Distressed Real Estate Offers Profitable Alternatives

Implications: A twenty percent (20%) ROI is still considered strong by most portfolio managers.  Jeff Opdyke's WSJ article is on point to wisely caution investors about a sudden exodus from real estate.  Opportunities abound for investors willing to consider alternative routes to their desired returns. Tax liens,public sector bulk sales,brownfield reclamation and redevelopment possibilities underwritten by state,local and even federal agencies are out there for the investor willing to conduct the requisite due diligence.

Analysis: Consider the following example---

This past April 3,2007,a retired mutual fund executive purchased his first tax foreclosure property at the DeKalb County,Georgia Tax Commissioner's monthly sale. The home was sold previously as a mortgage foreclosure in January 2006 at $469,000. The real estate taxes for 2006,however, remained unpaid,so the process of seeking the lost revenue required the local government to offer the home and land to the highest bidder for cash. The parcel listed a $445,000 taxable value by DeKalb County which,typically,falls somewhat short of actual market values. The neophyte tax sale investor was successful in his bid at $436,000. How did it happen? One can only surmise that the mortgagee processing the 2006 mortgage foreclosure sale dropped the ball along the way,failing to either discover or obtain notification of the property tax debt. The State of Georgia authorizes a flat penal rate of 20% to the tax purchaser upon redemption of the debt by either the property owner or their mortgagee. This redemption must occur within twelve months of the sale or the title to the parcel will be transferred to the tax buyer. Redemption in this example is not a case of if,but,rather,when,since the mortgagee continues to hold paper on the property. Upon redemption,the tax investor will receive his original $436,000 purchase price(Held in escrow by Dekalb County) along with a hefty 20% return of $87,200. Currently,some thirty two (32) jurisdictions or states hold tax foreclosure sales as a revenue recovery mechanism to recapture tax dollars needed for funding public infrastructures,so the process is not unique. It is also important to note that tax deed or tax foreclosures trump any existing lienholders including first mortgages held by banks,insurance carriers,and FHA/VA providers.

Institutional investors discovered this alternative offerings marketplace in the mid to late nineties and they continue to participate on a nationwide scale. It is worth more than a second look!

Howard C. Liggett
President,Distressed Real Estate Consulting Services,Inc.
4008 Indigo Drive
Pensacola,Florida 32507
Tel: 850.470.9974
Fax: 850.470.9522