What is the market size (annual dollar volume) for real estate tax liens in the United States?

$10 - $12 billion annually

What states offer the most attractive deployment opportunities?

Each state or U. S. territory empowered to authorize local governments to conduct tax sales has its own unique methodology for orchestrating delinquent tax collection. Variables influencing which jurisdictions are selected for tax lien purchases include the sale method employed including interest bid down, premium bid up, rotational sale, and bulk purchase.

Another factor to be considered is the tax foreclosure process in place for a particular state. This may be judicial requiring the engagement of legal counsel or nonjudicial which is a straight out administrative procedure.

What are the actual interest rates realized at auction today?

Interest rates are literally all over the map depending upon the state selected for deployment and the product being purchased (e.g. tax lien, tax deed, redemptive tax deed). Interest rates range from a flat penal rate of five percent (5%) up to fifty percent (50%) for certain redemptive tax deeds.

Who are the major institutional buyers?

Institutional purchasers of real estate tax liens have included J. P. Morgan Chase, BankAtlantic, Bank of America, Merrill Lynch, Bear Stearns as well as a variety of hedge funds, private equity firms, lien pools, and insurance companies.

What is the average size of a tax lien and LTV?

Nationally, the dollar amount of a tax lien also referred to as the face amount represents from 3% - 10% of the property value to which the tax lien is attached. This percentage is identified as the LTV or lien to value ratio.

What percentage of tax liens are redeemed vs. foreclosed and what is the average time outstanding?

Generally speaking, a well-researched portfolio of tax lien certificates should reflect first year redemption rates between 65-70%. Second year redemption rates will typically bring another 15-20%. Prepurchase due diligence is the single most important action to be taken by any tax lien investor insuring the monetization of their purchase. Predictability of a tax lien’s redemption is enhanced through the use of time tested evaluative criteria and state of the art IT applications.

How is the tax lien auction process orchestrated?

As referenced earlier, the sale may take place lien by lien or in bulk sale format. Liens sold individually are typically done at public outcry auctions while states such as Florida, Arizona and Colorado have implemented internet based tax lien sales controlled by private vendors under contract with the local revenue collection authority.

Where do tax liens rank in priority of other encumbrances against property? What other liens may exist?

Real Estate tax liens enjoy a superior lien position. Other liens that are often found in the course of a title search include mechanic’s liens, code enforcement liens, and additional liens for unpaid taxes.

What are the risks (environmental liabilities, etc.) associated with tax lien purchases?

Properties legally defined as wetlands or superfund sites are two examples of parcels which carry inherent risk and quite possibly future liability for the tax lien purchaser.

What are the fixed costs to pursue this asset class?

Fixed costs can generally be broken down into three broad categories. Due diligence prior to lien purchase and again prior to tax foreclosure. Monthly servicing fees for day-to-day portfolio management requirements and legal fees when and where applicable.

How are tax lien service providers regulated?

The short answer is that they are not.

We strongly recommend that you take the following precautions prior to engaging any tax lien servicer.

  • Conduct a FINRA inquiry if the principal is registered as a securities broker.
    Link: http://brokercheck.finra.org/search/search.aspx
  • DOJ Antitrust Website.
    Link: http://www.justice.gov/opa/pr/2012/April/12-at-486.html
  • Inquire with the State Attorney General and Secretary of State for those jurisdictions where the servicer has indicated they have purchased or are servicing real estate tax liens. Check specifically for civil and criminal actions taken by the Attorney General and the timely filing of all reports with the applicable Secretary of State’s Division of Corporations.
  • Perform due diligence through the use of search engines such as Google and Yahoo. For example: Type in tax lien bid rigging along with the name(s) of the company and the principals with whom you are considering doing business.
  • Finally, always establish custodial services with a bank or trust entity of your choosing. Servicing companies should not be hired as fiduciary agents.

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