Posted over 3 years ago

Tax Lien history and payoff 16% in Arizona after 7 years

A few years ago I wrote a blog post detailing the monthly interest accrual on an Arizona tax lien that paid off. Tax lien payoff post link. I had purchased over a dozen liens on vacant residential lots in a small northern Arizona city. Arizona online tax lien auctions you bid the interest rate lower in 1% increments. All liens start at 16% and the winner is the investor who bids the lowest interest rate. I landed all the liens in this one area at 16%.

Also in this county, the lien holder has the right to pay the next year's taxes if the owner hasn't paid. This way the investor keeps control of all the liens. For this county, if the investor chooses NOT to pay the next year taxes, then the county takes the previous lien and interest earned and rolls it into the new taxes owed can sells the entire lien in the next auction. The new winning investor is buying all the historical liens, paying the accrued interest and now is the only lien holder. The original lien holder is paid their principal and interest by the county from the funds the new investor paid to buy the lien.

I had another of those vacant lot liens pay off after almost 7 years of earning interest. I had been paying each year's taxes to keep the liens in my name. I earned 16% interest for 7 years. 

This was an interesting "vacant lot" lien because there actually was a foundation for a new home that was poured and standing on the lot. The owner never finished the home beyond the foundation after the 2009 real estate crash. Red lines define parcel (County website a little off on the lines)

Normal 1544372741 Parcel Foundation

I have driven by the parcel a couple of times on visits to the area (I live outside Chicago and visit Arizona about every 12-18 months) and I had seen the bare foundation each time.

However, I just received a check from the county for the payoff on the lien. I still had 2 years before I had to file for foreclosure on the liens since you have 10 years from the date of the first lien to foreclose or else you lose that lien amount  - both principal and interest.

I buy liens mainly for the interest rate return. It's just one of my investment allocations that covers a real estate exposure for me. Getting the lot through foreclosure is not the end goal but if the owner never pays off, it's how I cover my initial investment.

Before I get to the interest paid breakdown, I looked up the parcel to see what happened to cause the payoff. It could have been the owner just realizing they needed to redeem the back taxes or, as I suspected, they sold the lot. 

What interested me more was that I saw the parcel was sold for $185,000. That told me the owner had finished building a house on the foundation. Unfortunately, there is no updated satellite or Google maps image showing the finished home. Google overhead show shows some type of update - as though a crawlspace floor was poured based on the "grid" pattern, but I don't see the garage on the front finished:

Normal 1544373478 Google View Foundation

Here is the history of recorded documents on the parcel from the county website:

Normal 1544373603 Recorded Docs Lot Foundation

We can see the lot changed hands on 7/19/2005 for $5,000. Then again 5 months later for $42,000. Pre-crash, lots in the is area were going for anywhere from $21k to $50k. Then the crash came and lots eventually fell to $5,000 (some sold for less via foreclosures) Today lots are being sold anywhere from $5k to $19k. 

My check stub from the county (below) shows the breakdown by lien of principal and interest. I love seeing this when I'm accruing 16% interest for several years. You can see the earliest year liens (2008 taxes are actually sold in 2010 so the "2008" taxes had until 2020 to be foreclosed on before I would lose any money). But the interest for the first three years of liens is actually greater than the principal amount I paid (the taxes).

16% interest is so much better than 2% in a CD or savings account - and this money was meant to be a part of my low risk investment allocation. (Click on image to make larger)

Normal 1544374219 Yavapai Lien Redemption Lot Stub

My plan, if I ended up with this particular lot, was to team up with a builder in that area that I have gotten to know through Biggerpockets. My contribution would have been the lot and the foundation. They would have financed and built the home. I would get my payoff at the sale of the home. As you can see the home that was built sold for $185,000 and I estimate the home's actual cost to build to be about $100k to $120k depending on the finishes.

Comments (5)

  1. Jerry, how much money total, would you have spent if you paid for the whole 10 years? Making the interest is great, but if they don't redeem in 10 years you have to go through the process to take ownership. What concerns me is if the cost of paying 10 years of property taxes plus the cost of the foreclosure, is that going to be more than the amount the land could be sold for? 

  2. Fantastic post.  thank you.

  3. @Bryan Hartlen The cost basis is what you said - the original taxes. It's actually the taxes plus any interest that has accrued between the time the tax payment was due and the time of the tax lien auction. While you pay for the accrued interest, the owner has to pay you all that interest you paid along with the principal when they redeem.

    You actually caught an anomaly that I did not even mention in the post; the owners paid their taxes for 2015 and 2016 year - but not the previous years that I held the liens. I earned interest for those two years that they did not redeem (pay back) the previous year taxes that were still outstanding. The owners can choose to pay the most recent taxes and leave their old unpaid taxes out there. My guess is, they wanted to build the house and sell it. Then use the proceeds to finally pay the back taxes and interest.  

    I hold so many tax liens in the area, I didn't even realize they paid their taxes in 2016 and 2017 - but not the older liens. No matter to me, I earned 16% interest for two more years and still held the liens. The interesting part would be that if I foreclosed, and they did not pay their old liens, I would be getting a brand new house for the cost of taxes on a vacant lot.

    1. Thank you Jerry.

  4. I’m not a tax lien investor but this is interesting. What is your cost basis? Is it equal to the principal amount shown in the table? And in this case are you payin 2 years after the tax year?  So the last payment you made would have been $175.38 paid in 2016?