Category Archives: Buying Arizona Tax Liens

Maricopa County Tax Lien Auction Results for February 11, 2014

The Maricopa County Tax Lien Auction on February 11, 2014 offered tax lien certificates of purchase primarily for the 2012 tax year.  This was the most disappointing year ever for investors, especially the smaller ones.

As usual, Grant Street did a great job.  Their data point to a continuation of the trends mentioned in our post last year, but things are much worse now.  While many of the players are the same, some have gotten much more aggressive.

The top 10 bidders by face amount this year purchased roughly 75% of the certificates that were not struck to the state.  The top bidder by volume this year, a fund associated with a biotech hedge fund manager out of San Diego, purchased nearly 31% of the liens not struck to the county, buying over 2500 tax lien certificates at a weighted average rate of approximately 2.66%.  The extent of the fall in the weighted average rate of winning bids for investors has been dramatic over the past five years:

Contributing to the fall in yields has been a sharp drop in supply: tax lien face amounts available to investors in Maricopa County fell from $86mm in 2012, to $47mm in 2013, to $35mm this year.  Of this year’s $35mm, roughly $16mm was struck to the state, leaving only $19mm in investors’ hands.

Considering that the average Maricopa tax lien certificate of purchase sold this year had a face value of about $1,619, the $10 TIF alone puts a real dent in returns like this year’s.  At the auction overall weighted average rate of return of 3.82%, a $1,619 CP would need to be outstanding for two months just to cover the TIF.  Considering that Arizona tax liens do not pay interest for the month in which they are auctioned, that means on average investors would not be in the black until May.  Although risk-adjusted returns for (properly researched) tax liens are still attractive, the absolute returns offer scant compensation for the research and administration required, in our opinion.

Tax Lien Investing for Non-US Citizens

We have had several questions about whether or not non-US citizens (and residents) can invest in tax liens. In most cases, the answer is YES. In order to bid in Arizona tax lien auctions, however, you will need to have a valid US taxpayer ID. There are 2 main ways for non-citizens to obtain a US taxpayer ID. You can apply as an individual to receive an Individual Taxpayer Identification Number. Alternatively, you can set up a US business entity that can participate in the tax lien auctions. This route is more costly, as there are business registration costs as well as ongoing maintenance and tax reporting requirements. A US corporate entity might make sense for larger portfolios or portfolios that are being managed for multiple people.

For those of you with a Kindle, you may want to read Jeffrey Gakstatter’s book about tax lien investing for non-US citizens. This book is not specific to investing in Arizona tax liens, and as luddites who do not possess a Kindle, we are not able to review the book for accuracy or usefulness, but it does appear to have easy-to-use practical advice about obtaining a US address for tax lien correspondence, applying for a US tax ID and, if appropriate, starting a US-based business.

Secondary Market Tax Lien Listings

Remember, there are three ways to buy tax lien certificates of purchase in Arizona: at the auctions in February, in the OTC market, and finally in the secondary market from other investors.  Buying in the secondary market is the only way to get a tax lien certificate of purchase for less than face value.

After a big flurry of activity in September and October, where we had multiple buyers and sellers connecting with each other and transacting, November has been quiet.  We do not broker any transactions: we merely make it possible for buyers and sellers to negotiate directly with each other.  We do not charge fees for listings, but we do reserve the right to choose which listings we accept.

Two sellers have recently dropped the prices for some older listings, as they did not attract potential buyers.  In one case, they cut the prices in half.  We moved the listing dates forward so that these would appear in the “Listing Age < 30 Days” filter.

As always, we welcome your comments.  Thank you!

Secondary Market Listings of Arizona Tax Liens

We have been getting much more interest recently in secondary market listings for Arizona tax lien certificates. Perhaps this is because money market and bond market yields are near zero, or maybe it is because the stock market creates too much indigestion? Whatever the reason, we are happy to help, and we appreciate the feedback we have received.

First, posting listings on the Listings page of our site is free, so long as you are offering a manageable number. If you are trying to sell an entire portfolio, it would be better for us to write a blog post for you with an attachment that people can download. The point is: we do not charge anyone fees for facilitating the secondary market for Arizona tax liens. We will introduce interested buyers to the sellers directly and leave the rest up to you.

