I went to my first tax lien sale yesterday (Boulder, CO) and wanted to write about my experience. The interest rate this year was 11% and if the account owner doesn't pay for the following year you get the first opportunity to purchase those outstanding taxes as well (also at 11%). After 3 years of delinquency you have the opportunity to apply for a treasurer's deed.
A couple of days before the sale I came up with my strategy.
1) I was taking a purely investment approach and completely discounting possible homeownership. From what I understand, actually getting a house from a tax lien sale is extremely rare, and happens less than 1% of the time.
2) I was planning on spending up to 15k since this was my first auction. I was only going to bid on liens that were in the $1000 to $3000 range. My thought process was that since I wasn't planning to spend a ton of money I wanted to diversify this money across several liens.
3) I was only going to bid on tax liens that were backed by residential property. I didn't want to mess with any random weird lots of land in the middle of nowhere with no access and no utilities. I did some due diligence using the tax assessor's website, google maps, and redfin/zillow to look at the property backing the lien. My initial impression is that it takes forever to do this research. Even though my criteria was pretty narrow it still took quite a bit of time to go through hundreds of listings to figure out what actually matched my criteria. Does anybody have tips on how to optimize this task?
4) I was looking for around a 9% ROI, assuming that it takes the account owner a full year pay the outstanding taxes. Of course, if they pay off faster that number goes down, if it takes them longer that number goes up. But as a starting baseline I was assuming 9% after a year. I put together a quick little ROI lookup table that told the the percentage return at varying price points.
When I got to the auction I learned that we were actually going to be bidding on the premium amount (number of dollars over the tax lien value), not the total value you would be purchasing the lien for. This meant the quick ROI lookup table I had put together was garbage. No worries, I did some quick math to figure out my max premium bid for each of the liens I wanted to bid on, and re-sorted the listings to match the order in which they would be auctioned off. Basically, I was willing to pay a 2% premium and still meet my target of roughly a 9% ROI.
Once the bidding actually started it became abundantly clear that I wasn't going to end up with any liens. Everything was going for like a 6% premium. At that rate, if the account owner pays off their lien within 6 months they end up losing money on the deal. If it takes a year for it to be paid off, they are essentially getting a 5.5% return. If it takes 2 years, and they are able to buy the outstanding taxes for the second year as well, then it starts to approach a 9-10% effective annual rate of return.
Of course there were people bidding like 8-10% premiums on certain liens. And there were other people who were bidding on all of the really low value tax liens. They would pay like an $80 premium on a tax lien worth $40. I didn't really understand that at all. Why would somebody pay $120 to get a tax lien worth $40, backed by some 0 acre piece of undeveloped land in the middle of nowhere?
My big take away was that I felt like I was missing something. I just didn't get what people's strategies were. The handful of people I talked to definitely had an investment approach and were realistic about how rarely you actually get the property deed. So it didn't seem like people were bidding in order to win deeds to the property. But still, at 6% premium you are making anywhere from a small loss on your money up to 9-11% return on your money, depending on when the lien gets paid off. It feels a bit unpredictable, a bit like gambling.
This was definitely an older crowd, so I was half wondering if some of these people were just using the tax lien investment vehicle as an alternative to bonds. That could make sense, as your money is typically only on hold for up to 3 years, and the returns probably look pretty decent compared to bonds. It might not be such a crazy idea if you are looking to rebalance your portfolio and take money out of the market as you get older.
But I don't know... I kept coming back to just investing in performing notes. You can get these for a pretty solid return of 9-10%, which is the most you will be making on tax liens anyway. They are also backed by real estate, and they are pretty safe as well. I'm just not seeing the advantage of tax lien investing over note investing when I compare the two. I just don't think the returns are as good or as predictable. Regardless, I'm glad I went, as I definitely learned a lot.
It can seem overwhelming at first. Hang in there, it gets easier, and more difficult, as time goes on. Iowa is a 24% state, with a 2 year redemption period. So far, I have limited myself to 1 county, but have another research ready in case I need to invest more cash.
