Double Digit Returns Without Work Part II Don Fullman and Charles Sells of P.I.P. West FAQs

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1 Double Digit Returns Without Work Part II Don Fullman and Charles Sells of P.I.P. West FAQs 1. If we are interested in investing with you, to get the tax lien assignments, how do we start, where do we start, and how to proceed? To start, just send an to requesting the INSTRUCTIONS and FORMs to open an account. Also specify the type of account (e.g. regular investment funds/cash or IRA/401k/etc funds), and if the latter also specify the name of the IRA/401k Custodian company. Also, feel free to ask any questions that you have that we can answer via or phone. The process of opening a PIP-West account involves filling out our Agency Agreement to select PIP-West as your Servicing Agent for tax lien investing and providing the investment funds check and a separate fee check. 2. What's the minimum investment? The minimum to open a PIP-West account is $20,000. This decision is primarily based on business practicality, but it also has roots in our desire to ensure a positive experience for the Client. We feel that a Client cannot get the full experience of Tax Lien Investing if there are only a few liens in the account. 3. Are all properties looked at, e.g. due diligence done on them more than an on-paper review? Viewing the property is part of the due diligence when the likelihood of foreclosure is high. This applies to any Tax Deed auctions including of course Texas and Georgia redeemable Tax Deed auctions. This does not typically apply to high redemption rate tax lien states such as Illinois, Florida or Arizona, where most of the liens historically redeem by maturation. Due diligence for such tax liens does however consist of thorough research of the property records and financial data. For example, for IL tax liens, the likelihood of foreclosure is low and historically most liens redeem by the lien maturation date (2 ½ years after purchase) due to the fixed cost for the liens. Copyright and Page 1

2 4. I heard you say that redeemed properties cause a check to be forwarded to me. If I reinvest the money do I pay 6% again to give you the same money for a new investment? Our fee structure is as follows: (a) Annual management fee to be paid in part at the end of each calendar quarter. The management fee is equal to one and one-quarter percent (1.25%) of the total amount of Client s funds that remain actively placed in tax liens or other acquisitions at the end of each calendar quarter. This does not include redeemed liens since those funds are returned to the Client when received from the County. (b) One-time only set-up fee of 6% for all new funds. This fee then allows all redemption proceeds (i.e. principal and interest received, called rollover ) to be invested without incurring this 6% fee. Any funds exceeding the rollover amount are considered new funds and incur this one-time set-up fee. (c) 0% Rollover Fee (i.e. no fee for reinvestment of investment proceeds) (d) Supplemental 2% IL set-up fee, applicable to only ILLINOIS purchases (e) Performance bonus of 25% of the net profit upon sale (sale price less rehab/repair expenses), transfer or lease of any real property acquired by PIP- West on behalf of the Client, thus 75% of net profit to the Client rarely needed for high-redemption rate tax liens as in Illinois, although the recently poorer economy of late has been providing some very good opportunities. 5. Is the original 6% fee for account set up and the initial deposit or do adding funds also incur an additional 6% fee for all new money? After making your first investment through PIP-West, and when making your next investment, adding any funds over and above the amount of redemption funds you ve received to date ( rollover ) incurs the 6% set-up fee, but then redemptions from those *new* funds can be reinvested for the life of your account without incurring the 6% setup fee. For example, a Client invests $30,000 in October 2010, and receives $12,000 from redemptions (i.e. both principal and interest) by the time the October 2011 IL auction season arrives. The Client wants to invest another $30,000, thus $12,000 (the current rollover amount) incurs the 2% IL set-up fee and the $18,000 incurs the 6% plus 2% as new funds. (See item #4 above for fee description.) Copyright and Page 2