We caution investors from purchasing secondary market liens from some other sites that charge large settlement or service fees. One common scam is to offer a low-value CP while charging a high transaction fee. We strongly urge investors to do their homework, understand what they are buying, and be very careful not to agree to fees which are often excessive and unjustified.

People will not want to visit our Listings page if someone is trying to sell scratch-and-dent CPs for full price, so we reserve the right not to post anything that is overpriced, in our opinion. Also, if something is getting stale and not moving, we will either ask that you lower the price or remove the listing.

We have seen numerous situations where, through hard work, people have recovered full value on scratch-and-dent CPs. You can learn a lot from working with these situations, but please know that the risks are high.

To see how to read one of the listings, the following steps will take you through the process using a real example.

  • Click on the Listings tab of our navigation bar. This will take you to a Terms and Conditions page, which you must agree to in order to see any listings. Also on the Terms and Conditions page, you will find a few ways to filter the listings that you would like to see. The most common filter will be to select a particular county of interest. If you do not use any of the filters, you will see all of our current listings that have been posted. (Please be aware that we cannot list CPs with incomplete information. We actually have a large number of Mohave County tax liens for sale right now at deeply discounted prices, but we cannot present them due to some missing information. Interested investors should inquire by email.)
  • After hitting the Submit button, you will be taken to the listings of secondary market tax liens available for sale from our clients. Each listing consists of a summary row (beige background) and detail rows (white background) that can be unhidden by clicking on the green plus sign to the left of the county name and parcel number. The parcel number is itself a hyperlink to county-provided information on that specific parcel.
  • While most of the listings on our site are from clients, a small number are from affiliates of AZTLS. Let’s take one of them as our test case: Gila 208-10-012-B.
  • The summary row for Gila 208-10-012-B has ten columns, each of which we will explain.
    1. The green plus sign expands the selected listing to show more detail for the CP.
    2. The Jurisdiction column shows the county in which the parcel is located.
    3. The Parcel column has the assessor’s parcel number for the CP, and it functions as a hyperlink to the county web site information for that parcel.
    4. The CP date originated is the date that the CP was first offered for sale. This is the date that starts the clock ticking for the three year period before the investor is able to foreclose. Our example CP was purchased at auction on February 20, 2009.
    5. Column 5 has the interest rate on the CP. In this case, it is 16%, the maximum.
    6. Column 6, Principal Face, is the sum of the original and subtaxed principal amounts for the CP. This is the amount on which the CP is earning interest.
    7. Column 7, Principal Price, is the price at which the investor is offering to sell their CP. In this case, we are offering this CP at 98%, a small discount to full value.
    8. Column 8, Accrued Charged, is a Yes or No. If an investor wants to be paid for interest accrued to-date, they will put a Yes here. If they do not require payment for interest accrued to-date, they will put no. If Yes is selected, the accrued interest on the CP is added to the principal times the price to determine the total amount required to purchase the CP. Normally, solid CPs will require payment of accrued, while scratch-and-dent CPs will not.
    9. Column 9 is the Purchase Amount, the full amount required to buy the CP, excluding the $10 assignment fee charged by the county. This is the Principal Face times the Principal Price, plus the Accrued interest if it is being charged.
    10. The final column is the most recent Full Cash Value of the property in question per the records of the county assessor, when it is provided.
  • The detail rows for Gila 208-10-012-B each have eight columns. Before the detailed information, you will see the CP number. Also, when provided, you will find Seller-provided, subjective notes at the bottom of the detail section.
    1. Column 1, Tax Year, indicates which tax year is covered by a particular row in the CP detail.
    2. Column 2, Accrual Start, shows the date that interest began accruing on the Principal amount for a particular tax year. This will normally be an auction date for the CP’s first year and subtax dates for later years.
    3. Column 3 repeats the rate for the CP.
    4. Column 4 shows the Principal amount for each tax year covered by the CP.
    5. Column 5 shows the number of months for which each tax year principal amount has been accruing to date.
    6. Column 6 shows the amount each tax year for a CP accrues each month. This is arrived at by multiplying the principal amount for each tax year by the Rate / 12. In the case of our example, we subtaxed CP 9032507 (Gila County tax lien on parcel 208-10-012-B) for the 2010 tax year on June 9, 2011. As of today, August 10, 2011, it has earned two months of interest. The subtax payment was $3,950.47. At 16%, this equates to a monthly accrual of $52.67. So, the accrued interest as of Aug 2011 is $105.35 on the 2010 tax year part of the CP.
    7. Column 7 shows the total accrued interest for each tax year covered by the CP.
    8. Column 8, the final column, shows the full principal amount plus accrued interest for each tax year covered by the CP.
  • Summarizing the example listing, we are offering this CP for $15,914, which is a $265 discount to the full redemptive value of the CP. Note that this CP will be eligible for foreclosure on February 20, 2012, three years from the date it was first purchased at auction.

