BiggerPockets

First redemption 2012

Saturday, May 12

Well the check for the first lien redemption came the other week.  The owner of the mixed commercial/apartment building paid off his tax lien in April.  I bought the certificate in February and it was for 2 years of taxes.

Made $52.06 in interest on a $5,206.47.  Kind of makes the calculation easy that way - 10% for 2 months.  Beats the heck out of a savings or money market fund.

Florida Sub account elimination in Tax Lien Auctions

Monday, March 26

Recently, several Florida counties announced they are eliminating the use of “Subaccounts” in the annual tax lien certificate auction.

I have seen several posts on various websites – including my own posts – that tout this as a win for the individual investor and it should “level the playing field”.

But in reality, it will probably result in a mixed bag for investors.

It helps to understand what subaccounts are and why individual investors feel their use is unfair.  In many online tax lien certificate auctions, you create an account to use for bidding.  Each account requires a Tax ID number of some sort so that the county can issue a 1099-INT at the end of the year to the winning bidder who has had certificates redeemed and interest paid.

For most individual investors, they use their Social Security number as the Tax ID.  If you have an LLC or other business that also has a Taxpayer Identification Number, then you can open an additional “subaccount” for bidding.  Thus you have two accounts (or more) for bidding.  

All subaccounts are bid at the same rate as the main account for any one certificate.  So if you had one account with 4 subaccounts, you would have 5 bids placed on one interest rate for any certificate you bid on.

This is significant because the online auctions work this way; you bid down the interest rate you are willing to accept on the certificate.  The lowest bid wins.

For example, in Florida the top interest rate you can earn is 18%.  You can bid down in quarter point increments.  But you’re not bidding in an open auction.  You’re bidding online and you get to put your bid in at one interest rate.  So you have to know the lowest interest rate you want to accept and place your bid at that rate before the auction closes.

You don’t get to see what rates others are bidding on the same certificate.  You can see only the total number of bids for that certificate before the auction closes.  After the auctions closes, within seconds actually, you can see the breakdown of where all the bids were placed for that certificate.

You’re “flying blind” in a way, because you know how many bids there are, but not where the bids are placed during the open auction time.

So where do multiple subaccounts give an advantage?

If there is a tie for the lowest interest rate bid, the auction company software randomly picks a winning account from the pool of bids at that rate.  In other words if you had 5 accounts and I had only 1, and we tied for the lowest rate, then you have 5 chances versus my 1 chance to be awarded the certificate.

Banks and funds use the Tax ID’s of all their investors as subaccounts.  An institution can have tens of thousands of subaccounts.  Talk about David and Goliath!  You are competing against tens and yes, hundreds of thousands of subaccounts of banks and funds sometimes.

Look at this spreadsheet of the bid counts from Polk County Florida’s 2011 tax sale.  Notice the column for 0.25% and that the total bids that were made for all the certificates at that rate totaled over a BILLION bids!

Further, there were only 111 people/entities that won certificates in the auction.  From 111 winners and numerous others who bid but did not win any certificates, there were a total of almost 3.8 billion bids for this one county!

Online auctions are fairly new to the tax lien auction industry.  In Florida there are auctions that see over 1 million bids on one interest rate for one certificate!  And guess what?  That interest rate bid is often 0.25%.  

And if you bid 0.25% then you have one in a million chance for winning the certificate.

On first glance the prospect of the elimination of subaccounts seems to level the playing field.  No more will banks and funds be able to bully their way around with several hundreds of thousands of bids.  It’s no longer a Chicago election where one person can cast many votes under other ID’s.  One person, one vote - going forward.

I haven’t seen the new rules, but it might be that a bank/fund could still open individual accounts for each Tax ID.  Unlikely, because they would have to allocate the total funds they want to invest among the hundreds of thousands of accounts.  They also would have to ACH for each individual account the 10% deposit and then also the payment for all the certificates they win.

So we’ll put the “open individual accounts” aside as it requires a lot of manual work – which some banks can easily outsource if they really wanted to.  (I would not like the bank giving my SS# to some overseas person to open an online auction account in several Florida counties – but how do I know what the bank does with my ID numbers anyway?)

