Tax Certificate – To Foreclose or not to Foreclose? A Case Study
In 2011 I purchased several tax certificates in Yavapai county Arizona. Every certificate I bought that year was on residential vacant parcels in a small town in northern Arizona.
Each certificate also was for two years of taxes, not just one. In Arizona the owner has 3 years to redeem the certificate by paying the back taxes plus interest before the owner of the certificate can foreclose.
I was earning 16% interest on my money. Granted, the taxes on vacant residential lots in this area were low. Since taxes are paid in arrears, the taxes were still at highs of the real estate boom. Assessments didn’t start falling until about 2012 – which in turn made the taxes lower going forward.
When I bought the certificates, the taxes on the parcels were running about $500.00 per year. The lots had been selling for about $20k at the height of the boom and had already fallen to $10k when I bought the certificates. By the time I could foreclose after the 3rd year, the values had fallen to $5k per lot.
I kept paying the next year’s taxes so that I held the certificates and the sole right to foreclose for taxes. Each year the taxes fell. In 2012 the taxes were only $205, 2013 they bumped up to $243, and then fell again in 2014 to $175. By 2016 the taxes were $116.
While the owner has 3 years to redeem the certificates, the certificate owner must foreclose in 10 years or the certificate expires worthless. As of 2017 I was 6 years into the 10 year period for holding these certificates. A couple of owners redeemed after 3-4 years. I earned a nice amount of interest being 16%.
In the meantime, real estate values bottomed out and a few similar lots in the neighborhood sold for as low as $4k in 2014. It costs about $2,000 to use a lawyer for a tax lien foreclosure. I needed to sell a lot for about $6,000 to break even with my investment plus foreclosure fees. It didn’t make sense to foreclose with several years left in the 10 year period and annual taxes going down. The interest was still accruing at 16% annually (1.333% monthly).
I saw lots and homes selling in the area the spring of 2017. The recovery was starting to affect the smaller towns of northern Arizona. Lots in the same neighborhood now sold for $7k – $11K. I began to look at my inventory of certificates and the underlying parcels.
Then, out of the blue, I get a phone message from a woman in the town. She introduces herself in the message and says she and her husband live next to two vacant lots on which I hold the certificates. They are interested in either buying the certificates or the lots if I have started foreclosure.
I looked up the parcels and they are close to a lot that sold several weeks before for $7k. Now I had a decision, do I foreclose and sell the lots or do I sell the certificates and let her foreclose?
I had already done some research on the lots a few years before. Both parcels were in one person’s name. That person, and his spouse, had died in 2008. I could not find any heirs. The owners mailing address for the county taxes were for South Dakota not Arizona – so there was likely no heirs who wanted to use the lots. They probably weren’t interested in paying all the back taxes, interest and any legal fees either. The lots are likely to become mine in foreclosure.
So let’s look at the numbers;
I paid $1,841.98 in taxes for one lot through the years and earned $1,422.72 in interest through August 2017. The total amount to payoff was $3,264.70. The other lot was similar in size and the total to payoff was $3,267.77.
When you add in the foreclosure costs of $2,000 for each parcel, it came to at least $5,300 each for taxes, interest and foreclosure costs. The retail price was $7,000 per lot - a $1,700 premium if I foreclosed and sold the lots. However, there were still a couple of unknowns.
- Were there heirs who would redeem during foreclosure? That would be ok because they would pay all taxes interest and any legal fees I incurred.
- Would legal fees go above $2,000? Possible, since both owners were deceased. Probate might have to opened and the legal cost could possibly go up.
- The buyer and her husband might want to pay lower than market for the lots. If they backed out, then I would incur selling costs to list the lots.
- The time factor of waiting for a foreclosure to complete. What if the market slipped down again?
The decision I made was to sell the certificates to the neighbors instead of foreclosing. I proposed selling the certificates for what I had earned through August 2017. They accepted. All it took was to download a simple assignment certificate from the county website and have my signature notarized (free where I work).
The buyer had to create an auction buyer account with the county so they could be placed on the county system (free). There was also a $20 fee for each parcel for the reassignment. The buyer paid those fees when they created their account.
I gave their bank my bank’s wire instructions so they could send the $6,532.47 to my account. All they wanted to see was that I had the forms notarized. I grabbed my smartphone and took a picture of the assignment certificates that were completed and notarized. I have an app that converts that to a PDF and I faxed that to the buyer’s bank and emailed it to the buyer too.
The money was wired, I saw it deposited and I sent the original documents to the county and put the buyer on the tracking of the envelope.
The owner would be out only the $40 they had to pay the county if any heirs pop up during their foreclosure case. But they also are earning interest each month going forward.
There you have it, a simple case study of almost doubling a small amount of money for little work. This is money I would have earned maybe $10 in interest if I left it in the bank for the same period. There were too many unknowns to foreclose for a $1,700 premium versus assigning the certificates to the neighbor instead.