Letter from a New Tax Lien Investor

Letter from a New Tax Lien Investor

I receive quite a number of emails every month from new tax lien investors expressing disappointment with the auctions they attended.  At best, they spent hours and hours researching how the sale works, reviewing properties and attending the auction only to be left with no liens to purchase at a reasonable rate.

At worse, they spend thousands of dollars on a ‘hyped up’ training program or seminar and then buy a bunch of nearly worthless liens

I received an email from a new investor in Colorado.  He gave me his permission to share it with you as I think it reflects the experiences of many new investors in the current market.

Here’s his email (my emphasis added):

As a newbie to Tax Lien Auctions I wanted to share my experience with you that I had today at auction.

I live in Arapahoe County, Co and we had our electronic auction today and I spent a couple months preparing myself for today.

I wanted to invest $10k so I deposited $1,000 with the auction site. I did my homework and reviewed the liens I wanted to purchase. I knew that in order to make money I should pay the smallest premium possible so on liens like $3-5k I entered a premium of $21 in advance. If it was small liens like $400 I would bid by proxy $5-$8. I knew that if a certificate was redeemed within a month you wouldn’t make much interest on a 10% interest rate.

By the time auction had opened I had about 77 bids totaling $33k. I wanted to go way over in case I didn’t win most of my bids.

Boy was I in for an awakening when I checked out Batch1 in which I had no positions.

After Batch 1 closed I checked on the winning bids and I was shocked to see that most bidders were bidding very high for a Lien.

Here is a snapshot of some of the bids. In checking a sampling of them I can see that the average percentage of the Premium to the Tax lien was around 6-7%. Even IF the lien was not redeemed for a year that would leave the purchaser/bidder with a return of 3-4%.

I went into Batch 2 which would close an hour after Batch 1 and started adding a lot more bids. I didn’t have time to research but I knew that if I wanted to win some liens I would have to enter more bids.

One thing I didn’t want to do was do what everyone else was doing by bidding high. I knew that if I did that I would more than likely not see a return at all or if so it would be very small and I should have kept it in a 1% interest bearing savings account.

Well, I didn’t win anything in Batch2. I bid even more on Batch 3 and I did add like $5-$10 per bid over what I thought I should pay.

This didn’t help.

On Batch 3 I did win 3 bids for a total of $140 with a $15 premium. I doubt I will get back 100% of my money. Luckily these 3 liens are vacant land so maybe, just maybe I’ll end up with a treasury deed but I doubt it.

When all was said and done after 5 batches I had bid on a total of $330k in tax liens. I won only $140 worth of that.

Will I do this again next year? I doubt it.

I put well over 40 hours into this in the past 6 weeks and I have nothing to show for it but experience. At least I wasn’t foolish thinking I could get someone’s expensive properties for pennies on the dollar. I was just looking for a good way to earn 8-9% return on my money with little risk.  I think most of these bidders are in for a rude awakening when they look at their outlays vs. what their returns will be.

State of the Tax Lien Certificate Market

State of the Tax Lien Certificate Market

For most tax lien certificate buyers, 2013 has been a frustrating year.  In fact, many of my readers and newsletter subscribers have put of their hands and walked away from buying tax liens altogether.  For institutional investors (those funds who purchase thousands of tax liens a year), the experience this year has been even worse as they’ve raised $100s of millions of dollars with few places to invest profitably.

What’s the cause of this?

Simply, over the past two years, one or two large funds have been buying almost all of the publicly auctioned tax lien certificates and at incredibly (and some would say, unwisely) low rates.  Moreover, these funds have been buying very broadly including buying tax liens on lower quality properties that most investors stay away from.

As an example, earlier in the year at the 2013 Maricopa County, AZ tax certificate auction, one company purchased over 20% of the available liens–most at below seven percent.  Across the whole auction, the average coupon rate sold decreased from nearly 10% in 2012 to 7.5% in 2013.  These large firms knocked out most individual buyers simply because they were OK with rates of 5, 6 or 7%.

The past year’s Florida auctions were slightly better for some of the other institutional players, but the individual buyer had no chance to get into the market. This was because those institutional funds were able to flood the auction with thousands of “virtual” bidders effectively blocking out the smaller tax lien buyer (to understand how the Florida tax lien auction works checkout my article on Buying Florida Tax Certificates).

Are there alternatives for the individual tax lien investor?

Unfortunately, for the investor simply looking for a safe, high “yield” on their investment without worrying about taking the tax liens thru the foreclosure process, the options are limited.  However, if you have experience in direct real estate investing, there are a few options worth exploring (and still profitable):

  • Buying tax deeds directly – I haven’t been a huge proponent of buying deeds directly, but as the market improves, there are great opportunities for the savvy buyer.  It takes time, expense and local market knowledge but there are bargains to be found.
  • Attending ‘out of the way’ auctions – Generally, the institutional buyers shy away from smaller county and municipality sales.  It’s not worth their time to attend when they can only pickup a few liens.  By focusing your efforts in these small and rural counties, you’ll be up against less competition and be able to find higher yielding tax liens on solid real estate.
  • Buying tax liens from other investors – There are a good number of investors who bought their tax liens two or three years ago and who simply do not want to take those tax liens thru the next step and into foreclosure.  Finding these investors can be a bit of a challenge but talk to your fellow attendees at the auctions and, in some states, lookup the owners of liens you may want to buy.

My forecast for the rest of the year and 2014

Like most markets, the tax lien certificate market is cyclical.  We’re in a low rate, highly competitive cycle right now.  Back, 5 years ago, it was completely opposite of what we’re seeing.  And, in the future, we’ll see it back that way.