While the initial thought about eliminating subaccounts is that banks will be treated just like an individual investor with one account, you have to remember why the bank is buying tax liens in the first place.

They are parking cash in relatively safe investments to get better rates of return than other safe instruments.

T-bills are paying nothing, same with other Treasury securities. The average overall interest rate for all the certificates sold in the Polk County auction last year was 5.17%.  Divide that number by 12 and that is how much a certificate earns each month it is unpaid.  (0.431%)

Seems like peanuts when you consider that most certificates are paid in the first year.  After all, if the property owner paid in the first month, 0.431% on the average lien amount of $1,153.63 is $4.97.

But Florida has a law – the minimum any certificate earns is 5%.  The property owner will have a penalty that equates to making the interest earned be at least 5% for the certificate holder.

So no matter how low the winning rate is bid, the certificate holder will earn at least 5%.

This is why I say it’s a mixed bag for individual investors.  Yes there will be less bids placed for certificates.  But banks and funds can still participate and they will still bid 0.25% because they know they will earn 5% on the certificates when paid off in the first year.  And 5% is plenty for the banks, they've proved that by using over a billion bids in Polk county alone last year on 0.25% bids.

Individual investors will have a better chance of winning certificates, but the overall rates will not rise much higher than what they have been in the past.  Banks/funds will still bid 0.25% and gladly accept a 5% return on the funds.

If the individual investors also gravitate to accept a 5% return than yes, more individual investors will have a shot at winning certificates because of the elimination of subaccounts.  They just won’t get higher rates.

Mixed bag - less bids, still low rates.

Video on my AZ analysis for 2012

Sunday, March 11

My last 2 blog posts I showed the properties behind the liens I went after and also explained my thought process.

I created a screen capture video (link below) where I explain again what I did and show my spreadsheets that helped me win the certificates this year.

In 2011 I went after the highest return and got it with all liens getting 16% rates.  In 2012, I wanted to prove my analysis could also help me win highly competitive certificates that would get lower rates of return, but still better than CD's and saving's account rates - and the property behind the certificates are really good.

95% of all liens are paid off so I don't expect to get any of the underlying property, but I'm confident that whatever strategy I want to use will work.

Here is the link to watch the video:
http://dl.dropbox.com/u/59325075/2012%20Results%20BP.mp4

Arizona Analysis - what I did & why

Wednesday, February 22

Picture this, you go to bid on a tax lien certificate. You see there are 7,165 other bids.  Do you bid?

Most people would think "I don't have a chance!" The way you bid is that you choose a round number between 0% and 16%.  You're bidding the lowest interest rate you would accept for the certificate.

With almost 7,200 bids what do you think your odds of winning are going to be?  With that many bids surely ALL the interest rates are covered with at least one bid.

Nah.

And I know it. I make a big deal out of online tax lien auctions because, well, no one else does.  And there is money to be made when no one else is looking closely.

In baseball there's a saying - "Hit it where they ain't."  In other words try to hit the ball where the defensive players are not covering.

In online tax lien auctions, no one is covering analysis based on past results. Yet that is exactly how you can make bids that will win highly competitive certificates.

In my last post I showed the properties for the two certificates I won in the 2012 auction.  Nice looking properties, each with many bids.

I targeted 3 prime certificates that I wanted to win.  I won 2 of them.  I also had a couple of really choice parcels that had certificates that I placed bids on just in case I missed out on the 3 prime certificates.

My 3 prime targets

Property "#1" was the expensive residential lot with the fantastic views.  It had 2 years worth of back taxes up for auction so the lien amount was fairly high for a residential lot.

I had bought a certificate on this same property in 2010 but the owner paid that back in a month.  I skipped it last year when I saw it was up again, thinking he would pay it off again in a month.  When I saw it was in this year's auction AND it had 2 year's worth of taxes, I knew the owner did not pay last year's taxes or the previous.

This is a really nice area and the certificate would get a couple of hundred bids.  I looked at my spreadsheet of bid results for the auction the last 2 years and I knew what rate I had won it in 2010 and I saw the winner last year had won it with almost the same rate.

Based on my knowledge of past results, I went to place my bid a day before the auction closed.  I saw there were 170+ bids.  No matter, I placed my bid at 4% knowing it was one percent below last year's winning rate.