Our strategies are a little different. I manage a group of investors. This allows more investment capitol with less of my own cash. The investors then pay me a commission (on profits only) to invest their cash. Investors are not interested in ownership, as that is where the bigger risks start, but I have a backup plan in case I do have to take ownership. Win, win!
I don't discard the lower value liens. I would rather purchase 2) $500 liens than 1) $1000 lien. This way, if one of the liens are redeemed, I still have $500 invested. For this reason, I try to buy as many liens as possible with the available cash, rather than buying a fewer number of the higher dollar liens. The cash from the redeemed liens is then invested in the sub taxes, when due, on the active liens.
Research, research, research! It can be the key to your success, or a nail in your coffin. June is a very hectic month at my desk. Everyone around me knows that I am no good to anyone until after the tax sale is over. However, I have gotten very familiar with the properties in the county that I concentrate on and have purchased liens on the same properties multiple times over the last few years.
I send 8 bidders to my target county. I usually come out of the tax sale with 20-22 liens, and can invest somewhere between 14-16k. I then have another county close by, that holds their sale in the afternoon. If I need to, I can attend that sale to pick-up more liens if I have the available cash. The only downfall is the registration fee. It is possible that I spend $25 per bidder on fees, and never attend the sale.
This system has worked well. In the last 8 years, I have never had to take possession of a property. The investors pay me 25% of the realized gains, and still see an annual R.O.I of somewhere between 13-17%. They are happy, I am happy! Win, Win!
I like your approach. I am definitely trying to figure out how I get to the point of using other investor's money through either performing notes or tax liens. Finding people with money to invest is the easy part. The part that I have been struggling with is finding returns that are high enough in order to attract the interest of investors. With an ROI of 15% I think I would have no problem finding people that want to invest with me (I could set up something where I get 25% of the realized gains; or I could split profits 50/50). However, it seemed like the tax liens I was looking at would return maybe an average of 6-8%, and the performing notes I am able to find right now are returning 9-10%. There is just not enough of a margin to attract other investors and still get a percentage for myself.
Regarding the tax liens in Iowa, what does that 24% usually get bid down to? Do they still typically wind up in the double digits? Also, you typically do research every asset behind the lien that you are bidding on? How do you manage to do this effectively? Do you hire virtual assistants? Are there websites out there that can do this efficiently? Or is it just a grind?
Thanks for any insight!
I don't understand why they would only average 6-8%. Yes, some of them will be redeemed in the first 2-3 months, which would yield 4-6%, but there would be others that would continue for a full year. Let's say you bought 2 liens at the tax sale in June. Each property was 1/2 year behind, and each lien cost you $1000. The first lien gets redeemed in September. You would earn 8% on that cash(2% per month). Let's say the second lien stays active for a full year, and redeemed in May, just before the next tax sale. In October, there is subsequent tax due of $1000 on that property. You take the cash from lien #1 to pay the sub tax on lien #2. In April there is another sub tax due on lien #2 of another $1000. In the first year of lien #2, you have invested $3000. If it were redeemed in May, your payout would be as follows: On your original lien you would earn 24% (2% x 12 Months). On the first sub tax, you would earn 14% (2% x 7 months). On the second sub tax you would earn 2% (2% x 1 month). Overall you have earned $240+$140+20, or $400 in interest. $400/$3000=.1333 or 13.3%. I gets even better than that through the second year.