3 6. What are your fees per property, per year, per redemption? The set-up fees are based on the amount of capital invested in a new purchase, and the management fee is based on the acquisition cost of remaining unredeemed liens still under management at the end of each quarter. There are no fees per property or per redemption. (See item #4 above for fee description.) 7. Is the money earned with tax liens a taxable or tax free investment? Your tax accountant can best answer this, however the money earned from a tax lien redemption is interest income (1099-INT), and the money earned from the sale of a property that was obtained through foreclosure of a tax lien is capital gains. The tax liability for each scenario depends on whether the investment is made with regular investment funds or with IRA (or 401k, etc) funds and the type of IRA (or 401k, etc) (i.e. ROTH or Traditional, etc), and again that is a tax account question. 8. How is the client protected against fraud? The way that PIP-West operates has been developed with the intent to grow the trust and confidence of the Client in our services, and thus hopefully to reduce the possibility of fraud. First, PIP-West is an Agent to purchase and manage your tax lien investments, but the Client, not PIP-West, owns the investments (in contrast to a fund that pools funds and holds all capital and investments in the name of the fund). Your ownership of the tax lien (or any) investments does not depend on the existence of PIP-West. If PIP-West were to decide to discontinue operations (not in the plan we re in a growth mode!), the Client owns the investment and can change the address of record to that of a replacement Agent to manage the tax liens. Second, although not insignificant, PIP-West has a relatively small minimum investment ($20,000) such that an investor can try out our service and test out our performance before investing further funds. Third, PIP-West demonstrates the expertise by providing significant information about tax lien investing. These and other operational policies hopefully help increased the level of trust and confidence in PIP-West, and reduce the concern about fraud. Copyright and Page 3

4 9. In case I get into a position of foreclosure, am I on my own to sell or rent it? PIP-West is a full Servicing Agent and sticks with the Client from beginning to end, so you are not on your own. In the event that a Client takes title to a property, PIP- West provides recommendations to the Client on various courses of action (i.e. liquidation options or hold), discusses with the Client their priorities and preferences, and requests a decision from the Client regarding the desired course of action. 10. If you are my agent, can I be involved as well in the purchase of tax deeds to eventually get the properties? When purchasing tax deeds for a Client, PIP-West discusses the Client s purchase criteria and resources and shares information about PIP-West s strategy and the available supply of properties and best opportunities in upcoming auctions. Thus together, PIP-West and the Client determine the type, value, price, location and even condition of a target property before attending a Tax Deed auction. 11. If our funds are invested in the order received and we remain invested next year, do we move up in the pecking order or do we remain forever in our original slot? The order of checks received only applies to the upcoming target auctions. Clients funds are placed and the Final Report delivered and the process is done. For example, several months in advance of the October start of the IL auctions, PIP-West starts to contact all Clients and interested investors to start planning their investment in IL. We start to accept checks the month prior to the start of the auctions and continue to accept checks throughout the auction season to the very end. Any funds not placed are returned with the associated fees. Fees are earned on only funds that are placed with very few exceptions. Copyright and Page 4

5 12. Are there any redemption fees when I want my money back? When a tax lien redemption occurs, PIP-West sends the redemption funds to the Client when received from the county and the Client deposits them in their personal account or their IRA. No fees are charged on redemptions. (See item #4 above for fee description.) If you mean can you cash out of your purchase, Tax Liens are illiquid investments that you own, and there isn t a secondary market for selling them as there is with the mortgage market. If you find a buyer, it s a simple matter of submitting an assignment request to the county to transfer title. 13. If I get the title to a property, what kind of fees as an investor would I have? Typically to foreclose on a tax lien, there are fees to initiate foreclosure (just under $2000), nominal expenses to clear city and utility citations/fees, and finally the last step before taking title to the property would be to pay off all other tax liens on the property (approx. 3-5 times the original cost of the lien). All these costs and potential costs would be taken into consideration in the analysis/reassessment that PIP-West performs in arriving at the foreclosure recommendations for the Client. Despite these expenses, the Client can see very significant profits compared to the interest earned if the lien had redeemed. However there is more to the activity, but PIP-West sees the Client through it all. After taking title to the property, you would have all of the expenses of property ownership. PIP-West also would earn the Performance Bonus of 25% of the profit. (See item #4 above for fee description.) 14. Can I use a self-directed IRA or self-directed IRA LLC to purchase tax liens and which is better? Both a self-directed IRA and a self-directed IRA LLC can be used for tax lien investing and both work well in their respective domains. The difference between them would be in the ease of use by the Client (the IRA Owner). I believe the benefit of a selfdirected IRA LLC would be that the IRA Owner has easier access to the IRA funds (i.e. check-book control ); whereas for a self-directed IRA, the IRA Owner would make requests to a third party IRA Custodian company for checks and other duties. An investor should compare the costs and features of each type before proceeding. Copyright and Page 5

