Tax liens

[kapilm]

Has anyone invested in property tax liens? It seems like an interesting model - low returns most of the time with an option to make a killing once in a while (via foreclosure). Returns in towns like Newark, Camden and Trenton (NJ) seem to be around 15-18% from talking to people in lien auctions. Texas (from what I have heard) allows for as high as 25% interest to be charged to home owners who are late on payments. Other than the administrative hassle of paperwork not sure I see any other major issue. Would be curious to hear if anyone has explored / invested in these before ,or, just general thoughts on why this may / may not be the best use of time. Thanks.

 

[T-bone1]

Has anyone invested in property tax liens? It seems like an interesting model - low returns most of the time with an option to make a killing once in a while (via foreclosure). Returns in towns like Newark, Camden and Trenton (NJ) seem to be around 15-18% from talking to people in lien auctions. Texas (from what I have heard) allows for as high as 25% interest to be charged to home owners who are late on payments. Other than the administrative hassle of paperwork not sure I see any other major issue. Would be curious to hear if anyone has explored / invested in these before ,or, just general thoughts on why this may / may not be the best use of time. Thanks.

 

Other than the "hassle of paperwork," there is also the issue of loansharking people who are down on their luck in the hopes that in some cases you can take their home...

[Jurgis]

3 past threads:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/anyone-have-experience-with-tax-lien-sales/msg243175/#msg243175

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/tax-liens/msg37327/#msg37327

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/tax-title-sales/msg171365/#msg171365

 

(maybe last one is not exactly what you are asking, not sure).

[kapilm]

Tbone-1: Fair point, but don't see it's any different from other distress-type investments.

 

Jurgis: Very helpful

 

Thanks guys.

 

[oddballstocks]

There's no free lunch, none.

 

I've done some of this "physical" investing.  It's just like real investing but different.  The market is mostly efficient.  If you think you've found something clever you are seeing a mirage or there is significant work to get it fixed up.

 

I had (still have, execution is a PITA) a plan to buy land develop the parcels with RV's or small pre-fab hunting cabins and then sell those plots in major metro areas.  Simple enough right?  I thought it would be easy to find land.  I figured out the hunting cabin angle, found suppliers etc, but couldn't get land.  Spent a day visiting the courthouse of EVERY county that had state game lands or national forest within driving distance.  I was looking for properties on the tax rolls that could be repurposed for what I needed.

 

Guess what...there was nothing!  There was junk land, but it was junk for a reason.

 

I took another approach, started to look for land via other means.  People wanted fair values or inflated values for the parcels.  Tried writing cold letters to people and offering to buy their land even though it wasn't for sale (parcels and cabins we liked).  Nada.

 

I kept striking out.  Then started talking to a guy who buys mineral rights.  Asked if he ran into anything where he needed to dump a few acres of surface land, he had nothing.  Said finding surface land like I wanted was rare.  In a few cases he ended up with it he dumped it or used it.  This guy was looking for mineral rights in a similar manner to myself for surface land.  I asked for advice, his was "good luck, it's REALLY hard to find deals like this."  Case in point he was able to buy some mineral rights dirt cheap because a family company owned them, the person running the company died but there was a delay in when the death notice was sent out.  He found out right away about the death, made an offer before notice got out.  He said once the notice went out everyone wanted the rights.  This guy had an information network built up so he could find these deals, he'd worked for years to build this network.

 

Next step I decided to advertise.  I ran Craigslist ads for months, no hits.  I won't say I've given up, but I'm not putting much effort into things at this point.

 

I think there's an impression in the 'real world' that no one else is looking in the corners.  That's not true.  I was in the records department of a very remote PA county.  Nothing was digital, we were in a room full of files on the wall.  You had to find a reference number on a computer then wander through isles to find the info.  This was mid-week and there were two other people there at the same time looking for properties like we were.  From small talk I had the sense one of these guys was a very frequent visitor and would swoop up anything the day it came into the courthouse.

 

I've come to a conclusion that in the real world arbitrage or small time deals you see in the markets rarely if ever exist.  You can make money through operational excellence (plus sales/marketing) or by having an enormous pile of cash to do things others can't.  Or you can make money by doing things differently, through innovation.  If all of the excavation companies are using some outdated technique and you figure out how to excavate quicker and cheaper you can make money via that.

