“Try a Little TLC (Tax Lien Certificate)”


Kurt A. Schultz

(Author’s note: This was originally written for a discussion group that I was a part of. I am using that monograph and my responses to some of the subsequent questions as the basis for this article. The TLC auction that I attended occurred February 9-13, 2004, in Phoenix, Arizona.)

Hi, folks -

Here's the pertinent details on my recent experience with the Tax Lien Sale at Maricopa County, Arizona.

Before I left, I was able to obtain the published lists that contain information on all of the liens (26,000+) that were to be auctioned. I attempted to manipulate the .html lists into an Excel spreadsheet, but had no success.

I visited my local AAA office and obtained maps for Arizona and Phoenix.

I arranged to stay with relatives in Phoenix, which helped reduce my overhead costs.

I also arranged to borrow an Apple laptop with Excel in it.

I drove for two days to get there (and the same for my return). I now believe that this was a mistake. I could have taken the train and spent the time studying or catching up on my backlog of reading.

One of the things that I found out while I was in a hotel Saturday night was that the Apple had a "test-drive" version of Excel, and that the test period had expired.

I toyed with the idea of ordering a US$400 laptop from Dell and getting overnight delivery, then obtaining a copy of Excel from a store in Phoenix. My wife vetoed the idea, and I eventually found a better way.

One of the things that I managed to get when I arrived in Phoenix was a local phone book, which came in especially handy here and there.

On Sunday night, I drove to the place where I was planning on registering for the auction. It was about six or seven miles away, and I didn't want to get lost when there was some time pressure involved. In addition to being successful about finding the route to take, I also found adequate and convenient public parking.

Monday morning, I arrived about 15 minutes before the auction was to begin, and attempted to register as a bidder for the auction. This was a mistake, I should have already been registered by this point. I would have registered by mail, but I couldn't tell if I needed one bidder number per entity that I was bidding on behalf of, or if I only needed one bidder number for the entire auction. It turned out that I needed one Bidder Registration Form for each entity that I was bidding on behalf of.

There was a snafu at the registration counter that didn't get straightened out until Tuesday morning - they issued bidder numbers to me that they had also issued to other bidders! It didn't cost me any more or any less, and I decided it wasn't worth getting upset over, even though it meant I missed the opening of the auction. I can't tell how much it cost the County, but in business that kind of waste gets punished (the county bureaucrats get paid regardless, which is a shame).

At the Registration Desk, I was able to purchase (for US$25) a CD that had information on the liens. I was also able to purchase a copy of the Arizona Business Gazette in their lobby for a dollar. It was the issue that had the lien information published in it. I sat down in the lobby and used the laptop to check out the contents of the CD; it had a spreadsheet file, a database file and some text files.

It was a half-block walk to the room where the auction was actually being held. I got there about 8:30 A.M. and it was packed. Almost all of the seats were occupied, and many folks were standing along the walls in the outer aisles. As an estimate, I'd say there was about 250 people. I groaned when I heard liens being won at seven percent. I got a seat and tried to settle in. I pulled out my copy of the auction listing (the Arizona Business Gazette) and tried to find out which number they were working on. Oops! Disaster! The font was too small for me to read!

It wasn't very long before I bailed and began searching for a Kinko's. I asked around in the downtown area without success, then finally checked the phone book and map that I'd left in my car. The nearest Kinko's was almost four miles away (which is really close by Phoenix's standards - that city is about 50 miles across).

When I got to Kinko's, I had to spend about ten minutes trying to figure out how to get the CD out of the laptop (I’ve been working with computers for twenty-five years, but Apples make me feel stupid for some reason). Once I was able to put the CD into a rented Windows machine, I quickly discovered that the spreadsheet file didn't contain the information that I was looking for - the value of tax to be paid for each lien. The Database file didn't have it either, but one of the text files had it.

There's a reason that I wanted this information. It doesn't make any sense to spend US$10 to register a $3 lien. If the lien is for US$250,000 then the ten bucks is trivial. Somewhere in between those two values there's a place where it starts to make sense to pay the registration fee. As a baseline, I figured near-instant redemption on a 16% lien. If the lien value is US$850, you get it at 16% and they redeem after one month, you get a little over US$11 in interest (which is pretty-much a 'break-even' deal). Lower interest rates correlate to more months for that amount, or to higher amounts for one month. If you want to explore this area, use the formula "I = P x R x T". Even though I knew capital amounts weren't getting placed at 16%, it was still convenient for me to use US$900 as a threshold in my selection criteria and I expected that my break-even point would move out to three months or so.

