Return in Tax Lien Certificates

Tax Liens & Mortgage Notes
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Return in Tax Lien Certificates

Luc M.
CT · Member since 2011 · 41 posts · 3 votes

So, let's say you have an amount of money sufficient that you can buy a nice diversified portfolio of tax liens in a handful of states (live and online bidding Counties). What do you think the return potential would be over a 5 to 10 year horizon?

I would think the majority of the certificates get redeemed but you would have 2-4% that you would need to foreclose on. Several of those that you foreclose on turn out to be a PITA due to someone filing bankruptcy, a mortgage holder challenging you and forcing you to spend money in court to protect your claim, etc. I would think that you would be able to get a gross return of 10-12% but then your net reurn could be 7-8% due to the costs associated with the problem childs.

Does anyone have any real world experience in what is possible with a large portfolio of tax liens over a longer time horizon?

Thanks,
Luc

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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
14y

I know a lot of people do it but I do not recommend investing out of state. The laws vary considerably. Not knowing the specific laws can cost you a good amount of money. On the other hand knowing MD tax sale law very well has served me extremely well on a lot of deals. Early this year I was able to make a $58K wholesale fee and save $15k on taxes because I knew MD tax lien law better than any of the other players.

Also if you do not know a specific market very well you may not have a good idea of how assessments relate to the properties true value. This can make wise bids tough to do. There is also the risk of a building being dilapidated and you don't have the ability to inspect it if it is out of state.


My off the cuff guess would be 7-10% should be attainable.

I did MUCH better than that 5-7 years ago because I mad a killing on some properties I was able to foreclose on. Lately I have walked away from liens because the property wasn't worth the cost to acquire in a dropping market.

Today, especially in some areas with high vacancy and foreclosure rates you may be able to pick up nice homes because the owner has walked and the bank is asleep.

I am starting to inspect properties now for the May Baltimore City sale.

Good Luck,

Ned

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  • Jerry K.
    Specialist · Phoenix, AZ · Member since 2011 · 698 posts · 629 votes
    14y

    Luc,
    I don't invest in this group of funds, but they have a nice slide show of how they invest in Tax Liens in both a fund and a separately managed account for an individual.

    Take note of the slides that show the average returns and the slide that shows how they operate the fund.

    http://www.facebook.com/ComianFunds?ref=nf#!/photo.php?fbid=154310411255365&set=a.154310214588718.43365.107630372590036&type=1&theater

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  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    14y

    I know a lot of people do it but I do not recommend investing out of state. The laws vary considerably. Not knowing the specific laws can cost you a good amount of money. On the other hand knowing MD tax sale law very well has served me extremely well on a lot of deals. Early this year I was able to make a $58K wholesale fee and save $15k on taxes because I knew MD tax lien law better than any of the other players.

    Also if you do not know a specific market very well you may not have a good idea of how assessments relate to the properties true value. This can make wise bids tough to do. There is also the risk of a building being dilapidated and you don't have the ability to inspect it if it is out of state.


    My off the cuff guess would be 7-10% should be attainable.

    I did MUCH better than that 5-7 years ago because I mad a killing on some properties I was able to foreclose on. Lately I have walked away from liens because the property wasn't worth the cost to acquire in a dropping market.

    Today, especially in some areas with high vacancy and foreclosure rates you may be able to pick up nice homes because the owner has walked and the bank is asleep.

    I am starting to inspect properties now for the May Baltimore City sale.

    Good Luck,

    Ned

    2Reply
  • Luc M.
    OP
    CT · Member since 2011 · 41 posts · 3 votes
    14y

    Jerry,

    The Comian presentation looks impressive, but there isn't a lot of history with a those numbers. The separately managed account isn't very mature so you don't see the problem childs in the numbers yet. I was taking a look at another presentation from another group of funds and their returns for several funds were around 11%, but that is before management and incentive fees. Assuming a 1.5% or 2% management fee and a 20% incentive fee significantly alters the returns to investors.