 

To the last point about 1.5 years ago I saw an old steel plant come onto a lapsed tax status at a remote PA county.  You could buy 11 acres of this plant for less than $100k.  It was in a nice location as well.  Problem was you'd probably need another $100k to remove the steel and get the property in a state that it could be developed.  Then you'd need the capital to develop it into something.  While you could buy this thing cheap it wasn't really cheap when you needed a few hundred grand to bring it to a useful state.  Someone eventually did, it's no longer for sale and it's being redeveloped.  There was no competition for the property, but the person who purchased it also needed a lot of capital.

 

The real world is tough.  There is no easy money.  You will have to get your hands dirty.  If you're just a finance guy with extra cash I'd say stick to the markets.  If you're an operations person you'll be able to do well.

[Munger_Disciple]

Great post oddballstocks!

 

Based on what I see in Southern California, there seems to be a bubble forming in investment real estate also. I see real estate partnerships investing in B-rated apartment buildings at 4-5% cap rates. Do you have any thoughts on this?

[oddballstocks]

Great post oddballstocks!

 

Based on what I see in Southern California, there seems to be a bubble forming in investment real estate also. I see real estate partnerships investing in B-rated apartment buildings at 4-5% cap rates. Do you have any thoughts on this?

 

I know someone who was solicited a deal in SoCal at a 1% cap rate.  Was commercial but still...1%!!!

[kapilm]

Thanks oddballstocks! Appreciate the advice.

 

[Munger_Disciple]

I know someone who was solicited a deal in SoCal at a 1% cap rate.

 

Shocking!

 

[fareastwarriors]

Looking for that appreciation baby.

[kapilm]

Haha!

 

Just came across this - https://m.facebook.com/ComianFunds/

Impressive returns.

[randomep]

 

+1 to oddball

[jmp8822]

Just came across this - https://m.facebook.com/ComianFunds/

Impressive returns.

 

That guy might need a compliance department.

[Pelagic]

An excellent post by Oddball, really enjoy your insight.

 

One of the things I'll add about tax liens from conversations with people knowledgeable about them is that it can feel like you're spinning your wheels investing in them. A lot of work for very little return after expenses. While the 15% or 18% sounds good, in practice property owners will often pay you back quickly once they've found out you purchased the lien. It's rare to have the taxes remain delinquent for a year in order to collect the full annualized return.

 

As Oddball pointed out, there's also a lot of legwork involved. Depending on your location, tax lien sales can be a very popular event for individuals or money managers looking to allocate some capital to them, getting your foot in the door can be difficult. If you're interested in them I'd recommend going to one of the sales your county holds, here there's a bidding format where buyers bid down the interest rate with the winner taking the lowest amount. Sometimes you'll see lien's interest bid down to nothing in the hopes of filing for the deed.

 

 

[matjone]

I've been to a couple sales.  One in IL a few years back where everything was bid down to 1%/yr except junk.  I guess these guys figure 1% plus a shot in the dark on someone not redeeming is good enough compared to low yields available elsewhere.  The other one was probably 10 years ago in Louisiana.  That one was more interesting because a lot of properties with homestead exemptions were going for the maximum yield of 1% per month simple interest.  Presumably most of these were owner occupied houses which should almost always be redeemed.  I bought a few of the and they were all redeemed within a pretty short time frame.

 

Pelagic is right, the issue is that you need to be able to buy enough so that if everyone redeems within a month or two it was still worth your while.  And then you need to keep up on records and follow the procedures for ensuring you get paid.  I think you could probably make a decent little business out of this if you can find sales like the one I went to in LA.  If everything is bid down like it was in IL I have a hard time seeing how you make money.  I'd rather be a hard money lender or something.

[oddballstocks]

One other point on these.  I spoke with someone who did this for a fund.  He said their sweet spot was buying tax liens on huge properties, hotels, warehouses, office buildings.  Most bidders have the capital to handle liens on single family houses.  He said few were able to put up a few hundred thousand for large outstanding liens.

 

This guy said he would end up redeeming the properties more often at the higher end as well.  He said he purchase a hotel for a few hundred grand at one point.  Problem was he had to fly all over the country to participate in these things constantly.