6 15. I ve been to a handful of NJ auctions in Union County this year and it seems to be the same result. Two people in attendance that lose out to about 3 major commercial type investors. Are there other NJ counties that are more individual investor friendly? How is Illinois in comparison? Illinois is the same if not worse. There are a number of consistent major bidders and many other bidders. As a result, we cannot predict how much capital we will place in any given auction since it depends on who is in attendance. 16. Do sewage liens hold the same seniority as tax liens? The answer is state-dependent. For the states in which PIP-West is active (e.g. IL, TX, GA, SC), city and utility liens are not sold in auction but are attached to the property nonetheless. These liens are the only liens other than the IRS that have priority over the tax liens, however the amounts owed for city citations and utility liens are typically small, although there are exceptions. These only matter if you foreclose on the tax lien and you take title to the property, and then such liens need to be paid. IRS liens also have priority over tax liens. In the event that a Client initiates foreclosure on a property, the IRS will be notified during the process. The IRS then has a limited amount of time (about 120 or 180 days) to make claim to the property. If and when they do, the IRS typically pays the cost of the lien and expenses incurred and potentially a nominal interest rate. This occurs so few times that it isn t typically a concern, however even if it occurs it typically is not a loss for the tax lien holder. 17. Do you need a license? No license is required to bid, buy and manage tax liens. In fact, anyone can register for an auction and buy liens. Copyright and Page 6

7 18. What percentage of Illinois tax liens go to foreclosure? Historically very few (less than 5% of the liens) remained unredeemed and were candidates for foreclosure. In the recent poor economy, we ve seen this number slowly increase to maybe 10% to 15%, but Illinois remains a high redemption rate state. Historically for ILLINOIS tax liens, about 10%-20% of the liens redeem in the first year, and about 35%-45% in each of the 2 nd and 3 rd years, leaving the abovementioned 5% remaining. Although we ve seen most liens still redeem by maturation, the recent poor economy has caused a slowdown in redemptions to the above estimate of 10%-15% remaining. Due to the short time for the recent poor economy, we do not have any historical averages, but practically speaking, these averages are just that averages. Even today we ve seen some counties liens redeem heavier than these historical averages, some 40% redemptions in the first year! Still ILLINOIS has proven to continue to be a high redemption rate state, and the option to foreclose on some lucrative properties has enhanced the potential rewards for IL tax lien investors. 19. Does the lien holder then have a deed and own property if it is foreclosed on? Upon completion of the foreclosure of a tax lien, the lien holder holds the tax deed to the property and owns the property 100%. Tax Deeds are less marketable than warranty deeds, but a quiet title action can remove clouds from title and allow the tax deed to be transferred to a warranty deed. 20. What is the market for sale of such foreclosed on properties in Illinois? Once the tax deed is transferred to a warranty deed, the marketability for the property is the same as any other property in the same locale, however acquiring any property at such a large discount provides a great deal of flexibility in liquidating the property. Marketability of any property is influenced most by the economy and the regional real estate market. Copyright and Page 7

