The Trouble with "Get Rich Quick" Real Estate Schemes
Unless I’ve somehow agreed to get up at the crack of dawn to play golf, Sunday morning is a lazy relaxing time for me - definitely a law free zone. I gradually become aware that I’m awake. The cats and I have a little “quality” time while I lie in bed watching the CBS Sunday Morning television news magazine. Eventually I rouse myself to get showered and go downstairs to read the newspaper while watching one of the Sunday morning news talk shows.
THE HOOK. After the politicians have had their debates, an infomercial typically comes on next which I sometimes leave on whilst I'm preparing lunch. This week, it’s “JOHN BECK'S FREE & CLEAR REAL ESTATE SYSYTEM" which promises me that I can profitably invest in all manner of real estate by spending only a few hundred dollars at government “tax sales”. I’ve seen part of this infomercial on other Sunday mornings, but this time I became intrigued and went on a mission, in part because a client had recently been asking me some questions about real estate investments.
For only $39.95, the infomercial promised to send me a kit explaining how I too could make wads of money -- just like the folks giving testimonials -- by taking advantage of government tax foreclosure sales most people don't even know exist. According to the infomercial, by using the special "Free & Clear Real Estate System", I will be able to buy tax foreclosure properties for "pennies on the dollar" and own them "free and clear" with no monthly payments. The infomercial also tells me that all I have to do to get these properties is pay the back taxes owed on them and assures me there are many properties in my area I could get. Numerous examples were shown of houses bought for only a few hundred dollars, but worth far more. And of course there's a money-back guarantee!!!
TAKING A CLOSER LOOK. Having long been an adherent of the “if it sounds too good to be true, it probably is” school of thought, I found it difficult to believe this “system” actually worked, but was nevertheless curious. As an attorney with substantial experience in real estate and foreclosure law, it also just didn’t square with what I thought I knew about Ohio law in this area. But I’m always willing to learn new things….
So I decided to investigate. Google and the internet are a wonderful tool!! It wasn’t long before I found a website called Infomercialscams.com with page after page of complaints about this very program. Among the least of the issues with the “Free & Clear Real Estate System” was that the $39.95 apparently wasn’t a one-time fee as the program certainly implied, but instead was a recurring monthly charge. There was also heart-wrenching story after story of people induced to part with thousands of dollars to "upgrade" to more intensive training and/or who vainly tried to cancel the entire transaction. Well, if I had been inclined to shell out some money just to check it out, I certainly wasn’t going to do it anymore.
But I was still confused about how this would work even in theory. The idea is that because county governments need the tax money to provide necessary services to citizens, they have the power to sell property on which taxes have not been paid. OK, so far so good – that’s all true and some Ohio counties do indeed have annual tax lien sales. That, however, is where reality stops.
A quick look at the Ohio Revised Code (See ORC 5721.30 through 5721.43) and a little more internet research. I soon determined that while I suppose it’s possible (though I think unlikely) this “buy at tax sales” plan might work in other states, it CERTAINLY DOESN’T WORK IN OHIO!!!
OFFER NOT VALID IN OHIO. Here’s why:
1. No Such Sales. Perhaps the most important reason it won’t work here is that Ohio simply doesn’t do a retail “over-the-counter” business in tax lien sales. Since 1997, only counties with more than 200,000 in population are even permitted to have tax lien sales AND all of them sell tax liens once annually solely to an institutional investor as a single lot costing more than a million dollars.
2. The Long Wait. Even if you could participate in a tax lien sale in Ohio, it isn’t the carefree and direct road to quick profits portrayed on the infomercial. While it is true that if property taxes remain unpaid, the county will eventually offer a tax lien certificate for sale with respect to a particular parcel, that is only the beginning of a rather long journey towards making any money.
The tax lien certificate does in fact carry an 18% interest rate plus penalties that are dangled before the uninitiated as the safe, secure, and amazingly large return on investment. What is not disclosed is that having once purchased the tax lien certificate, probably at a discount (i.e. with an interest rate less than 18%), you CANNOT do anything with it for TWELVE MONTHS.
What you hope happens is that the delinquent taxpayer somehow has an upturn in his financial fortunes and suddenly becomes able to pay off the taxes, plus interest and penalties – in the unlikely event this happens, then yes, you will make money. However, you are not permitted to contact the delinquent taxpayer during this period and must just wait and see. In at least some counties, payment plans are offered to those delinquent taxpayers wishing to redeeem their property, thus further delaying your ability to profit on the investment. In addition, during this period, you may also find yourself dealing with zoning and nuisance issues associated with the property.
3. Working Through Foreclosure of the Lien. If the property is not “redeemed” during this year following your purchase of the tax lien certificate, then you have the “opportunity” to foreclose on your tax lien certificate and finally get possession of the property. However, you must do so within three years. In addition, Ohio is a “judicial” foreclosure state which means that you can’t just schedule a sale of the property and be done with it. No, a foreclosure action requiring a court filing fee of probably at least $200, has to be filed in the local Court of Common Pleas and wind its way through the courts. For a fee, generally around $3,500, you can use the services of the County Prosecutor to get this done; it’s also possible for you to engage the services of a lawyer in private practice although I rather doubt there would be any savings with this approach. By this time you should be adding up the time and expense and wondering why anyone would want to do this. But there's more......
4. Minimum Bids Required. So, assume that you finally get through the foreclosure litigation in a timely manner, perhaps in only a few months. Now what? Can you still get real estate at a fraction of its true fair market value? Nope. Under Ohio law, property sold at foreclosure sale must be appraised (more court costs) and offered for a MINIMUM BID of TWO-THIRDS of its VALUE. If no one is willing to pay the minimum bid, then the property will be reappraised and offered at a somewhat lower price, but probably not enough less to make it worthwhile.
5. Dealing with Lenders "Bidding It In". Maybe you think buying property at two-thirds of its value still sounds like a good deal, especially if you can immediately “flip” it. Unfortunately, the likelihood of getting the property for that little is not particularly good in practice. Usually, there will be at least one mortgage on the property as well as possibly some judgment liens. The bank or financial institution holding the mortgage will not infrequently “bid it in”, meaning that until it bids more than is owed on the mortgage, the lender is essentially playing with “house” money and will not have to come out of pocket to take title to the property. If the property IS worth having, chances are the lender will have figured that out and bid accordingly.
6. If You Don't Believe Me... For the "official" version of what I've just explained, visit the explanations of tax lien sales provided by the Franklin County Treasurer, Hamilton County Treasurer, Cuyahoga County Treasurer, and Lucas County Treasurer.
Look Before You Leap. Every state is different so the strategy might be more viable elsewhere, but there are bound to be some important procedures you should be sure you’re aware of that must be followed before you can realize any profits. Some of those may be similar to what I've pointed out above. In particular, at a minimum, I would suggest determining if the state is a “judicial” foreclosure state like Ohio. If it is, then it will probably take longer and cost more to get to the point where you can sell or take possession of the property. Make sure you really understand ALL the steps that need to be taken for you to get from putting money out to supposedly getting more money back.
My point in going into some detail here is that it’s important to understand fully the process by which you are supposed to get rich before investing even a little hard-earned cash into the deal. Whether it's this "system" or some other way to invest in real estate, or some other "plan" to make lost of money quickly with almost no risk and little effort, it really is BUYER BEWARE out there. If there really was a foolproof method of turning real estate into cash, many more people would be financially independent.
Soo.. now you know how I spent part of my Sunday… Scary, huh?