The auction software does not show what each person is bidding, only the total number of bids.  So unless someone has gone to the trouble of taking all of last year's bid results - that are only available after the auction is over - they will not know where all the bids were placed for each certificate the previous year.

I have that data so I can be confident my bids are competitive based on previous year results.

Here are the final bid numbers for that certificate:


You can see I was the single lowest bid and my analysis paid off since I beat out a person who in fact bid 5% - just like last year.

Property #2 was a certificate on a commercial building that had 2 apartments.  This was my first bid ever on a commercial property certificate.  I looked at my previous year results and filtered to show only similar types of parcels in the area.

I was able to place my single bid at a rate that seemed competitive based on past auctions.  The morning the auction was going to close, I was stunned to see that there were 7,165 bids on that one certificate!

Did I change my bid or cancel it? No. This certificate was late in the auction.  I started to look at certificates that would close hours before this one would close.  I saw certificates that also had 7,000 plus bids.  I knew it was a fund or bank that was bidding and they could place those 7,000 bids on only one interest rate per certificate.

Once the first batch of certificates closed in the morning, I went to see the results that showed at which interest rate the bids were placed.  I saw consistently that any 7,000+ bids were placed at the same rate for each certificate - 8%.  My bid was lower, so I didn't change or cancel my lone bid.

Here are the results of the bidding that were available after the auction:


I won the certificate and actually received 6% even though I only bid 5%.  So 7,000 bids should not scare you off.

Now we get to the third prime property I bid on.  This was another residential lot but not quite the luxury area as the first lot.  I saw that in 2011, lots in this neighborhood that had liens went for about 5%.  In 2010, there was an individual who had bid 2% for several certificates in the same neighborhood - but that person did not bid in 2011.

I couldn't be sure if the person would be back in 2012, but I also know I did not want to earn less than 4% on any certificate I won.  There were only 29 bids for this certificate, but the bidding went against past results.  Here are the bids:

There were several bids below mine at 4% so I lost out.  You don't win them all, but at least I was in the game as opposed to the people who bid way above the rate.

You don't have to build the detailed spreadsheet with all the bid breakdowns I use.  The auction website offers a text file of all the winning bids for each property that you can import into a spreadsheet. 

At least you'll know what the winning interest rate was for each certificate, so next year you could make your bid based on the previous year's winning bids for that area.  You'll be in the game.

As I said, I had two other certificates that I had as backup in case I did not win any of the 3 prime certificates.  But because I did win 2 of them, I did not have enough money left in the account to win either of the final 2 certificates.

But we can look at my bids and see if I was in the ballpark for winning them. 

Both certificates were on residential vacant lots in a very pricey area with great views.

Certificate #1 results:


I could have won - but out of money.  However, my analysis of prior year results gave me the best bid to win.

Certificate #2 results:

Again I had the right bid thanks to my spreadsheet analysis, but if I only had more money, I would have had a chance to win.

Due diligence is the most important analysis to perform.  You have to make sure the property is worth something, does not have EPA issues, bankruptcies and other legal issues. 

But after that, if you're using online auctions, you need to have prior year results to do your analysis of the competition and create your bid strategy for the next year.

My Arizona Liens - the pretty post

Sunday, February 19

This post is more eye candy than substance.  I'll get to the dirty work in the next post.  But hey, if there's beauty in real estate, you have to enjoy it.

In my last post, I talked about the results my friends received in their first tax lien buying experience.

I decided this year to pick off a couple of nicer looking properties for my lien certificates.  That meant lower returns, but I wanted to prove to myself that my bid analysis could help me win really competitive certificates.

Little did I know how competitive this year!

Since I decided for eye candy looking properties I started with parcel numbers for an area I had just visited this past June with my family.  The area is called "Village of Oak Creek" which has a Sedona mailing address.  The area is south of the actual town of Sedona and the views are spectacular.

Red rock formations with layers of white stone mixed in make for some of the most picturesque scenery in northern Arizona south of the Grand Canyon and Flagstaff.

