Your investment purpose, the amount of money available for investment and your tolerance for risk, will determine the best strategy for you. Generally, tax certificate investors are pursuing one of three strategies.

1. Large Volume: Investors who purchase a large number of certificates reduce risk by the sheer number of certificates purchased. The interest earned on the redemptions can cover the expense of tax certificates that are not redeemed and in some cases the investor will become the tax deed owner for non-redeemed properties.

2. Small Volume: Investors who intend to purchase 1 or a few certificates may have a lower level of risk tolerance. If the tax certificate is not redeemed, the investment dollars may be tied up for several years without receiving interest and may be lost in the end.

It pays to be cautious. However, the risk is low as long as

• You are purchasing first year certificates
• You have verified that
• The property is buildable
• The property has a respectable value
• The owners are not in bankruptcy
• You don’t intend to become the tax deed owner

3. Purchase to acquire tax deed: If you have property ownership as a goal, it will pay off to complete a full due diligence search and learn as much as you can about the property, particularly the financial situation. I would not seek property ownership via certificate holding because less than 1% of certificate holders convert to proprty owner for what is invested in the tax certificate.

Tax Certificate Investing
“High Dollar” Certificates

Certificates for very valuable property carry a high dollar face value. Contrary to what you might think, “high dollar” certificates may not create the greatest rate of return on your investment. These certificates are generally redeemed quickly.

Many investors will look at these certificates as golden tickets for future ownership of dream property. In rare cases, this may work out. If the certificate is not redeemed and the tax deed is not sold at auction, the certificate holder may become the owner of the property for pennies on the dollar. If this happens to you, outstanding! However, in most cases, the certificate will be redeemed within the first 3 months (95% chance). Many think, well great I have a 5% chance of pennies on the dollar ownership. Unfortunately that isn't so.

Of the remaining 5% another 50% will redeem before 6 months. Of those 2.5% left unredemed after 22 months, there will be stiff competition at the tax deed auction. Tax deed auction is the result of application by the certificate holder. The reality is that less than 1% of certificate holders walk away with the tax deed umless they bid at the tax deed auction or there is an underlying problem with the property.

I find that purchasing “Middle of the Road” certificates instead of “High Dollar” certificates will earn a higher interest rate, while spreading the risk.

Tax Certificate Investing Example:

$5,000 certificates at 5%
This “high dollar” certificate is likely to carry a low interest rate due to the competitive bidding at the tax certificate sale and may be redeemed quickly. If redeemed at 4 months, it will earn you $250 (5% minimum). If you beat the odds and it is redeemed at 12 months, the accrued interest will also be $250. If the property owner files for bankruptcy and this property is a homestead exempt property, you may lose $5,000.00!

Tax Certificate Investing Tip: Here's a Sarasota Tribune article sharing my views on Tax Certificate Investing.

Ten $500 certificates at 10%
The number of “middle of the road” certificates at the tax deed sale tends to work in the investor’s favor by lowering the demand, which equates to purchasing the tax certificate with a higher rate of interest. These certificates have a slower rate of redemption, which increases the number of months to accrue interest. For your $5,000 investment, you can buy ten $500 certificates. If they carry an interest of 10% and all are redeemed at 12 months, the accrued interest will be $500. If all are redeemed quickly you also would receive the $250.00 (5% minimum). If the same 10 certificates were redeemed at 12 months at 18%, which is very likely if you purchase middle of the road certificates, the realized rate of return would beat that of the single $5,000 certificate by $650.00 with a reduced risk.

“Middle of the Road” Tax Certificate Investing

The safest bet for certificates are the “middle of the road” certificates. Although it is not an official term, it is used here to describe property that has a respectable value with a slower rate of redemption than homesteaded property, commercial land or multiple dwelling units. The slower rate of redemption assures that you will maximize the accrued interest and earn more money on the investment.

In Florida, I have found “middle of the road” to be certificates that are held against vacant land assessed at $15,000 - $50,000. When doing research for a tax sale, my search criteria is

• Assessed value $15k - $50k
• 1st year certificate
• Vacant land.

Properties of value higher than this amount draw attention from bidders and thus reduce interest earned. I find that properties of lesser value, typically less than $10,000, will have an increased number of problems i.e. no available utilities, county liens.

“Middle of the Road” Exception:

There is an exception that overrides the “middle of the road” recommendation. This occurs when the property owners are not US citizens and/or reside outside of the country. When the owners reside outside of the United States, the odds are that the tax certificate will not be redeemed quickly. If the owners are individuals and not corporate owners, there is also a smaller chance that they will file for bankruptcy.

In Florida, this exception is worth consideration. From my research, I find that non-US residents are less likely to redeem tax certificates as quickly as US residents. Knowing this, I am interested in finding opportunities like this. When I am satisfied with the due diligence results, I am willing to bid less interest for these certificates. The advantage is found in the certificate interest that is gained over a longer period of time.

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