Illinois tax liens..0-3%?

Question

I'm VERY new to this, so I have to be overlooking something. In Illinois they do a bid down auction on the penalty interest. And after some research, I found the majority of the winning bids on the liens go for between 0-3%! How are people making money with those interest percentages? Seems like a ton of leg work for such a low return. Am I missing something?

Thanks!

Chris

Thanks!

Chris

Emmett R. McCarthy · Answer

Many inexperienced tax buyers in IL don't realize that while the bid rates on the initial tax sale are typically low (0-5%), the penalty rate on subsequent years' taxes paid and posted by the tax buyer are 12% per year or part thereof. Therefore, if someone redeems the tax sale the day after a tax buyer pays and posts a surtax, the tax buyer has just made 12% interest. A year and a day later, the tax buyer would make 24% interest. Another thing to keep in mind is that only "police and welfare power" municipal liens must be paid before obtaining a tax deed in IL, other muni liens and judgments do not have to reimbursed and are the liability of the former owner not the tax buyer. I have many clients, both professional tax buyer and "mom and pop" tax buyers that are doing quite well investing in IL tax liens.

Jerry K. · Answer

@James Bitakis - I live in Will county but I don't bid/invest here. The last time I attended was in the late 1980's. It was all open outcry auctions then and the best property liens were all won by a small group of investors. I would never be able to prove it, but it seemed like typical Illinois politics. People with political connections won the best liens at the highest rates. See this case from 2013 in IL involving the Madison County Treasurer.  And this article St. Clair tax sales show disturbing similarities to bid-rigging scheme.

I keep track of the results of Will because the county website publishes the results each year. It's pretty funny to see the names of the winners; like AL CZERVIK LLC, TY WEBB LLC (both are character names from the movie Caddyshack) and an entity name "Scrub a Dub".

Based on your comment about each investor getting a laptop to bid, tells me Will county is now using RAM auctions for bidding. RAM auctions is run by a downstate Illinois firm and they have their system used by several IL counties. It helps eliminate the issue of an auctioneer steering bids to only a select group of people, but it still means you have to be at the county building in person to bid.  Here is a video from several years ago of how the auction works with that system from Peoria; 2009 Peoria County Tax Lien auction.

It is weirdly quiet as all the bidders sit in one room and each lien is sold in 5 seconds. You can't look away or you could miss the auction of a lien you want.

10% on residential from my spreadsheet is actually higher than reality. My results include the liens that no one bid on and the county takes them back at 18%.  You filter out the county 18% liens and the good residential parcels on average earn only  0%-2%. You have to get to the less populated counties to get higher rates on liens with houses.

Account Closed · Answer

I would say you should beat the competition by visiting the default tax property to find the owner, knock on door (the house may be vacant - how you really have to work, but it will be worth it), ask if they'd like to sell.  Control the property, pay the back taxes and do your thing, flip, finance, fix it up, rent it.

James Bitakis · Answer

Chris, I bought a Tax Lien 16 yrs ago on a property on the north side of Chicago.  It was a SFH in a decent middle class neighborhood.  I bid 18% and won!  In 3 months the owner of the home redeemed and I got paid my investment + 18%.  While I was bidding, I did notice a lot of properties being bid down by a few people.  In fact, they would have bid me down except for the fact that I strategically sat in the back of the room when I bid.  By the time these people turned around to see who had yelled out "18", the auctioneer had already said "Sold".  The auctioneer does not wait around.  If you don't immediately bid against the person, he sells it and moves on.  Remember, in Cook Co. there are hundreds of properties that the auctioneer is going thru.  It doesn't matter to the county people what bid wins, because remember the county is just interested in selling the taxes.  It is the owner that has to pay the penalties when they redeem.  I am planning on doing this again in Will County.

James Ihssen · Answer

@Chris Bojanowski

One thing to keep in mind is that 90+% of the time there is a mortgage on the property at the tax sale and the banks send representatives there that will bid and win the property at 0% just to protect their interest in the property.

As I am sure you know, tax liens wipe out a mortgage so they are not interested in earning a return, they just want to preserve their interest in the property.

I was very interested in tax lien investing until I started attending auctions and seeing the same 5 people in suits instantly bidding 0% on almost every single property.

Hope this helps!

James

Emmett R. McCarthy · Answer

The Cook County Property Tax Portal and the County Clerk's Delinquent Property Tax Search provide different types of information. That being said, both sites have disclaimers at the bottom re: they are not the official records. As I always tell clients, the online information should be used as a tool but not as the "official" records. I am frequently retained for the purposes of giving clients an objective analysis of the tax situation on various properties and then guiding them through the process, whether they are investors, property owners, mortgage companies or title companies. Thanks for asking and good luck!

James Bitakis · Answer

Let me say this too.  The reason that I did not buy more Tax liens (bought this only 1 in 2000), was because it was a lot of work for just 18% I thought.  I investigated about 20 properties, was at the Cook County building 5-6 times researching any other liens, or back taxes owed on these properties.  Then when I initially starting bidding, it felt to me as though the big investors were purposely bidding against me (but not against each other large investor) and any other small investors.  It was almost like they were trying to get us to "give up" and go home.  I couldn't understand this because I only wanted 1 lien, compared to them bidding on hundreds.  I felt like saying, "Cmon guys, can't you just let me have 1, you greedy bastards".  Anyway, the way I gave them the slip was that I changed my location to the back of the room the following bid day. They, not wanting to bid against other large investors, were not sure at first who yelled "18", and so they turned around and before they could bid against me, the auctioneer said "Sold" and moved on.  So that is how I outsmarted the large investors.  But all the research took probably 20 hours.  The lien I bought was only $1100, so I made approximately $198.  For 20 hours worth of work, I didn't feel it was worth my time to do it again.  Of course, in retrospect, I feel that the more I would have done it (the research, etc.), the faster I would have been able to do it.  But life's issues got me sidetracked.

Jerry K. · Answer

@Chris Bojanowski I gave some feedback on the past results of the Will county tax lien auction for the last few years on another thread; here.

I did some playing with the results data again and this time I did the average rate of return by "Building Type" as listed in the county records. This is more for fun since you can see in the list there are very similar "types". Not much you can do with this data.  Some have numbers at the beginning which I take to be some kind of code the county uses.

This data alone shows how inconsistent some counties have in their data. It would be interesting to know how the county defines "Newer" versus "Older" in the building types.

Emmett R. McCarthy · Answer

The redemption period depends on the type of property and the number of tax years delinquent. If it's a dwelling structure of 6 or fewer units, the initial redemption period is 2.5 years and can be extended by the tax buyer to 3 years. If you have gone thru the legal process (petition for tax deed, take notices, etc.), you can usually obtain your deed about 1-2 months after the redemption period expires. If you are going to be bidding at the 2014 Annual Tax Sale in 2016 and there are prior years, those prior years' taxes will be added to your tax sale and if not, they will be "merged" (wiped out) into your tax deed once you obtain and record your tax deed. If you want to find out the tax history, order a tax search from the Cook County Clerk or check the County Clerk's website online. Good luck.

Emmett R. McCarthy · Answer

I always check the official county records, the judgment books and warrant books, if I need to be sure. If I have a client who is looking to buy taxes, we may order forfeiture bills depending on the circumstances. Relying solely on the Clerk's online search has its perils.

Illinois tax liens..0-3%?

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