    I went to a live auction in Mahwah, NJ recently. There were 40 certificates sold and the vast majority went for a premium. There was a $10.3k lien that went for 0% and a $50k premium. Another $3.4k lien went for 0% and a $14.9k preimum. There were plenty of others that went for 2-4x of a preimium. I understand being able to buy the subsequent liens and get 18%, but I really don't understand paying 4-5x of a premium and being able to make an adquate return?! Even lots were going for a 1.5x - 2x preimum.

    Sure, this was just one auction, but I imagine that the same crew go to most/all of the other auctions in NJ (NJ does auctions by towns, not counties). Judging by just this auciton, I would not think NJ makes a lot of sense for individual investors buying liens.

    1Reply
  • Luc M.
    OP
    CT · Member since 2011 · 41 posts · 3 votes
    14y

    Ned,

    A friend of mine knows a person that invests about $1 million in tax liens across several states. Last year he made a gross return of around 11% before his writeoffs and slightly under 7% after his writeoffs. Keeping track of hundreds of liens, dealing with bankruptcies and foreclosures across several states, etc., all seems like a lot of work for 7%.

    Hopefully some of the bigger boys will go away when the Fed starts increasing interest rates.

    0Reply
  • Jerry K.
    Specialist · Phoenix, AZ · Member since 2011 · 698 posts · 629 votes
    14y

    Luc,
    I hear you on the NJ auctions. Some are just so competitive it makes it hard to be worth your time.

    Comian was just a group of funds I stumbled onto while looking at the auction results for AZ that completed in February. I saw they invested $290.8 K in the one auction and averaged 15.19% across all the certificates.

    They spread that $290.8K among four fund names. I did a little internet search and found them. Seems like a smart woman running the funds with a good fixed income management background who has been investing in tax liens for 15 years or so.

    I liked the fact she did have slides online where you could see her returns and her overall strategy for the funds.

    Based on the bid counts for the certificates she won, it looks like she had 125 or 126 subaccounts in AZ. I saw she invested in some Florida auctions last year too.

    With a few of those Florida counties dropping the use of subaccounts, it will make it a little easier to get liens in Florida online auctions for the individual.

    I'm about to do a quick blogpost on my BP blog on some Florida counties dropping subaccounts. It may level the playing field for getting a lien, but I don't think it will increase the interest rates. I give my reason in the post.

    Jerry

    1Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    14y

    I just took a look at the Comian presentation. It is an excellent example of how easy it is to make tax lien investing look great. I can tell you impressive success stories but I can also tell you a number of horror stories.

    As an active tax lien investor, the presentation raises more questions than it answers. Luc, you are right, it has not been in existence long enough to give any indication of results. I have several partners who work with me. We are only now seeing the results from our purchases almost two years ago. The "Problem Childs" as you say (and the home runs) are just showing up now

    Some very safe looking purchases from 2010 don't look so good after two years of declining real estate prices and excessive assessments.

    As you have seen competition can be very high. The resulting returns can be so low as to make no sense. Their 17% forecast returns just don't seem credible to me. Also for such a small fund the travel expenses and due diligence they imply they do would eat tremendously into the returns.

    One big obvious no no to me is they are advertising a private placement on Facebook. SEC rules for securities exemptions require no public advertising.

    7% is just so so over the long run. It is a fantastic return in today's market. However the bids were just as high, and returns just as low, when market interest rates were higher.

    Luc, there are almost as many strategies to invest in tax sale as there are investors.

    My strategy is to know my market extremely well and pick up the good deals that fall between the cracks from the big investors. My goal is to inspect 2500 properties this year. With that many bids, that is a lot of liens that "fall through the cracks". My partners and I can can put a lot of money to work this way.

    I hope you find a strategy that works for you.

    Good luck,

    Ned

    2Reply
  • Jerry K.
    Specialist · Phoenix, AZ · Member since 2011 · 698 posts · 629 votes
    14y

    Ned is on the money with his replies. I know I saw some returns about funds from Comian that were earlier than 2010 on some other site, but more importantly, it didn't hit me until Ned pointed out that they are discussing and posting for investors on their Facebook page for a private placement.

    As a former SEC Registered Investment Advisor, I know that is a "no-no" for the private placement. I just went on the SEC site to find their documents for the funds. They are registered for private placement, so either I need to see if there have been changes to the laws, or that is in fact advertising that has not yet been discovered but the SEC.