Of course, if anyone needs further explanation of how our Listings page works, please feel free to send us an email via our Contact page. Better still, write a reply post to this blog post!

Calculating Interest Earned on Arizona Tax Lien Certificates

If you buy one tax lien, you can keep track of it with a calculator or your fingers. If you buy several, you should probably make a good spreadsheet. If you buy hundreds or thousands, as we do, you need a database system. Having a spreadsheet or database tracking system for Arizona tax liens helps you forecast your income, manage your subtaxes, and verify that no checks get lost on the way to you or your bank. Without a good tracking system, you might not even know when a county check gets lost. Imagine if a year went by and you earned zero percent on your money while your check was floating around somewhere. Not good!

Central to any tax lien system is a function that correctly calculates the accrued interest. Apart from keeping track of tax liens you already own, correct interest calculations are vital when purchasing existing tax liens from other investors in the secondary market (please see our Listings page for real examples).

Arizona Revised Statutes 42-18114 says in regarding to a new tax lien, “The lien bears interest at the bid rate from the first day of the month following the purchase of the tax lien.” ARS 42-18053 describes that when calculating interest on delinquent taxes, “A fraction of a month is counted as a whole month.” So, the question naturally arises, what spreadsheet or database formula can I use to calculate Arizona tax lien certificate interest correctly? There are several ways to do it, depending on the type of spreadsheet or database you are using. They key point is that partial months are counted as whole months, so it does not matter when during any given month a CP redeems.

Most spreadsheets and databases include a function that calculates the difference between dates based on a specified interval. For Arizona tax liens, the interval is a month. To calculate accrued interest, you need to know how many months are between two dates, irrespective of when during the beginning and ending month the dates occur. Using regular subtraction or daycount functions will not work.

Consider two date ranges: Feb 1, 2011 – May 30, 2011 and Feb 28, 2011 – May 1, 2011. Before the Ulan v. Pima County Board of Supervisors case in 2006 and subsequent revisions to the Statutes, there was some ambiguity about whether investors should earn interest in February, the month that CPs are first offered for sale in Arizona. Today, it is clear that investors are not entitled to February interest. So, in both example date ranges, the investor would earn interest in March, April and May, or three months. This is despite the fact that there are 118 days in the first range and only 62 in the second.

Some investors use a modified version of the DateDif (or DateDiff) function available in popular spreadsheets and databases, but you may need to tweak them to work properly. We prefer an “Old School” formula that works on virtually any platform.

(Ending Date Year – Beginning Date Year) * 12 + (Ending Date Month – Beginning Date Month)

In Excel and Access, you would use the Year() and Month() functions with appropriate cell references to implement this formula.

With the correct number of months, the rest is easy. Multiply the principal amount times the number of months times the interest rate divided by twelve and you obtain the accrued interest. For CPs that have been subtaxed, you will need to repeat this exercise for each tax year and then sum them to get the total for the CP.

A great place to see how this is done is on our Listings page. Click on the green plus sign next to a given listing with more than one tax year on the CP, and you will see how the different years are calculated and then summed together. Remember that Taxpayer Information Fund and assignment fees are not included in principal and do not accrue interest, so they should be deducted from your purchase payment to arrive at the tax lien certificate principal amount.

Arizona counties offer varying amounts of information to tax lien investors, but most offer easy ways to double-check what is in your portfolio. In Maricopa County, for example, the Tax Lien Web Application provides account statements for each month with activity. You can access this helpful site by going to our Research tab, selecting “Maricopa” from the drop-down menu, and then clicking the hyperlink to the Maricopa Tax Lien Web Application.

By using a good tracking system and county-provided resources, you will do a better job managing your tax lien portfolio.

