, then you get the property.
Joe Fairless: Got it. All the money you invested plus 20%… Is that annual return, or is that in total, so if you have it for five years, then it would be five years divided by 20?
Ted Thomas: Well, you wouldn’t have it in five years. Every state’s gonna be different. I’ll give you some numbers now, but the only way you could learn this is you have to learn it state by state. Let’s stay with Texas, because you picked that one… Texas – they will issue a certificate that’s redeemable by the person that owns the property. So if I went in and paid the taxes on Ted Thomas’ house in Dallas, and I paid $5,000, then what would happen was I paid the tax, I got the certificate… Sometime in the next 180 days, it doesn’t matter which day, but any day they come in to pay, they have to give me back my $5,000 plus 25%.
Each state has its own rules, and that’s because when they first started the states with the colonies, and as they went across the country the states came at a different time… If you know Texas it doesn’t mean you know Florida; if you know Florida it doesn’t mean you know New York. People can buy these now — I’ve created courses… We actually could sit wherever you’re sitting now, in the studio or your kitchen table, we can buy it from there online.
Joe Fairless: What state offers the highest return on the tax that you pay initially for the person who’s defaulted?
Ted Thomas: The highest for a tax lien certificate is Illinois; they pay 3%/month, or 36% annualized.
Joe Fairless: So if you are an investor and you’re doing this, why wouldn’t you just focus on Illinois?
Ted Thomas: Well, you could if you wanted to, but people are provincial. They like to do things in their own place. People in Texas love to buy there, people in New York like to buy there… I just happen to teach all the United States, because what I wanna do is create home study courses where people in Singapore can sit on their computer and they can buy here in Florida.
I live here in Florida, and I like to buy in New York. I bought seven last year, and I’ll buy another six next month… So I buy there. But in New York they actually sell property. I’m an entrepreneur, so I wanna buy the property as close to back taxes, whereas a lot of people are conservative, which is good…
A conservative investor wants to start out buying tax lien certificates. So let me review that – the tax lien certificate, when you buy it, you give your money to the government and you’ll get your money back from the government, or you’ll get the property, one or the other.
Joe Fairless: And then the tax-defaulted properties, that’s where you go in the bidding process, and the starting bid is usually whatever the back taxes are…?
Ted Thomas: Right, they’re usually just the back taxes. And it’s always a bidding process. You have to bid on a tax lien certificate. Everything you have to bid on, because it’s a government sale; it’s always government.
Joe Fairless: So you bid on the tax lien certificate too, you said?
Ted Thomas: Yes, tax lien certificates you bid on, like a state like Florida… Florida, 18% is the maximum. Okay, so Joe wants to buy and I want to buy; we will both wanna buy the same thing. So it’s a shopping center, and the tax on it is 100k. So you say, “Oh boy, I wanna place 100k at 18%”, which will be a good percent when the banks are paying 1% or 2%. So you bid 18%. He says “I’m not gonna let him get it, I’m gonna bid 17%.” You get mad, so you bid 16%. Some people bid all the way down to 4% or 5%.
Joe Fairless: Okay, got it. And depending on the asset that’s [unintelligible [00:10:13].27], that would influence the bidding process, too…
Ted Thomas: Right, right. There’s literally millions of these. In the state of Florida they will have one million certificates every year. One million.
Joe Fairless: Going on that example with the hypothetical commercial property you referenced – do you have access to historical financials of the property when you’re bidding?
Ted Thomas: No. We have access to every property in the United States; in round numbers, there’s a hundred million properties. We have access to every one of those through the county. Our databases are set up, so using a simple thumb drive, we can plug into every county and that takes us to every property, but the property tax assessor – the only information they hold on the property is a description of the property, and then any liens or encumbrances on the property. They don’t put in any financial data.
Joe Fairless: And what due diligence do you do prior to making a bid? You can choose to answer that either with tax liens or with tax-defaulted.