 

Like I said in my earlier post in the real world there aren't that many ways to make decent returns outside of operations, innovation and probably leverage.  All the real estate guys I know brag about 10-15% returns, but when I ask about buying RE unlevered I get a quizzical look "why would you do that? You'd earn nothing."

[Munger_Disciple]

All the real estate guys I know brag about 10-15% returns, but when I ask about buying RE unlevered I get a quizzical look

 

I have had the same experience when talking to real estate investors. It seems to me that all the real estate levered bets benefited from interest rates being in a downward trend from almost 20% in 1980 to close to 2.5% now. Real estate investors could lever up 4 to 1 and buy a property (even w/o much cashflow) and refinance a few years later. Plus the low interest rates and easy money also pushed up exit valuations. That game appears to be over now. Interest rates have no where to go but up, but rents are unlikely to increase at a faster rate than GDP. Even if Yellen goes rogue with negative interest rates, banks will not make loans below a certain positive rate. Plus current purchase prices are very high. All these factors will likely to lead to very poor results in the next 10-20 years in real estate in my opinion.

[SmallCap]

I had some very nice small time success with tax liens in Michigan before they stopped selling liens and started selling property.

 

1st year I only picked up a small one to figure out the system.

2nd year I bought 20 and most payed off with decent interest but one didn't so I had to go though the legal process of claiming the deserted property, unfortunately it was a small one, but after all cost of back taxes and legal fees were added I had invested 6K in that property. I put it on the market and sold it 3 days later for 27K.

3rd year they no longer sold liens. O well.

[Pelagic]

One other point on these.  I spoke with someone who did this for a fund.  He said their sweet spot was buying tax liens on huge properties, hotels, warehouses, office buildings.  Most bidders have the capital to handle liens on single family houses.  He said few were able to put up a few hundred thousand for large outstanding liens.

 

Another good point. Like with a lot of markets the opportunity probably lies at the edges, you might be able to have some success in the low dollar amount liens on things like vacant land that are in the hundreds of dollars and figure a way to scale it or if you have the capital the high dollar liens that price out most of the other players in a market.

 

Kind of a tangent but South Florida has gone to an online marketplace and bidding system for tax liens, deeds and foreclosures. Their marketplace web portal looks like something out of the 90s and has about as much functionality as you'd expect from that era that as I understand it uses a proxy bidding system where you set your max bid and the computer bids for you in $100 increments. I have to wonder what an online marketplace that aggregates tax liens/deeds from all over the country would look like with real time bidding and what it would do to the market.

[LR1400]

A steel mill in PA for $100k, you almost can't lose. If you have a company in the industrial sector, regardless of specifics, you could make this a home run.

 

Like a tiny refinery I heard about this week that sold for $5MM ten or so years ago. That's a pretty easy play.

[netnet]

 

 

...I have to wonder what an online marketplace that aggregates tax liens/deeds from all over the country would look like with real time bidding and what it would do to the market.

Bid4assets.com has really screwed up the market.  There are bidders sitting at their computers from all over the country bidding.  There is still some inefficiencies at the larger 100k price point. (I'm thinking of California, but these are not liens but outright sales.)

[wachtwoord]

It hasn't screwed up the market then but made it more efficient.

[netnet]

It hasn't screwed up the market then but made it more efficient.

Ok it screwed up the market for investors.

[TwoCitiesCapital]

 

 

...I have to wonder what an online marketplace that aggregates tax liens/deeds from all over the country would look like with real time bidding and what it would do to the market.

Bid4assets.com has really screwed up the market.  There are bidders sitting at their computers from all over the country bidding.  There is still some inefficiencies at the larger 100k price point. (I'm thinking of California, but these are not liens but outright sales.)

 

They do this in Florida. Returns have been run out of the market. Now you have to go next door to GA to get anything worth buying.

[Pelagic]

 

 

...I have to wonder what an online marketplace that aggregates tax liens/deeds from all over the country would look like with real time bidding and what it would do to the market.

Bid4assets.com has really screwed up the market.  There are bidders sitting at their computers from all over the country bidding.  There is still some inefficiencies at the larger 100k price point. (I'm thinking of California, but these are not liens but outright sales.)

 

 

Is this just for tax deed sales or do they have liens as well? I looked around for a bit and saw a lot of deeds, especially vacant land.