8 21. If you buy a tax lien and the counties do not foreclose on the property for outstanding taxes, how can you sell your lien? Is there a secondary market? Tax liens should be considered illiquid investments. Although it is possible to sell them, there is no secondary market as with mortgages. However if there is a buyer for a lien, the owner of the lien can be changed through the lien assignment request to the county. 22. Is there still time to get into the Illinois sale this time using IRA funds? Yes, but time is of the essence since the auctions have already started. Most all of the ILLINOIS auctions span from mid-october thru mid-december, with only a few in the first 2 months of the new year. Thus the October to December auctions are the best ones to target. 23. Do you only buy residential homesteads? If not and you buy commercial do you stay below a certain value? PIP-West emphasizes residential properties (both improved and land) when purchasing tax liens. Although not impossible, it would be unusual for PIP-West to buy a lien on a commercial property for a number of reasons, but particularly since they are more difficult to liquidate in the event that we foreclosure and take title to the property. We avoid industrial due to the possibility of EPA issues. Although commercial properties are very unusual, there could be a very compelling reason to consider one from a financial perspective, a redemption perspective or other and that call is made by our Director of Acquisitions. If a Client is particularly interested in commercial properties or other specific types, there would be better strategies by which we could acquire such a property at a significant discount, rather than hoping for the chance to foreclose on that type through a tax lien in a high redemption rate state like IL. Some examples are TX or GA Redeemable Tax Deeds, foreclosure properties, REOs, potentially SC, etc. Copyright and Page 8

9 24. Can you request only residential or homestead property be bought with your account? Liens on residential properties are by far the dominant property type in tax lien investing in high redemption rate states such as ILLINOIS. However, when purchasing such tax liens, PIP-West cannot entertain special requests due to the complication it causes in due diligence and bidding at the auctions. We research all properties in advance in our due diligence step that are acceptable and consistent with our tax lien investing strategy before bidding on the lien. On the other hand, if a Client is particularly interested in acquiring a specific type of property (e.g. commercial retail or office, residential, land, etc.), there are better strategies for acquiring such a property as mentioned in an answer above. 25. What if I bought a lien and found out later that the house burnt down? Have I lost my investment? PIP-West purchases liens for which the lien cost to county assessed property value ratio is under 10%, so if the house burnt down, there would still be value, and hazard insurance would allow for rebuilding. 26. Can Canadians be clients? Yes, Canadians and other international investors can become clients. The only requirement is that the individual or entity has a U.S. Tax ID#/EIN# to which the Counties can report interest income from the redemptions in any given calendar year. Then the Agency Agreement and the appropriate Tax ID#/EIN# Certification Form (e.g. a W-9 for domestic US Tax ID #s, a W-8 for non-u.s. Tax ID #s) is filled out accordingly. 27. Since your company invests for individuals vs. a pooled fund, how do you determine what properties each investor will receive? Clients funds are placed in the order that we receive checks, and all liens that we choose satisfy our criteria of our tax lien strategy. Copyright and Page 9

10 28. Can I use funds from my self-directed IRA to invest? Yes. Provide the name of the IRA Custodian and we ll you the appropriate instructions and forms. 29. How much in total funds do you have under investment and how do you decide which client gets which lien/deed? PIP-West has managed in excess of $4M of tax lien investments since inception and it is growing. 30. I live in the Atlanta, Georgia area and work full time as an accountant. What states allow me to invest online so I do not physically have to be there? Most counties in Florida and in Arizona have online auctions, and I m sure there are many more going in that direction, however you will have difficulty realizing the double-digit returns in web auctions. 31. I would like to know the agents who are helping me in investing. PIP-West was formed in 2004 by Don Fullman and Charles Sells and has been growing its business and focus on its Agent Services for the purchase and acquisition of tax liens, tax deeds and default properties for our Clients. Don Fullman and Charles Sells are the only two principals of the company and Charles has over 7 years of additional experience in tax liens/tax deeds and default property acquisition prior to the formation of PIP-West. 32. How do you evaluate properties? For high redemption rate states we evaluate the properties through research of the county records and other sources. For Tax Deed and mortgage foreclosures, we do the same plus we view the property. We have many criteria in our due diligence process by which we choose the liens for bidding. One important one of those is that we look for a high property value compared to the cost of the lien. Copyright and Page 10