Ted Thomas: Well, I’ll give you an example. Last week I was in New York and the particular county that I’m gonna go to – I won’t tell you that, because I don’t wanna create any more competition, but that county has 300 properties which they will auction in October. So I download all the listings so I can see them; in some cases, if the county is really up to speed, they’ll even have your pictures on there. Or if they’re using an auction company, they’ll have pictures. If they’re low behind, then they won’t have those. So I get that first, and then I choose the ones I wanna look at, and then I either go myself or I send my crew, and we evaluate every property before we bid on it. We’re not ever the high bidder, we’re always the low bidder. We’re really in a business, and that’s what we teach – we teach people to get an outcome; not get the property, get an outcome (how much money do you wanna make?).
So we look at all those properties. Of the 300, we’re not gonna bid on all of them, but we’ll bid on about 10% of those, and we like to buy at 20 cents on the dollar if it’s a nice colonial house, or something like that — I don’t know if you know… Well, you’re in Cincinnati, you know – big, four-bedroom, two-bath, on a couple acres; we’ll bid more on some of those, because we can tidy them up and put them back out into the market… But we usually sell to fixer-upper people. Our business is set up so we buy it low and sell it low. We really like to buy them, because we know how to do that. The marketplace does not know how to do that. 80% of the people at any auction have no idea what they’re doing. They’re just bidding… They think it’s gonna be a deal, they overpay… People don’t wanna get an education, they’re too lazy, so they’ll show up at an auction; if there’s 300 people there, 20% will be bidders, and 20% of those will know what they’re doing. So it’s kind of an unknown business. There’s a lot of secrets people just learn by studying, but they don’t do that.
Joe Fairless: Specifically you said you download listings, then you look at pictures if they’re available, and then you said you choose the ones you want to look at… How do you choose the ones you want to look at?
Ted Thomas: Well, you go through a process of looking at a lot of things. First of all, we’re gonna know the county a little bit – I won’t go through all that, but if the county’s got a massive out population and there’s a lot of poverty and they’ve closed down all the businesses, well that demographic and that psychographic is gonna make a difference.
For example, I like to buy within 150 miles of New York City, because that’s commute distance there. So I look at the county, I look at the property, and then I look at the marketplace around it; how many are for sale – that’s really easy to find out – and I look if they’ve got a brokerage community that is active or inactive, and then we get in a car and we actually go there and look at it.
In some counties, they’ll actually let you walk on the property; rarely can you get in. In certain counties you can get in the property, but most you can’t get in. A person needs to learn to keep their bidding low, because sometimes you walk in a property and the ceiling is caved in, or they’ve had a roof leak, or… As you know, in Cincinnati it gets cold, so places like anything North, if it hasn’t been winterized, the house could be ruined.
Like, I buy in Cleveland in Cuyahoga county – I’ve been in houses in Cuyahoga county that had a foot of ice in them; a foot. So you can’t buy that house. If you buy that house, you’re gonna have to tear it down.
Joe Fairless: So the way you could lose money is if you pay too much at the auction and you come across something like you just described, and you can’t sell it back – even the dirt – for what you paid.
Ted Thomas: Yeah, you shouldn’t pay any more than the dirt, or a little bit more. Now, I’m not a fixer-upper guy, so I’m gonna be super conservative and I teach that. The fixer-upper guys will buy those, they’ll drain all that water out of it, they’ll clean it out and dry it out and pick up those hard wood floors, but they’ll have to replace sheetrock and whatever, because water does a lot of damage if you have broken pipes and what have you… Especially if they’re upstairs and it drips down.
So the best way to explain it is it’s an abundant world; by that, I mean – most people don’t know this, but there’s five thousand tax auctions every year. Five thousand. I don’t think I’ve ever seen one with less than 25 or 30, but some have thousands of properties for sale. This is a big business, people just don’t know about it.
Joe Fairless: Why do you look for an active brokerage community? Is that for the resell?
Ted Thomas: Yeah, for resell. I’m looking for a brokerage community because I know enough ways to sell using Craigslist, eBay, and all the different electronic sites and so on. But the average person that I’m teaching to do it, they’re gonna learn the tax lien business, but their weakness is always gonna be — and I’ve been teaching it for 20 years, so I know that the weakness of the market is sales. They’ll buy right, but then they don’t know what to do, they make a mess of it, and they end up holding too long, and next year’s taxes come, and then people get in the house and do more damage or whatever… So I’m always looking to see if there’s [unintelligible [00:15:45].21] on the market last Saturday, and it’s only one of 27 in that part of the county, in that township; it’s one of the 27, and there’s 72 brokers. I love it, I love it!
