Tax Liens: Over-the-Counter. Junk or Needle in a Haystack?

Tax Lien investing is where you pay the outstanding tax bill on a parcel because the owner has not paid their taxes. You earn a rate interest on your investment that gets paid when the owner pays (often called "redeems/redemption") the taxes back.

When a county/city sells the tax liens/certificates, investors bid on the liens either by bidding the interest rate lower or bidding up the amount they will pay in addition to the unpaid taxes. There are a few other methods of bidding, but these two options are the most popular.

A county may have thousands of liens available to purchase and not all liens are sold to investors. Those unsold liens are often called "County Held" liens or "Over-the-Counter" and can be sold directly by the county just by calling them up, getting a list, and then paying for them. You can get the highest rate the county offers on these types of liens. As an example, in Arizona you get 16% interest and in Florida it's 18% interest.

Not all counties sell unsold liens over-the-counter. They just add them to the auction the next year. Some counties have a special sale on these types of liens where it is first come, first served, but you can only buy them during the time frame of the special sale.

These sound like great deals since you get the highest rates with little competition. Many new tax lien investors ask me why they shouldn't just concentrate on County Held liens since the rates are so high. I tell them there are reasons investors pass on these in the original auction. Good liens are hard to find and take hours of going through hundreds of liens. Here are a couple of the more popular reasons to not buy an Over-the-Counter lien;

1. Junk Parcel - meaning the land is worth less than the amount of taxes and costs associated with doing a tax foreclosure.

2. Bankruptcy/Foreclosure - the parcel is involved with a bankruptcy or foreclosure that could delay the payment of the taxes for a long time. There are cases, although rare, where the bankruptcy judge reduces the amount of interest or taxes owed.

Let's take a look at the recently closed Pinal County Arizona tax lien auction. Of 12,445 liens, 9,585 liens went unsold. Many of the unsold liens are multi-year liens on the same parcel, but that is still a high number of unsold liens.

I'll randomly pick a few to look at and see if they fall into one of the two main reasons for not buying the lien.  It can take a long time to find a needle in the haystack of junk.

Parcel 10008002K for $51.33 - Looking at the aerial photo below, this falls under the Junk Parcel. It is a small, landlocked parcel. Approximately 30 feet by 143 feet, it's too small to build anything. The only redeeming quality is that the parcel is owned by the same person as the parcel directly to the right. That owner will likely pay to keep the land and keep a rectangular parcel. The problem is that the amount is so small, $51.33, of which $10.00 is a fee that does not earn interest, that even if they pay after one full year ($41.33 x 16% = $6.61) the interest does not cover the $10.00 fee.

Parcel 308030450 for $958.34 - The aerial photo below also shows a thin parcel of land that again falls under Junk Parcel. Approximately 20 feet by 190 feet. It has street access but is too small to build. The amount is actually 6 years of unpaid tax liens, so it could be foreclosed on immediately, but it's not worth the amount of the liens and the costs of foreclosure ($2k-$3k with a lawyer). Selling it to one of the neighboring owners is a gamble and there is little likelihood you would get enough to cover the taxes and foreclosure costs.

Parcel 1010309001 for $1,729.04 - This is an interesting lien. It is for one year of taxes, is a commercial building and seems to be in a decent area. The aerial shots below show U-Haul trucks out front so I assume it was a U-Haul rental business. A look at street view indicates the business is closed. The windows are boarded up, no trucks on the premises. A view of the side of the building shows a couple of electric meters so the space is two buildings connected but can operate two businesses. No holes in the roof are indicated in any of the pictures.

To the right of the building as you face it is a Dairy Queen restaurant that is newer and open for business. To the left are a couple of older retail buildings with gift shops. Across the busy commercial street are a McDonalds and an Arby's both in newer buildings. So the location seems very solid. 

The county record shows it is two structures connected. The front is classified as Retail built in 1973. The back portion was built in 1988 and is classified as Light Commercial Utility. Note the side view from street view shows 2 large overhead doors. Punching in the address into the EPA website shows there are no EPA issues with the parcel.

Initial look is not a Junk Parcel. So maybe there are legal entanglements. I looked at the Deed and it is owned by a couple in Fountain Hills, AZ. No mortgages, liens or other encumbrances are listed online from the Recorder's office, but a check with the actual office is in order since the website can be delayed in getting updated.

A Google search of the owners did turn up a lawsuit for the owner, but he is the plaintiff - not the defendant, and it does not involve this property. He sold a business 20 years ago with a note tied to the inventory of the business. The subsequent owner went bankrupt and never paid the note. Again, it is not tied to this property in any manner and since the owner is actually the plaintiff - he is not at risk. The owners are in their late 70's and no obituary notices are online for either person.

Google aerial and street view can be dated pictures. So I Googled the property address and it indicates there is a business active at the location. There is a retail store operated as a vintage clothes shop in the front. It has very good reviews on Yelp.com. Another website written by the owner of the business indicates her and her husband plan on using both the retail and the commercial portion of the building. She states that the build-out took longer than anticipated but her husband will soon be opening a repair business in the rear of the building. The Yelp reviews start in late 2013 and continue through present. I did not call the business, but that would be a next step for a lien investor.

So the parcel is not "Junk", a first look into legal issues indicates no bankruptcies or foreclosures, and possibly even no mortgages or liens. The space appears to be currently leased. This could be a very good lien to grab in a County Held auction or Over-the-Counter purchase. You'll get 16% interest and probably be paid off by the owners since there is no history of late taxes prior to this year. It's just a question of when they pay the taxes.

A little more research should be done to see if the building is still standing, a call to the recorder to make sure there are no new liens or encumbrances. A call to the business located there may be worthwhile also.

Hmmm, I wanted to show three random parcels that were not bought in the initial tax lien auction were worthless, and I may have stumbled onto one of the needles in the haystack. Just goes to show, there are always exceptions.  Can somebody please tell my wife that I do admit it when I'm wrong?