11 33. Who does the actual investing, me or someone else for me? PIP-West is a full service Tax Lien Servicing Agent, from start to finish % is an extraordinary return. Please explain why it is so large. Has it been consistently so? Over how long a period of time? The 36% is the maximum annualized certificate purchase rate possible in ILLINOIS. The maximum penalty rate on an Illinois tax lien certificate is 18% every 6 months. If the certificate penalty rate is 15%, that corresponds to an annualized 30%. PIP-West s performance objective and commitment to Clients when purchasing ILLINOIS tax liens is to provide a portfolio whose certificate purchase rate average is between 24% and 36%. Thus we do not purchase a lot of liens that could prevent us from following through on this commitment. 35. What do you see as the risks associated with investing in tax lien certificates? I like to call tax liens "High-Yield Conservative investments" almost an oxymoron because they are secured by property and the payoff is known at the time of purchase (i.e. the interest or penalty rate on the certificate). The main risk that I can identify is the level of knowledge and experience of those participating in the tax lien investing activity - all steps from the due diligence through the redemption or foreclosure of the lien, many of which are as follows: purchase objectives, due diligence, county auctions, legal filings, lien management, redemptions, foreclosure, etc. 36. How can a person get started with poor credit and little money? Learn how to do it on your own. 37. Would we own individual tax lien certificates or be a part of an investment pool of liens? You would own individual tax lien certificates, and PIP-West s final purchase report to the Client would include copies of all certificates owned by the Client. Copyright and Page 11

12 38. What s the best state to invest in? It depends on the Investor s objectives, but for a high interest income objective, PIP- West likes ILLINOIS best, and for a property acquisition objective, PIP-West likes Texas and Georgia redeemable tax deeds and potentially South Carolina, although it depends on where the most opportunities can be found. 39. Is Georgia a great state to invest in? Yes, and Texas is very similar. PIP-West s choice at any particular time would be dictated by where the most opportunities lie. 40. Why are your fees so high? Please describe what your due diligence process is. Tax Lien Investing is a labor intense business and activity. PIP-West fees are below other such Agents in the industry, as few as they have been, and which are no longer in business. PIP-West focuses on high performance in service and in returns. 41. I don t have 20k, can I still invest? Yes. You can do tax lien investing yourself local to your region. Liens in tax lien certificate states can cost as little as a few hundred dollars, even less but I caution you on buying liens that cost very little since the underlying property would be similarly low in value. 42. Can this type of investing be done for investors with or without self-directed IRA accounts? Yes. Any titling that is associated with a SS#/TaxID#/EIN# is possible. For example tax liens can be titled in your name, an LLC, a corporation, a living trust, a selfdirected IRA/401k/etc, among others. Copyright and Page 12

13 43. Has there been any year in which an investor has lost money? Not to my knowledge. First of all, liens remain on title indefinitely but the lien holder has the right to foreclosure at Maturation. Foreclosure is the leverage that the lien holder has in owning the lien. However, even if foreclosure is not pursued, it doesn t mean that the lien won t redeem, and we continue to manage liens beyond the maturation. 44. What happens to any properties that are not redeemed? PIP-West discusses with the Client the options, including the option of foreclosing on the property. 45. What is the average time to wait on a tax lien purchase before you can realize a profit? Tax Liens can redeem in as little as a month following the purchase. 46. Is the income received taxable by the state in which you are investing in? Your tax accountant can best answer this. 47. Is the income payable at the end of the holding period for the line or before? When a tax lien redeems, the full principal and interest are paid to the county by the property owner, and PIP-West receives it soon after and passes it along to the lien holder. Copyright and Page 13