Joe Fairless: Wow. You mentioned the last part of the process is to evaluate the property before you bid on it, and you bid on 10% of them. What about those 10% from a numbers standpoint? Is it they’re all 20 cents on the dollar, or is there something else on top of that?
Ted Thomas: There’s quite a bit on top of that. First of all, when I say I’m gonna try to get 10%, if I look at an auction list of three hundred, I’m probably only gonna choose about 30. You don’t wanna try to choose everything on there, you’ll never get anything done. My point is it’s abundance; there’s gonna be too many.
The amount of properties available are way too many. You cannot handle it, and if you’ve got hedge fund on there, they can’t handle it; there’s too much there. So I narrow it down to what I think is gonna be the best ten that I can resell. I’m only interested in reselling. I don’t buy them to rent them, I wanna resell. So I only look at properties that I know I can resell, and then if I’m gonna buy that property, and it’s worth in the neighborhood of a 400k, a 600k, and now I’ve got this auction property… So I look at it and I say, “Will that thing bring in somewhere around 400k?” If it would do that, do I wanna bid 10%? Sure. Will I get it? No, because there’s gonna be someone else savvy enough to bid more than that. But I know from going to auctions for 20 years very few people will bid over 50k for anything, and it’ll be down to two people in the room when it gets to 100k, so I’m prepared to go to six figures, because if I can a $400,000 house for $100,000, I’m buying it right now.
Joe Fairless: How does the process work when you’re doing the bidding? Does it vary based on county?
Ted Thomas: Most of the properties — on tax liens there’s over 100 different ways to bid on tax lien certificates. Some of them are up, some of them are down, some of them are sideways; sometimes it’s percentage of property. But tax-defaulted property, that’s what the entrepreneurs want – property that they can get cheap. That’s generally starting out real close to the back taxes, and then it’s just a battle of who’s gonna do a good job, or what you ended up in the auction round.
Now, if there’s three or four hundred properties, I can tell you it’s probably gonna take a good auctioneer two days to get through it. So the first day — simple strategy, you’ll figure this out in ten seconds… Everybody’s crazy to buy on that first day, right? And then the second day nobody’s there. So you’ve gotta have some staying power, you’ve gotta say “Alright, well that one came up first, so I probably won’t get it, but number 72 I’ve got a good chance…” It’s not like betting on horses, but you’re getting the idea. You’re gonna have to think it out. We have auction classes that last three days; we’re taking people all the way there. Now, we can’t be in the auction room when they’re bidding, because the county [unintelligible [00:18:32].25] won’t let us, but we teach them how to do that before we go. They practice in a room, in a hotel, they practice all that, and then they go there, and — we’ve had people six of them go, and six of them get a property; now, that’s the best. We’ve also had six of them go and none of them got a property… So you get the idea.
Joe Fairless: Based on your experience in this space, what is your best real estate investing advice ever?
Ted Thomas: Buy low and sell high, that’s easy.
Joe Fairless: Well, you buy low and sell low, though. I do, because I have a different strategy; I’m a strategist, I figured that out a long time ago. I wanna sell to all the guys that are on your podcast. They wanna go fix it up, they wanna go do all of that stuff; I don’t wanna do all of that. If I have to — I don’t wanna hire the crew; I just wanna get in and get out. I wanna be in the knowledge business, that’s what I wanna be in.
Joe Fairless: To buy low and sell low… Can you give us an example of just some numbers on a deal that you did recently.
Ted Thomas: Sure. I won’t be exact, but I did two in Albany, New York, this year. First one had a 140k value; that was a tax assessed value, because no one will believe a broker, and no one will believe you and me, so… The tax assessed value was 142k or something like that. We went in, we cleaned it out… There was bears on the property, there was deer, whatever… It took a couple weeks to get the electricity on and make sure all the plumbing was okay, and we sold it for 71k or 72k. That was half, so that gave the fixer-upper guy plenty, and I paid 38k for it.
Joe Fairless: And how long of a turnaround was it?
