State of the Tax Lien Certificate Market

State of the Tax Lien Certificate Market
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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.






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