I saw a particular certificate was up for auction again this year.  In 2010, I had bid and won this certificate on a residential lot that the owner has done some grade work and stone "bridge".  The lot backs up to the National Forest land so nobody will ever build behind the lot and the views are spectacular.

The lot pre-2008 was worth about $425K.  Lots in the area today go for about $195k.  When I won the certificate in 2010, the owner paid it off in 4 weeks.  However he did not pay the next year taxes and it was again in the 2011 auction.

I passed on it last year, thinking he would just pay it in a month.  Well he didn't.  It was in this year's auction showing the amount included the prior year's taxes as well.  That meant the certificate holder also did not pay the taxes for the current year.

I debated on bidding on it this year, and decided that since I wanted to prove I could use my spreadsheets to win bids, this was a perfect certificate because it would get a lot of bids.

I'll cover my bid analysis in the next post.  Since this is the eye candy post, here is a Google street view of the property:

A little blurry but you get the idea.  How would you like that view from your home every day?

Here is the overhead view of the lot in the red outline.  You can see how no one will ever build on the National Forest land with all the trails right behind the lot.



Houses in the area go for $600K to $800k these days.  I had to show this picture which is from a house two doors away from the lot that was sold a couple of years ago.  Nice view eh?


So that was the first target - the lot with the view.

My second target was just a few blocks away on the main road that leads to Sedona.  It was a commerical property that was built in 1979 and has a thriving bike rental and coffee shop business on the ground floor and then a couple of apartments on the top floor.

The business owner does not own the building.  When we visited in June we saw how busy this business was.  Being right across the street from the National Forest land with all the trails was the perfect location for this business.  The building was solid and the combination of apartments and retail space is something I like.

This property had all the earmarks of high number of bids certificate. Again the bid analysis will be in the next post.  I expect this certificate to be paid, but if you're going to bid on a property, it's fun to occasionally go for the eye candy and dream.

Here is the Google street view of the building:

The arrow obviously points to the building with the certificate on it.  Next is the overhead view (building in red outline) and you can again see the location to the National Forest Land and why the bike rental business is in this location.  Look at the parking and trails right across the street:

I know this next picture is big, but what a view from Google street view of the building on the left (arrow) and the view and area that it's located in:


Ok that's enough of the eye candy post.  I won both of these certificates and I'll go through the bid analysis I did to give me the best shot to win these liens.

I'll also go over the one I lost and the two other backup liens that I had if I didn't get these first two certificates.  We can see if my bid analysis would have put me in a position to win those.

Analyzing Arizona

Friday, February 17

I'll start this series of articles on my recent Arizona online tax lien auction results by focusing on the friends I mentored to their first tax lien purchase experience.

So these poor workmates have heard me talk about tax liens for the last couple of years.  Once I found that Arizona had their lien auctions online, I dove in full force a few years ago.

Lunch and water cooler conversations turned really interesting once they saw the interest rates I was getting.  Then when they understood the low risk and the possibility of ending up with the property if the owner never paid - they became fully engaged.

We spent several lunches together where I gave lectures on Tax Lien 101.  We started with the basics of what a Tax Lien is, how they differ state by state, how they work in Arizona. 

Then we dug deeper into parcel research, due diligence, how the auctions are run, risks, returns, etc.

Finally I gave my experiences and how I do analysis for online auctions in Arizona.  I showed how I build my spreadsheet of past auction results, how I outsource the copy & paste work of data, how I build the spreadsheet for the certificates in the current auction once it becomes available.

Four of the friends decided to invest this year for the first time.  We discussed strategies and I drove home the reality that they should be expecting the owners will pay back the lien.

The friends consisted of 2 guys, one in his mid 30's and single, one in his early 40's married with 2 grade school children.  Also two women participated - both married and their 30's, both with grade school children.

The married people all decided to take some money they had in the kid's college accounts earning less than 1%.  They had enough exposure to mutual funds and were looking for safe returns that were better than CDs.  The single guy wanted to look at another investment option that was safe but better than CD's and money market funds.

Once the list of certificates came out for the Arizona auctions, I had my outsourcer add the legal description (vacant land, residential, commercial, etc) for each parcel to the spreadsheet of certificates.  This allowed us to filter and search by Lien amount, or parcel number, or type of property.