Ted Thomas: It probably was five months… In New York you have to wait three months to get the deed. You’re working with the government, so you can’t go in and say “Give me the deed!” In Texas they give you the deed right now, at the auction, but every place is a little different, so don’t hold me to exact anything on the call, because I can only recite the states that I’m in buying.
It’s not difficult, because when you wanna buy, it’s the government, so they disclose everything. An auction brochure will have 35 pages, 40 pages, and all the disclosures.
Joe Fairless: What’s the most challenging state to do a transaction in?
Ted Thomas: New York.
Joe Fairless: And why is that? Not from a political standpoint, but what specifically makes you say that?
Ted Thomas: It’s all political, because New York is over government; they have a state government, they have a county government, and then they have a township government. Everyone of those is a tax, so keep that in mind. So New York is gonna have property tax, which is, depending upon where we are in the state, it’s double what it would be in Florida. So their bureaucratic system is very slow, very cumbersome. You don’t need townships anymore, and you probably need counties unless you’ve got four, five million people.
California, for example, only has about 40 counties, yet they’re the biggest state in the union. They don’t have a lot of counties. Texas has a lot of counties (250), but neither California or Texas has townships. Townships are these little things that slow everything down to an absolute stall, so New York is a difficult state for people to buy in.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Ted Thomas: I don’t know what that is. What’s that?
Joe Fairless: I’m gonna ask you some questions and you’ll provide just some quick-hitting answers.
Ted Thomas: Who knows, I might know some…
Joe Fairless: [laughs] Alright. First though, let’s welcome our sponsors for the show.
Joe Fairless: Alright, best ever book you’ve read?
Ted Thomas: There’s two. The first one would be The Art Of War, Sun Tzu. The second one that I just recommended to everybody is Perry Marshall’s 80/20.
Joe Fairless: Yeah, it’s a great book. Best ever deal you’ve done?
Ted Thomas: I bought a high rise office building for 10% down, I syndicated the whole thing, I wrote off 500%, and then traded it into 600 apartment units. I did all that in two years.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Ted Thomas: It’s not one transaction, it’s an overall strategy of what you should do in real estate. People don’t that don’t understand think real estate always goes up, or they think real estate goes up steady… It does not; it has huge cycles, and if you don’t understand the cycle, you’re probably gonna go bankrupt.
Joe Fairless: What’s the best place the Best Ever listeners can get in touch with you?
Ted Thomas: Just go to TedThomas.com. We’ve got a little basic Q&A stuff there, there’s little free videos they can watch… So if someone wants to start small, that’s the place to be. I’m really not in the small business, I’m really in the outcome business where I teach people on the high end, but nowadays you have to have something on the web for 300-400 bucks, so we do have that, but that’s not the client we’re looking for. We’re looking for people that wanna make $10,000-$20,000 every month, and do that all year long. We’re really in the business of teaching them how to buy and sell those tax-defaulted properties. But we teach the other because you’re not part of the business unless you do some of that, so…
Joe Fairless: Ted, thank you for being on the show. Thanks for talking about both tax liens and also the tax-defaulted properties… And also going through that due diligence process that you go through when you evaluate a tax-defaulted property. You get the downloaded listings, you look at the pictures if they’re available, then you choose the ones you wanna look at based on knowing the county, knowing the economic factors like jobs, that sort of thing… Looking at the property if available, walking around the marketplace or having a team do that, seeing how active the brokerage community is, because it’s about the quick turnaround on the sell; that’s where a lot of rookies get burned. Then, ultimately bidding on roughly 10% of them, and those are the best ones that you know you can resell.
Thanks for being on the show…
Ted Thomas: Wait a second. Joe…
Joe Fairless: Yeah?
Ted Thomas: You’re doing a great job. I’m not just saying that to [unintelligible [00:24:53].20] I do a lot of webinars and I do a lot of these calls, and you’re on the [unintelligible [00:24:59].05] you’re doing a great job and you’re really helping your clients. You’re providing a great service.
Joe Fairless: I appreciate that, especially given that you have been on a lot of these interviews and I know you’re speaking from experience. Thanks for being on the show, I’m really grateful that you were on… I hope you have a best ever day, and we’ll talk to you soon.
Ted Thomas: Thank you.