Investments in Arizona Tax Liens Bear Simple Interest

When comparing investments, it is always a good idea to compare their risks and returns. Naturally, if one investment is much riskier than another, it must pay an appropriately higher rate of return to warrant your attention. Judging the relative riskiness of investments can be extremely difficult, and comparing returns is not as easy at it might appear. This blog post talks about one aspect of comparing returns from tax lien investments with other investments.

Arizona tax lien certificates pay simple interest. The actual computation for interest earned on an Arizona CP is covered in a separate blog post entitled “Calculating Interest Earned on Arizona Tax Lien Certificates”. What simple interest means is that your interest does not earn interest. Arizona CPs accrue simple interest on the initial investment amount until the CP is redeemed or the investor successfully forecloses on the property. For example, assume you buy a $1,000 CP at a bid rate of 8%. After one year, you will have earned $80 in interest, but it won’t be paid out to you, as you have to wait for redemption for that to happen. The next year, you again earn $80, because the interest is calculated only on your principal and not on any interest accumulated along the way. After three years, you would have earned a total of $240 in interest, bringing your redemption amount to $1000 + $240 = $1,240.

Compound interest is where your interest earns interest also. The more frequently the compounding occurs, the better off you are. Picking up again on the example above, let’s assume that compounding occurs yearly. After year 1, the results would be the same: you earn $80 and have a total principal plus interest of $1,080. In year 2, however, you earn interest on $1,080, rather than $1,000, as would be the case with simple interest. So, during year 2 you would earn $1,080 * 8% = $86.40 in interest and have a total value at the end of the year of $1,166.40. During year 3, you would earn $1,166.40 * 8% = $93.31 and have $1,259.71 at the end. So, with annual compounding, you would have earned $19.71 more than you would have with simple interest.

This matters when comparing tax lien investments with other investments that offer compound interest, either directly, or indirectly by paying out interest along the way that can be reinvested. Most corporate bond yields reflect semiannual compounding, for example. The more frequent the compounding, the higher the interest rate, and the longer the time period, the greater the benefit of compounding becomes. The following chart compares the growth of a $1000 investment over five years at 4% and at 16% with no compounding (simple interest), annual compounding and monthly compounding.

Simple Interest versus Compound Interest

Simple Interest versus Compound Interest

You can see that at the end of year five, at 16%, monthly compounding leaves you with $414 more than simple interest!

When considering purchasing an Arizona tax lien in the secondary market, one should always bear in mind that the interest you will earn will be based on the principal amount of the lien only, and not an any accrued interest that you might have to pay to the selling investor. The older the lien is, the more this will matter. Consider a $1000 tax lien certificate that, for simplicity’s sake, has a rate of 10%, is five years old and has never been subtaxed. It would have accumulated interest of $1000 * 10% = $100 per year or $500 in total. If you were to buy this from a seller at its fully accreted value of $1500, your return going forward would be interest of $1000 * 10% and not $1500 * 10%. This would essentially lower your return to $100 / $1500 = 6.7%.

When you see secondary market offerings, such as those on our Listings page, you should consider this example when deciding to bid for certificates where the seller expects to be paid for the accrued interest. They might understand your point and negotiate with you. On the other hand, you don’t have to wait as long, if at all, to foreclose on older certificates, leading many sellers to expect to be paid in full, despite the disadvantage of simple interest demonstrated herein.

The Three Ways to Buy Arizona Tax Liens

By far the most popular and straight-forward way to acquire Arizona tax liens is to buy them at the annual Arizona tax lien auctions.

  • Advantage:  Typically the best liens are sold at the auction, leaving the more problematic properties remaining.
  • Advantage:  The dollar value of the liens which are sold each year at the various Arizona tax lien sales is quite large.  If you want to invest more than, say $10,000, in an Arizona county, it is much easier to achieve that level of investment at the auctions vs. the OTC or secondary markets.
  • Disadvantage:  The auctions are very competitive, and the rates at which liens are won is usually well below the state’s rate of 16%.
  • Disadvantage:  All 15 of Arizona’s counties hold their tax lien sales during the month of February.  If you are not able to attend the sales at that time, you will need to wait until the following February to participate in any Arizona tax lien sale.

People who miss the February auctions may buy tax lien certificates directly from the counties via the Over-the-Counter market (OTC).  Most counties will give you a list of the tax liens that are available at the time of your request, and after careful research, you can purchase these liens directly from the county.