Presently, the flood of cheap money from the federal reserve has enable institutional hedge funds to take low cost loans for their purchases of tax liens.  They are financed by the deep pockets of banks such as Capital One and Wells Fargo willing to lend 70-80% of the purchase price of the liens.

Until the federal reserve decides to tighten interest rates and money supply to the banking system, we’re going to continue to see a tight tax lien market with low returns and few options for individual investors.  The 2014 auctions look to be much the same as this past year’s tax auctions.  However, should we see a rapid rise in rates, the institutional buyers could actually start to see sharp losses and thus quickly pull out of the market.






My New South Carolina Tax Liens E-Book on Kindle

My New South Carolina Tax Liens E-Book on Kindle

As my e-mail newsletter subscribers know, I’ve recently completed my second Kindle e-book.  My first one was a strategic look on how to buy Florida Tax Lien Certificates including where to focus your efforts to boost your yields and maximize the safety of your investment. Although the title suggests it’s just a beginner’s guide, I’ve included specific advice for more ‘seasoned’ Florida tax lien investors.

Now, I recently completed the second of my tax lien investing guides.  This one is on investing in South Carolina tax liens and you can find it here on Amazon.  South Carolina is one of my favorite states to buy tax liens in–the rates are decent at 12%, the real estate market is fairly strong, and the overbid style of the auction keeps alot of your competition away.  Because you might be investing more than 50% of the value of the property, it’s a higher risk state and you absolutely must perform good due diligence before you attend the auction.

The first auction begin during the first week of October and continues in the different counties for the next three months.  As always, if you have any questions, you can subscribe to my newsletter for free and email me anytime directly from there.



Truth vs Fiction in the Media about Tax Lien Certificates

Truth vs Fiction in the Media about Tax Lien Certificates

One thing that bugs me about as much as hyped-up, promotional websites trying to sell you the perfect “system” to buying tax lien certificates is the media’s take on tax lien investors.  There’s a recent article that was released by the AP based on a report by the National Consumer Law Center (see the article here).  First, the title of the article indicating that people are losing there homes for $400 is total BS.  Really?  If I could simply buy tax lien certificates for $400, wait a few months, then get a good condition house and make tens of thousands of dollars, I’d do it in a heartbeat.  

But, it’s simply not true.

At all.

Here’s what I’m talking about:

Report: Some lose homes over as little as $400

“The elderly and other vulnerable homeowners are losing their homes because they owe as little as a few hundred dollars in back taxes, according to a report from a consumer group.

Outdated state laws allow big banks and other investors to reap windfall profits by buying the houses for a pittance and reselling them, the National Consumer Law Center said in a report being released Tuesday.

Local governments can seize and sell a home if the owner falls behind on property taxes and fees. The process helps governments make ends meet at a time when low property values and the weak economy are squeezing tax revenue.

 But tax debts as small as $400 can cause people to lose their homes because of arcane laws and misinformation among consumers…”

Look…The average redemption period for a a tax lien certificate is 2-3 years.  Since most tax liens are sold for the past year’s taxes, the homeowner would have not paid taxes for 3 years or more.  Then, there’s usually a tax deed or quiet title process which takes another six months.  During that entire time, the homeowners are receiving delinquency notices from the county, required noticing from the tax lien investor, or they are being served in person with the legal documents clearly stating that the house is being foreclosed on for taxes.  Yes, the initial delinquent bill might have been $400, but in order to lose the home, you’re talking about years worth of taxes.

Here’s my reader challenge:

If you can show me a situation where an “elderly or vulnerable” homeowner lost a house for only $400 in delinquent property taxes (I won’t count legal fees), I’ll give you the floor and let you write an article about it, front page on my blog. 

What are the Five Best States for Yield on your Tax Lien Certificates?

What are the Five Best States for Yield on your Tax Lien Certificates?

It’s almost June and the tax lien certificate auction season is about to finish up.  From Florida to Maryland, it’s been a busy month of buying and I hope everyone did well with their respective bidding.  If you’re new to investing in tax lien certificates, I wanted to give you a two part series on the best states for earning yield and for safety (part II).  It’s just my opinion given the current competitive environment, so I’m happy to hear your thoughts on where to find the best yields or safety in the tax lien market.

Yield in the tax lien certificate market is a function of risk and competition.  Just like any investment, the higher the risk…the higher the rates.  The tax lien auctions work the same way.  You’ll find that those properties that are less likely to redeem and/or result in a profit will go for the highest statutory rate.  In fact, counties would be better off not having a top statutory rate if they wanted to sell all of their liens.  Often times, the risk is so high, that there are no buyers even (more…)

Three Strategies for the Florida Tax Certificate Auction

Three Strategies for the Florida Tax Certificate Auction

With the Florida tax certificate auctions about to kick off, I wanted to discuss three strategies to employ that should get you higher risk-adjusted rates.

First, the tax certificates on the best properties in the auction usually are picked up by larger institutional buyers and the minimum bid.  This means that the bid all the way down to a .25%.  By statute, the certificate holder will earn the larger of the 5% penalty (earned from the day you purchase the certificate) or the bid rate.  So, these institutions are able to accept the 5% rate and they are betting that the majority of the liens they buy will redeem in less than a year.

If you’re looking to earn more than 5% yourself, you’ll need to bid on properties that these larger players don’t bid or or bid higher rates on.  I’ll discuss three possible strategies that will give you an advantage over these buyers and possibly earn you up to 18% on your investment.

You can also find a much more detailed discussion about strategies and FL tax lien certificate investing from my new E-Book exclusively on Kindle: A Beginner’s Guide to Investing in Florida Tax Lien Certificates