    Good call out Ned. I'll be quiet now.

    1Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    14y

    Jerry K. Thanks for the nice comments.

    I doubt there have been changes to the rules although Perhaps there has been some kind of court interpretation of the rules RE Facebook. However I can't imagine the courts saying it would be OK to market on Facebook.

    There is a proposed new law about "crowd funding" - Modest amounts of money raised form a large number of investors.

    Ned

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  • Jerry K.
    Specialist · Phoenix, AZ · Member since 2011 · 698 posts · 629 votes
    14y

    Ned,
    I was just reading some "crowd funding" articles today thinking maybe that could be used for private placements - but like you stated - nothing on the books yet.

    And you're right, I doubt the SEC has a special exemption for social media posts. As a matter of fact I know the rules for financial firms posting on social media are pretty strict. The rule that they MUST archive every post they create on Twitter, Facebook, LinkedIn, heck, even here on BiggerPockets - is quite a tall order.

    You want to make good money, offer archiving services for Financial service firms of all their online posting and interactions!

    1Reply
  • Ken M.
    Tampa, FL · Member since 2012 · 7 posts · 1 vote
    14y

    The gist of what I'm seeing here after having researched tax lien investing over the past few days is that if you are playing w/ a sizable sum of money (say $1M in the state of Florida) it would be extremely time consuming and difficult to do the amount of due diligence required to make safe investments.

    Assuming you average 7% over the course of the year, that's $70,000. As a previous poster mentioned, that sounds like a LOT of work for $70,000, especially considering you'll be in tight competition for most of the properties you are looking at.

    Is there a play the numbers method worth exploring? Taking Florida for instance, just bidding 0.25% on thousands of single family home liens and hoping you win a bunch, get the 5% penalty and move on.

    0Reply
  • Jerry K.
    Specialist · Phoenix, AZ · Member since 2011 · 698 posts · 629 votes
    14y

    Ken M. Bidding on thousands of single family home liens in one county without doing any due diligence is not the smartest way to earn 5%.

    Ned Carey talks about staying local and really understanding your market so that you know what is good versus bad properties. He researches 1,500 certificates for one auction. It sounds like he has interns and assistants to help. Ned can you elaborate?

    If I had $1 million to invest, I would be looking at more substantial commercial properties. But the due diligence is even stronger at that level. Bankruptcies can tie up your funds for years at those levels.

    I looked at some of the Funds that invested in the online auctions in AZ last month. Some bought liens on properties that had "Unbuildable" in the property description. Others were listed as "Limited Use Well/Tower/Private Road". I normally stay away from those, but maybe the funds know something I don't.

    However those funds averaged 15% rates for the $300K they invested. Just not sure how many of the certificates will never pay and the property may be worthless.

    I think there is a line you dance around - once you have substantial dollars to invest (over 100k is substantial to me) - then you have to decide how to attack due diligence to make sure you don't buy headache liens with bad underlying properties.

    I know not everyone does a lot of due diligence all the time. I don't know how they do that and sleep at night though. I also know I don't go the levels of research more experienced investors do. I think it's a matter of being comfortable with your risk level and decisions.

    1Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    14y

    Ken M. you wrote:

    Well that is what me and my investor partners are doing. We will bid low on a LOT of properties. However we will at least drive by 98% of them. Keep in mind I am bidding in Baltimore City. Thousands of liens are available but many are decrepit abandoned 100 year old buildings. I have to inspect in Baltimore just to make sure there is actually a building there.

    Some areas are are newer, more consistent and /or much safer. Some bidders in Howard county MD just go by the assessed value without inspecting. One bidder I met there wouldn't buy commercial property because he felt that in the weak economy businesses might be more likely to be in Bankruptcy. Some online auctions even offer pictures.

    So there are areas you can bid without that much due diligence. However you have to do your due diligence to discover which auctions are safer, and which will make that a prudent or risky strategy.


    I couldn't begin to tell you because I don't know FL rules and how the bids affect the return. Which is why I say you have to at least do due diligence on the auction and rules even if you chose not to do much due diligence on the properties.