Iowa's interest rate is set at 2%/mo, (24% annual). The bid down is for % of ownership. I have seen 3-4 bid downs in my primary county in the last 8 years, and none of them have been below 95%. This is at the live auction. From what I have seen, the on-line auctions are a little different. I would be hesitant to bid below 51%, unless I knew for sure that it was going to be redeemed. It would, likely, need to be an income property, or have a mortgage on it before I would even remotely consider it. Even then, I would be a little nervous. The first couple of years, research was a task. I researched all of the liens that I was interested in. I searched each one on IowaAssessors.com, then I took a Saturday to drive the county to see each one of the properties first hand. Since I go to the same county every year, I don't do the drive by any longer because there are very few liens offered that have not been offered in the past years. Some of the liens offered are on the list every year, if not, every two years. After a while, you get to know which liens will be redeemed in the first year, and which ones you will be able to hold for the second year.
Sorry for being so long winded...hope this helps!
At that rate, if the account owner pays off their lien within 6 months they end up losing money on the deal
I Don't understand that. If you are earnign6% how are you losing money?
My big take away was that I felt like I was missing something. I just didn't get what people's strategies were.
Some people just don't know what they are doing and make bad investments. If you have listened to the hype of tax lien investing and never took the time to learn the downside, it is easy to lose money.
I suspect some of it is big money like banks and hedge funds that have a very low cost of capital and 5-6% is killer money for them. Some of it is smaller investors that are happy to beat a bank CD. Some as I said above is just ignorance. I see a regular cycle of people coming in, think they are doing great, and only after a couple of years do they realize some that don't redeem are losers.
@Ned Carey The interest rate is really 9.16% compounded monthly. You only earn interest on the principal. So let's say the tax lien is worth $1000, and you buy it at a 6% premium (for a total of $1060). If they pay their taxes after 1 month, then you only earn 1 month of interest ($9.16, so you would have a net loss of roughly $50 on this purchase). If they pay their taxes after 6 months, you would get $56.28 in interest, so you would just about break even, but still a slight loss.
@David Piqueira are you sure you do not get the premium back? In MD you pay a premium the day of the sale. This premium does not earn interest however you do get it back when the property redeems.
@Ned Carey Yes, the boulder county treasurer website clearly states that (1) the premium is not part of your investment, (2) you will not earn interest on a premium, and (3) premiums are not refunded or returned. Maybe I just don't live in a very favorable place place for tax lien investing.
@Kent Braaksma I'm going to run with your example, but substitute in the CO numbers. You buy the 2 liens ($1000/each) at a 6% premium (typical from what I saw) at the auction in December 2017. The first lien redeemed 3 months later, while the second get redeemed 23 months later (November 2019). For the second lien you buy the endorsement of $1000 in July 2018, and another $1000 in July 2019). On the first one you lose $33. The second one you get $173 from the original lien ($233 interest on principal, minus $60 premium). On the first sub tax you earn $168. On the second sub you earn $47. Overall that is $355/$4000 = 8.8%
I guess that's not too bad, but it still feels a bit like a gamble since you don't know when they will be redeemed. Diversifying your investment across multiple liens helps, but it still doesn't feel like they will do better than performing notes. At least not from what I see.
How does the bid down for % ownership work in Iowa? Do you split the interest with the county? And then if it goes to auction then you split the money from the sale as well? That's interesting. Also, 24% interest is huge! Maybe I should look into Iowa, it's not that far of a drive, but it's also not the most interesting drive...
@David Piqueira OK so back to your original question, why do people do it? Stupidity. People buy lottery tickets too but that doesn't make them a good investment.
It sounds like you should stick to performing notes.
@David Piqueira The interest rate is set at 24%. What your are bidding down is the ownership of the parcel if you would need to foreclose. I would never bid less than 51% ownership, as I would never pay a premium to buy a tax lien. I would assume these are huge corps, or big banks that buy 1000's of liens, in hopes that more of them will make money than will loose money. If that is the case, I will bail on tax liens, and find another investment.
I have to agree with Ned here. Stupidity. I don't claim to be an expert on anything. However, if I make an investment, I want to make that investment at the lowest risk possible. I know nothing about note investing. I know that there are good notes to invest in, as well as there are bad notes to invest in. Tax liens are the same. Some are good liens and some are terrible liens. If you know notes, that is where you need to invest.
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