In addition to this break-even aspect, there are other reasons to deselect certain liens. I would recommend that you do not bid on liens that are held by a school, church or an indian tribe, or that are against state-owned property. If you have the time to run searches in the county databases, check to see if there are first mortgages on the properties - and deselect any that do not have a mortgage on them. A mortgage implies that the securing property is saleable, but also, if you do get into a foreclosure position, you can negotiate a profitable buy-out of your position so that the mortgage lender protects their investment.

I managed to import the text file into the spreadsheet program, and hid the fields that were of no interest to me. I began working my way up through the sequence numbers, culling out the liens that were for less than US$900. After a couple of hours it occurred to me that I was doing it the hard way. I spent a few minutes experimenting, then sorted the spreadsheet, culled all the ones below US$900 in one deletion and all of the liens above US$12,000 in a second deletion, then resorted the list according to sequence number so that it would be in the same order the Auctioneer was following. I selected a larger font for two fields, and also made them bold, then saved it to a jazz disk (I didn't bring one, but it cost $16.95 and tax at the counter at Kinko's). I handed the disk over to one of the printers and they ran the print job for me - 160 or so pages cost me US$12 and change. A little money, a little time and some resourceful ingenuity and this ‘road warrior’ was once again in the game and ready to do battle.

Back at the auction with my freshly-printed list, I was able to follow the Auctioneer and actually get in sync with the auction. Several times I was tempted to bid but refrained because I wasn't sure what percentage to bid. I knew that the auction was a 'reverse' auction, that is the bidders bid from 16% down to 0%. I'd thought that if the bidding got down to 0%, then who ever was still holding up their paddle would have their numbers thrown into a lottery pool, but it didn't happen that way for this one. If anyone bid 0%, they were not underbid and they got the lien.

What was happening was that the Auctioneer would announce the sequence number and the amount that was to be paid by the winning bidder. Before the Auctioneer could announce all of the dollar value, the bidders would shout out a chorus of percentage bids. On Monday afternoon, the chorus was "Seven" (on Tuesday and Wednesday mornings, the chorus was "Six", and on Thursday morning, the chorus was "Five"). If there was no lower bid, the Auctioneer would try to award the lien to the first person that shouted it out; when it wasn't determinable, they would pick someone and award it to them. The Auctioneer would recite the bidder's number and then the percentage that was the winning bid. Until I got used to it, I kept getting bidder numbers confused with sequence numbers.

Just as a side note, I was startled to hear several bids of "sixteen" get awarded as "six" over the course of the four days I attended. I also noticed that once the Auctioneer began to award the lien, they ignored lower bids. When challenged, the Auctioneers didn't seem to care. They don't care and they don't have to. It's their game, their bat, their ball and their rules. If you don't like it, you can step aside and let someone else bid.

Very few of the liens were bid at sixteen, and when they were, there was often some competition amongst the bidders. Counter-bids were called out, dropping a percent or two, sometimes as much as six percent lower, until everyone dropped out but the winner. It turned out that this class of lien was small-dollar amounts, like US$100 and less. Most of these were bid down to 10%, but a few (not enough to matter) went for 14% or higher.

Very few liens got no bids at all. In one case, the lot was entirely under water - at the bottom of a man-made lake in an upscale housing development. Some of the liens that were passed on were for liens that were secured by the second stories of condos that hadn’t yet been built at the time the development was abandoned. Just try to foreclose on THAT! Having a US$900 threshold tended to eliminate the undesirable liens.

Monday, Tuesday and Wednesday mornings, the Auctioneer was a lady. Well, calling her a 'lady' is 'the benefit of doubt' - I didn't like her manner at all and wouldn't have invited her out to dinner. In the afternoon sessions, the Auctioneer was a guy. Come to think of it, I probably wouldn't have invited him out to dinner either.

Tuesday afternoon, I finally worked up the nerve to make a bid. The tax value was listed at US$10,995 and I was hoping that the high dollar amount would cause the field to be narrowed down. Fat chance! I listened for the Auctioneer to call out the sequence number, heard the Chorus shout "SIX!", then I held up my bidder number and boldly called out "Five!" - and won the bid. I made a note of the sequence number, listened a bit more, packed up and went outside.

