Posted almost 9 years ago

Example of a Tax Lien Payoff - Here Are The Results

A few years ago I bought several real estate tax liens in northern Arizona on residential
vacant land. I'm earning 16% (gross) interest on them. One of those liens paid off in October and I thought I would give the breakdown of actual interest earned to show the
details of how liens work when redeemed (paid off) after a few years.

Since every state/county is different in terms of how tax liens are handled, it's
important to note a few things about this county in Arizona. There is a 3 year
redemption period. The owner of the property has three years from the date of the lien
being sold to pay back the taxes plus the interest.

If the owner doesn't pay in the first year, the lien holder has first right to pay the
next year taxes and keep the lien position. These are called "Subsequent Taxes" or "Sub-
taxes" for short. So each year you (the investor) need to pay the new taxes. It is
considered a separate lien. You earn the same percentage rate at which you won the lien.
For example, if you won the original lien in the auction at 9%, then you would earn 9% on
the subsequent taxes you pay as well.

You have 10 years to foreclose on a lien. The 10 years is based on the date of the
lien. If you have paid the taxes for 10 years, and do not start foreclosure on the oldest
lien, then that lien is void and you do not get any of your principal or interest earned
on that lien.

There is a fee on which you do NOT earn interest. When you buy the original lien there
is a non-refundable $10 fee. That impacts your return, and thus, the Internal Rate of
Return (IRR) is not 16%. Plus, the first year is not a full 12 months of interest. And
depending on when it's redeemed by the owner, the last year is not likely a full year.

The lien starts accruing interest the first day of the next month after the auction.
Arizona liens are sold in February, so you start accruing interest on March 1st. And
yes, that means if the owner pays the back taxes before the end of February, you get no
interest and are out the $10 non-refundable fee - but you do get your Principal back. The
interest accrues on the first day of each subsequent month. If the owner pays on the 1st
day of any month, they have to pay the full amount of interest for that month.

With that, here is a breakdown of the interest earned on this lien.  (Click on picture to see larger version) Note - "P1" is January, "P2" is February, etc.

Normal 1418568690 Az Lien Return

The upper left is each lien year and how much interest I earned on that particular year.
For example, the first year lien is $350.60 of Principal. I earned 44 months of interest
on that year's lien or $205.69 in interest.

I should point out that when I bought this lien, it was for 2 years of taxes. So the
second lien amount of $375.60, I also earned 44 months of interest or $220.35 of
interest.  Also note the Cash Inflow is the sum of all the Interest earned and the Principal paid back. You don't get paid any Interest until the lien is redeemed by the property owner.

The Return % is a gross return on that lien amount. Under "Rate Analysis", the Internal
Rate of Return is using Excel's formula. I used Ankit Duggal's Tax Lien IRR spreadsheet in
the BP Resources > FilePlace > Spreadsheets. Note the first year outflow is $360.60
because it includes the $10 fee the county charges in the original auction. Interest is
NOT earned on that $10 fee.

So while my gross return is almost 44% in total, the IRR shows a healthy 15.9% return for
the overall time period of the investment. I have 9 more of these liens still earning a gross 16% annually.

Comments (13)

  1. @Tim Holmes  I also learned from self-study and talking with lawyers who specialize in tax lien foreclosures.  At some point in the early 1990's I bought a used guru course off of ebay.  The best thing I got out of that was the listing of all the counties that sold tax liens and tax deeds at the time.  It's out of date now and the course was very basic.  It did have have video tapes of actual auctions and interviews with the guru "students".  I found the actual auctions very enlightening to see since I only had experience with my local auction at that point.  That course has long been in the trash since it is so dated now.  I really don't recommend guru programs since most are funnels to lead you to higher priced "coaching" or have you just give them your money for them to invest.

    1. @Jerry K. Thanks, notes, liens and deeds appeal to me more than tenants.

    2. @Jerry K Thanks, notes, liens and deeds appeal to me more than tenants.

    3. @Jerry K Thanks, notes, liens and deeds appeal to me more than tenants.

    4. @Jerry K Thanks, notes, liens and deeds appeal to me more than tenants.

    5. @Jerry K Thanks, notes, liens and deeds appeal to me more than tenants.

  2. @Ned Carey  That's right - in Arizona you can foreclose 3 years after the date of the first lien, and you must start foreclosure by the 10th year or your lien "expires" worthless.  

    In many counties in Arizona, there is only one line holder.  If you buy the taxes this year and the owner does not redeem nor pay the taxes next year, you as the lien holder have the option to pay the sub taxes by the end of December.  If you don't pay the sub taxes, then the current year taxes AND your lien from the previous year are sold in the next auction.  The new buyer pays you off with interest, and they also own the current year taxes.  They are now 2 years into the redemption period and that much closer to foreclosure.

    My example above is a parcel where I kept paying the sub taxes but did not foreclose after the 3rd year.  The owner redeemed int he fourth year.

    In Maricopa County (Phoenix area), they use a different process where you can buy an hold just a single year of taxes without having to buy the sub taxes.  If you have the oldest lien, then you can foreclose first.  You will have to pay the sub taxes when you foreclose to pay off the sub lien holders.  If you hold the oldest lien only and you don't foreclose in the 3rd year, once the person who owns the next year's tax lien hits the 3 year mark, they can foreclose. 

  3. If I understand you @Jerry K.  you can start to foreclose after 3 years and you must start foreclosure before 10 years? Can you foreclose if someone else buys the sub taxes?

    @Tim Holmes  I learned from both self study and the attorneys I work with.

    1. @Ned Carey thanks I always enjoy reading everything you write here.

  4. Jerry good article. I love the 15.9% IRR but it must be very time consuming trying to get $100,000 invested in a bunch of tax liens not to mention all the book keeping. Did you have a mentor starting out or did you learn though self study?

  5. For those who may have read this post in the first week, I noticed my dates that I paid the subsequent taxes were incorrect.  I had them as though I paid in March of each year, but I had actually paid them in December (the last one was credited as January 2014).  The spreadsheet month-by-month was correct, just the dates needed to be corrected.  The IRR calculation looks at those dates.  So by correcting the dates, it upped the IRR from 12.9% to 15.9%.

    1. How do I download the spreadsheet you used? I can't seem to find it the way you mentioned.