  • Advantage:  All liens bought over-the-counter from the counties will accrue at the state’s 16% rate — you will not have to compete with other investors to win the lien at a lower interest rate.
  • Advantage:  You can be relatively efficient with your research, as you have a very high likelihood of being able to purchase any of the liens that you want after the auctions are over.   When you are participating in the auctions, you will likely research a large number of liens for every lien that you actually win (unless you bid extremely low rates), as you are in competition with many other bidders.
  • Disadvantage:  OTC liens can be more difficult to research than the liens that were sold in the February auctions.  In fact, many of the properties that are available in over-the-counter tax lien sales are available precisely because they are more difficult to research (often there is missing data or the parcel is difficult to locate on a map).  Many are also of questionable value, as you will likely find liens on useless scraps of land that  may not redeem and that you may not want to end up owning.  Remember, many  experienced investors participate in the February auctions, and if they failed to bid on a lien, perhaps they had very good reasons for doing so.

A third way of buying Arizona tax liens is via a secondary market such as the one on this site (available under the “Listings” tab).  The tax lien secondary market is where individual investors in tax lien certificates sell their liens directly to other investors.  This is a very exciting and potentially lucrative way to acquire Arizona tax liens, but again, you must do your research before purchasing.

Some of the Arizona tax liens for sale in the secondary tax lien market are eligible for immediate foreclosure, others are being sold at a discount to reflect either the questionable quality of the underlying property or the seller’s wish to find a buyer quickly.  There are many reasons that people sell their Arizona tax lien certificates; sometimes there is a death in the family and the entire portfolio is put up for sale, other times a seller does not wish to foreclose and is looking to be redeemed by another investor who will then go forward with the foreclosure proceedings, some people find themselves needing liquidity, and this is the only way for them to sell their unredeemed liens, other sellers want to get rid of their purchasing “mistakes”, however we have found that at the right price, someone else’s “mistakes” can be your opportunity.  Again, it is imperative that you do your own research and due diligence before buying a tax lien from another investor secondary market for tax liens.

It is also important that you do NOT pay any fees for the purchase other than the transfer fee charged by the county.  There are many scammers out there who offer liens for sale via online marketplaces such as Bid4Assets or Ebay, where the seller or the marketplace charges you a large fee.  You should always consider how fees will impact your investment return before investing.

  • Advantage:  People who want to sell their tax lien certificates have few options, and some may be willing to sell perfectly good liens at a discount.
  • Advantage:  Investors who are interested in properties that they can foreclose on, will have shorter waiting periods than if they bought at the auctions, as the three-year holding period before the owner of the tax lien certificate can initiate a foreclosure lawsuit starts from the day that the certificate was issued.  Several of the liens currently available on this site can be foreclosed upon right now.
  • Disadvantage:  There is an element of trust inherent in purchasing a lien from another investor.  First of all, it is possible that the seller is offering their tax lien certificate for sale because they know something about the underlying property that makes the investment  unattractive.  Secondly, while each county has an official process for transferring Arizona tax lien certificates from one investor to another, there is a point in time when the seller has your money, but you are not yet the registered owner-of-record.  If the seller were to fail to do his/her part of the transfer,  you would have your work cut out for you to get your money back or to pressure the seller to complete their part of the transaction.


Pima Tax Lien Auction is Over — Sleep in on Friday Morning!

The Pima County Treasurer and her amazing team managed to get through the entire 2011 tax lien sale in 2 days.  Anyone interested in the Pima County 2011 tax lien clean-up sale will need to wait until April 1st.   The disk of remaining 2011 tax liens will be available in mid-March — you will need to contact the Pima County Treasurer’s office to purchase a disk containing the full list of available Pima county tax liens. Tax liens acquired during the clean-up sale are awarded at 16%, and are sold on a first-come-first-served basis.

Type Codes in Pima County Tax Lien BookData.pdf File

For those of you making use of the files on Pima’s data disk, which you should always get from them and not someone else, you may be wondering about some of the codes in the Bookdata .PDF file.  In the Type column, 99=original lien, 09=subtax, and OW=Owner Paid.  Please be sure to save yourself some time and possible headache by referencing the bankruptcy list as you research.  Good luck tomorrow!

Cochise List and Map

Cochise county has published an Excel and a PDF version of their properties for which delinquent taxes that will be offered in the upcoming 2011 Cochise county tax sale on February 24, 2011.  You can find the lists here. Continue reading