The value I had to pay was actually US$13,471.63, which includes the US$10 it costs to register the lien certificate in my name. The difference between US$13,461/63 and US$10,995 was caused by late fees and penalties that the county imposes upon the property owner. It’s an issue that disturbed me at the auction, because it made it difficult for me to synchronize with what the Auctioneer was saying. On the positive side, the interest rate operates on the higher value, not merely the $10,995 that was owed in taxes.

I had 24 hours to pay it and I'd bid over my budget. The extra funds came from my son's account and from the cash I'd brought along in order to invest for my corporation. Later that evening, I arranged for my wife to move US$3,500 into our joint checking account, so I could pull it out as cash from the bank's Phoenix branch (we used USBank – check ahead of time to find out which banks you use have local branches - you can also have cashier's checks sent to you overnight via FedEx).

Tuesday night, I was curious about the property securing the lien, and it dawned on me that I had the listing of the property value. The published values were over US$200,000 for the property and almost US$500,000 for the building(s) on it; over US$700,000 total.

Wednesday morning, I took care of paying for the lien I'd won on Tuesday. I also checked with the County offices and found out the street address of the property that secured the lien I'd won.

I refrained from bidding that morning until I knew the cash was available and pulled US$3,500 from the bank, in case I won other bids. Wednesday afternoon, I again attended the auction, but the rates had gotten bid down even farther - the Chorus was shouting "Five" and the winners were calling out "Four". I decided I wasn't going to bid any more. While I was at lunch, I happened to notice that one of the financial news shows had quoted the 10-year T-Note at four percent (and they’re a lot more secure than TLCs).

On the way back to my relative's that evening, I found the property that secured the lien I'd won. I drove around it and gave it the hairy eyeball. It isn't very impressive. It's an apartment building that's run down and seedy. I don't much care - I'll either get 5% on my investment or I'll foreclose and sell the place.

One of the hugely educational aspects to this trip was the variety of people that I was able to talk with. It really sank it that I AM a sophisticated investor - even though it doesn't always feel that way. I haven't acted on a lot of things, I don't make a living on investments, but I do know a lot about investing, and was able to hold my own in a variety of different discussions.

I met Ira, who is a retired lawyer from New York City. He may have been a successful lawyer, but as an investor he didn't seem very knowledgeable. We talked about a variety of investments besides Tax Liens, and he said he'd get in touch with me after he got back from his five week stay in Cabo San Lucas. We'll see. (Author’s note: it’s been about five months now and I haven’t heard from him)

I met Andres, a young man that works for a company that invests ONLY in Tax Liens (American Certificate & Title, 3960 Howard Hughes Parkway, Suite 500, Las Vegas, NV 89109, 702-990-3538). Andres was present at the Registration Desk and witnessed part of the fiasco with the Bidder Numbers. He told me that there are about 3,300 counties in the USA, and each one does things a little differently. Maybe the auctions have a similar format, but the payment procedures are different, or maybe the auctions are way different. He said that a course like Ted Thomas (who was, according to rumor, actually at the auction and conducting a TLC class) sells cannot adequately cover the entire market. He also mentioned that his company is starting up an SEC-registered fund for investing in Tax Liens.

I met Andy, who is an investor from Boulder, Colorado. Andy didn't care a fig about the yield - he wanted the properties. He had filtered the entire 26,000+ lien list down to the FOUR properties he wanted to bid on, and he got them. His winning bids were one property at zero, one at three percent and two at four percent. He's investing money from his self-directed IRA. He'll probably foreclose on all of them.

Andy told me he had timed the Auctioneer Wednesday morning; 17 per minute! She went through 100 lien numbers in six minutes! Ok, so maybe I wouldn't invite her out for dinner, but my hat is off to her for her performance. She had a better 'burn rate' than the afternoon guy. She was so fast that it would have been awkward for me to try and control the laptop and bid too. Some of the liens were redeemed between the time of publication and the actual Auction, and others were skipped for other reasons, but there was still plenty left to auction off and they couldn't afford to waste their time doing so. One of the problems I had in trying to synchronize with the Auctioneer was that I'd deselected a bunch of liens and they'd deselected a bunch of liens. I kept trying to step on the step that wasn't there and trying to walk where there was another step, so to speak. It took me all of Monday to figure out how to cope well enough that I could be confident about bidding.