    Jerry K. wrote:


    Shhh don't give away my secret :-)
    Yes I have used interns and will again this year. Despite having a system for them to evaluate properties, some of my poor choices in bidding came from intern inspected properties. I usually have people calling me wanting to work with me, mainly from reading the blog in my signature below.

    Mostly though it's just hard work. This year I have been driving, with my partner grading properties on a laptop as we drive. We have covered as many as 150 properties in a day. I have done as many as 80 in a day by myself where I have gotten out of the car to check the rear of all properties. Today I don't bother checking the rear of most properties.

    Jerry I had to laugh about unbuildable property liens in AZ. I am surprised it was the funds. That usually is inexperienced newbies that it happens to here.

    Ned

    1Reply
  • Ken M.
    Tampa, FL · Member since 2012 · 7 posts · 1 vote
    14y

    Jerry & Ned, thanks for the replies.

    Considering today's interest rates, investing in tax liens seems to be an extremely attractive alternative to CD's or treasury bonds. Your money isn't tied up for long (barring a messy foreclosure or three), so if interest rates rise in the future you can take advantage of those easier, even more risk-free investments. But it appears that acquiring a large portfolio of lien certificates would be quite difficult.

    Wish I had the guts to get into "real" real estate investing, but my education on the subject is so limited. Ultimately, all I have is some money and no other skills related to the subject. Besides being good at math I guess. It's all quite overwhelming, so back to scouring this forum for ideas.

    0Reply
  • Jerry K.
    Specialist · Phoenix, AZ · Member since 2011 · 698 posts · 629 votes
    14y

    Ken M.
    "... all I have is some money..." is such a great position to be in these days!

    I have invested in many different types of investments over the years. I like to get in early and get out before the peak. I've been out of the stock market since Decemebr 2007 and although I missed the stock price recovery, I never lost a wink of sleep through 2008. I have dabbled in a few individual stocks in the past year and made some money and got out.

    I started looking at real estate again as the major investment back in early 2010. I hold a REIT or two that are holding their ground. I know tax lien certificates the best and so once I saw the online auctions and the data available, I jumped on that and have been building a strategy over the last 3 years in liens. I think there are still a few really good years left in liens, then when we get a recovery, the liens will simmer down.

    I like the idea of commercial real estate that has apartments also. There seems to be plenty of inventory of that variety these days and I also believe we will see more built in the future in suburban areas as boomers retire and young professionals want to be closer to the actual town centers. The storefron on the street level with apartments/condos above seem attractive.

    If you want to pursue real estate and you have cash, pursue what part of real estate really interests you. You have to learn it anyway, so it's easier to learn about something that you desire, rather than learn about something that the media or others say is "hot".

    I've been working on a speech about wealth building success that starts with a "startling" title to grab attention - "Diversification is for Suckers".

    The gist of the talk is that the richest people throughout history made their first fortune from one company. All the eggs in one basket. It wasn't until after they had all that wealth that they diversified.

    So learn one way to make money in real estate that interests you - as long as real estate is your biggest interest for making money. You can expand beyond that once you have success.

    2Reply
  • Bob Lowry
    Property Manager · Moraga, CA · Member since 2012 · 27 posts · 2 votes
    13y

    Great thread, especially for a newbie!

    Just getting started in building a real estate portfolio. Have one solid home, just waiting to rent it. Now looking at liens as a means for cash flow and returns and deeds as a means for lower acquisition costs to initially build more cash flow then to hold and rent.

    After 30 years of corporate life and trying to be PC, it sure is more relaxed being engaged in your own business, and especially in tangible properties!

    Still can use any guidance, learning's, so will be tracking this thread going forward.

    0Reply
  • Morris Lucas
    Rental Property Investor · Atlanta, GA · Member since 2012 · 256 posts · 64 votes
    13y

    I have been researching lien/deed investing as means to eventually get a property as opposed to interest. My question is for you experienced investors, does this niche still require the marketing dollars that other strategies like wholesaling and foreclosure do? I would think your "lists" are just the county sites, newspapers and drive-around vacants. I did my share of letters and bandit signs which i hate, which is why i am wondering if this niche requires that level of marketing to find the deals. ( i would think not)

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  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    13y

    Bob Lowry welcome to bigger pockets!