Since each person was looking at only getting one lien to test the waters this year, they all picked their interest rate floors - that is the lowest rate of interest they wanted to accept.

In the northern Arizona auctions, you bid on a certificate by bidding the lowest interest rate you will accept.  The lowest bidder wins.

You can end up with a higher rate if you are the lowest bidder - for example you might bid 4% - and the next lowest bid is 8%, so then the auction software awards you 7%.  You were the lowest bidder, but since the next lowest bid was 8%, you get the rate right below the next lowest bid.

If there is a tie, then the computer randomly picks from the pool of bidders who all bid the lowest rate.

Part of the fun of tax lien investing is the dreaming "what-if" scenario where you imagine the owner never pays the taxes and you eventually end up with the property.  I stressed that is probably not going to happen, but I also said you want to bid on parcels that if you ended up owning it, it was worth more than the taxes and expenses you would be putting into foreclosing.

Once they had their interest rate floor chosen, I pointed them to the spreadsheets of the past 2 years of auction results I had on the county.  You see, while the current auction is open, you can place your bids (0% through 16% in round increments) online for any certificate you want to bid.  You can only place one rate to bid for each certificate.

The only indication you have of the competition is the auction website shows you a total number of bids placed on each certificate.  You don't know what rates other people bid, but you know how many bids are placed on the certificate.

Once the auction is closed, the website shows you how many bids were placed at each rate for each certificate.  That tells you exactly what the competition bid.  Since you can't see that during the current auction, the best you can do is gather the data after the auction and use it next year to create your bid strategy.

My spreadsheets are enhanced with the all the bid counts for every certificate that was sold in the previous year's auction.  I have that data for the past 2 years.

What I've found is that parcels in the same geographic location tend to have the same winning interest rates each year. I can sort my results by parcel location (same neighborhood), by type of property (vacant, residential, commercial), and by total lien amount.

I can see from the past results if a certain neighborhood had a lot of bids and were sold at lower rates.  I can see if vacant land sold at higher rates than residential or commercial improved parcels.

So I know if I want to get the highest rates (16% is the highest AZ rate) then I can sort the results from the previous year by rate, then look at the parcel numbers to see if the parcels in any geographic area consistently are won with high rates.

I can then further sort by type of property to see what types get the higher rates.  Same with lien amounts - do large lien amounts get higher rates than low lien amounts?

"Bill" the married guy wanted to get as high of a rate as possible.  We determined an area where the parcels consistently were won with high rates.  We found vacant residential had the highest rates and the least amount of bids. 

He then looked at the list of certificates in the current auction that were in the same area - you can sort by parcel number to get properties in the same geographic area.

He filtered that group to show only vacant residential parcels.  From that manageable list he did research to see if the properties were not junk slivers of land or non-buildable lots.  The auction website had links to the county records, Google maps, etc.  We looked at the EPA website to make sure there were not brownfield issues, and we looked at Zillow or Trulia for an estimate of current value.

He then bid on several properties at 14% in that area.  Results - he won a certificate and actually was awarded 16%.  The lot is between two homes in a smaller town (few thousand people).  A great certificate!

"Killer" the single guy wanted to get at least 10% and he wanted to get a certificate in a newer larger residential neighborhood.

He found several certificates based on previous year's results for 10% or above.  He attacked the list of current certificates and started looking at the Google map links to see if the street photos were of newer homes. 

He found a great area that had several certificates up for auction, that in previous years showed winning rates of 10% or above, and he placed his bids.

He won one and beat out 270 other bids and actually was awarded 11%.  By seeing the bids from the previous years, he knew bidding 10% was a good bid.  Once the aution was over and we could see where all the other bids were placed, we found all the other bids were above 12%. He found that by having the past results for that area, he had an advantage over the other bidders who would not have that data.

The two women did not fare as well.  They both did not win any certificates.  And the reason was that they wanted higher rates, but chose to bid on certificates in areas, that in the past, were won with lower rates than what they bid.

They liked the pictures of the properties, but despite what I taught, they bid rates that were higher than past year results.  Thus, they lost out.  They both have already said they will follow my advice next year.

In my next post, I'll talk about my own results this year.