    Morris Lucas you can either buy liens and deeds and hope to get the properties or you can use money to market to people who are in tax sale and perhaps negotiate a deal with them directly. If the property sells before the right of redemption runs out you simply pay off the tax lien holder at settlement.

    0Reply
  • Morris Lucas
    Rental Property Investor · Atlanta, GA · Member since 2012 · 256 posts · 64 votes
    13y

    Hi Ned!

    I'm way ahead of you! I actually started researching a few tax sale properties coming up in Atlanta, and will start calling the owners to try to work a deal. I know someone who has access to Lexis and can get me current address and phone numbers(couldn't believe they actually produced a WORKING phone number).

    Before I start following up and making an offer for a deed, I was wondering about due diligence. I have a login for the state lien index which shows all the deeds, warranty deeds, liens etc recorded for a property. I assume researching this list of mortgages, liens as well as driving the property is enough to make a decision? If not, what else would any of you recommend I look into before approaching the homeowner? Thanks!

    0Reply
  • Lynn Henley
    Real Estate Professional · Shalimar, FL · Member since 2009 · 117 posts · 6 votes
    13y

    Ned,

    What is your "grading" specifications when you're looking at properties to purchase Tax Liens?

    0Reply
  • Matthew Stewart
    Abington, PA · Member since 2013 · 6 posts · 0 votes
    13y

    Jerry,

    How did you review the Feb AZ results?

    Anyone - how long until a portfolio of tax liens should start delivering interest income (not accruals) which exceeds the management fee?

    Thanks ... first time poster!

    Matt

    0Reply
  • Jerry K.
    Specialist · Phoenix, AZ · Member since 2011 · 698 posts · 629 votes
    13y

    Matthew Stewart - The results are from a file the auction sites post after the auction is over. I just import it into a spreadsheet and start filtering, sorting, and using pivot tables. I also manually add to the data with things like types of property (vacant land, residential, apartments, commercial, etc).

    Your second question is a little confusing, are you talking about if you invest in a Tax Lien fund?

    0Reply
  • Matthew Stewart
    Abington, PA · Member since 2013 · 6 posts · 0 votes
    13y

    Jerry K., thanks. Do you have a link that you can share? I invested in one of the Comain funds, and would like to see how they split purchases in that instance.

    And yes, I was referring to a tax lien fund. I know that it will vary depending on numerous factors, but if anyone has experience it would be useful to benchmark.

    Regards
    Matt

    0Reply
  • Jerry K.
    Specialist · Phoenix, AZ · Member since 2011 · 698 posts · 629 votes
    13y

    Matthew Stewart, try emailing Comian Funds and asking them directly about interest payments. You can try through their Facebook page too.

    Coconino AZ county and Pinal AZ county allow you to download the TXT results file without creating an account. Here are the links. You'll see the link for the TXT file right near the top "All Batches Results File".

    https://www.pinaltaxsale.com/users/bid_results.cfm
    https://www.coconinotaxsale.com/users/bid_results.cfm

    0Reply
  • Matthew Stewart
    Abington, PA · Member since 2013 · 6 posts · 0 votes
    13y

    Jerry K., thanks for the links! I will ask them, but wanted to see if there were any other opinions or experiences outside of theirs.

    Thanks again, I appreciate it.

    Regards
    Matt

    0Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    13y
    Originally posted by Matthew Stewart:
    Anyone - how long until a portfolio of tax liens should start delivering interest income (not accruals) which exceeds the management fee?

    Well that will depend on what you mean by portfolio. In my own portfolio, I start getting checks about 1 month after the tax auction.

    I presume you mean if you invest with some national company. That will depend on the exact agreement you sign. With the partners I work with there is no management fee.

    Lynn Henley, I am just seeing this now. In the past I had a complex grading system. It was tough for anyone who was working with me to implement. Now I basically just decide if it is worth bidding on at all. If it is I put in a lien bid or just above.

    If a property is in a nice area and I know it has significant value then I just ball park a low and safe bid when I look at the property. No matter what system I used, or how good my notes, I couldn't make as good a judgement when I got back to the office, as I could there on the street. Good luck - Ned

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