Thursday morning, I woke up before I had to get up and was contemplating what I was going to do for the day. I suspected that my best bet would be to just come home. I packed my stuff and said my goodbyes to my relatives, then went to monitor the auction action a little more. Once I heard what the rates were being bid down to (fives and fours), I decided to head home. I said goodbye to Andres, Andy and some of the County employees and headed out of town.

Thursday afternoon, in Bullhead City, Arizona (just across the Colorado River from Laughlin, Nevada), I managed to get together with some friends from the gem shop for dinner. (Author’s Note: I belong to the Mineralogical and Gemological Society of Castro Valley – their web site is at http://www.mgscv.com) They'd moved away from my town several years ago; I'd met them because of our mutual interest in lapidary. I'd called before heading to Arizona, but hadn't managed to get into town soon enough on Saturday to meet them for dinner. Thursday, I was successful, and it turns out that the man has become a licensed real estate agent in the state of Arizona (and is working on his license for Nevada too). He mentioned 30% appreciation for local real estate and said that buying a lot, placing a manufactured home on it and renting it out would produce positive cash flow. I'm going to try to get some hard numbers from him, because that sounds really good to me.

I spent all day Friday driving home, and got back about 9:30 P.M.

One of the things that would have made it much better would have been a teammate to help coordinate the bidding process and for companionship on the long drive. Maybe next time.

I have been asked if there are risks associated with this kind of investing. I believe that there are. This kind of investing is similar to other kinds of investing - it is risky for the ignorant. The more you know, the less likely it is that you will lose on buying a lien. It's the County's ball, bat, rules and they are also the Umpire, and if you still want to play in that kind of a game, you have to accept that there are risks. The counties recognize that they have to leave some reward for the investors, or no one would play their game, so there ARE some rewards available.

Here are some obvious risks:

  1. The taxes may be redeemed so soon that the interest you earn is less than the $10.00 registration fee.
  2. The lien might be secured by worthless or otherwise unsaleable property (the property might be a drainage culvert, the second story of an condominium that never got built or it might be under water, like the man-made duck pond/fountain that I heard about for one upscale housing development). Also, if you buy a lien that's secured by property contaminated with toxic waste, you could be liable for the cost of cleaning it up, and that might be far, far more than the property is worth after the clean-up is done.
  3. Once you foreclose on the property (if you get into that position), you might still lose it because of bankruptcy, lawsuit or redemption. If you have spent money to improve or rehabilitate the place, you could lose all of that.
  4. If you buy a lien secured by a property owned by a school, church or charity, you may get a barrage of high-pressure pitches to donate your lien to them.
  5. Your travel costs to attend the auction may be greater than the interest you receive on the lien(s).

I have been asked what study materials I can recommend. There are a lot of them. I got started when a friend gave me his copy of Ted Thomas’ videos. There’s also “The 16% Solution” and some material in John T. Reed’s 2-volume book about buying property for at least 20% below market price (I wish I’d have read Vol. I before going to Arizona). The downside to studying this stuff is that it may give you the general framework, but it won’t give you the details that you’ll need to actually buy liens. In addition, the ‘gurus’ (like Ted Thomas) make it sound a whole lot easier than it really is, and a whole lot more lucrative than it really is.

It is possible to reduce some of the risks involved. I suggest that where possible, you deselect everything outside your appropriate financial bandwidth (my rejection criteria were “below US$900” and “above US$12,000”), deselect everything that doesn’t have a mortgage already in place and then try to do Due Diligence on as much as you can on what remains. If the job is still too big, try narrowing your bandwidth – probably starting with raising the lower value.

I was asked to discuss “assignments” with regard to TLCs, but I wasn’t aware of what they were referring to. At first, I made these comments: I'm not sure what you mean. If you are referring to the practice of buying things and registering the owner as you "and/or Assignee", so that you can subsequently assign the item to someone without paying another registration fee, I would have to say that you should check with each county where you are considering buying liens. In Maricopa county, the Registration Fee is trivial, but that's not the issue. Maricopa County wants to know the SSN or EID for whoever buys the lien, because they report earned interest to the IRS. I suspect that this happens throughout the USA.

Once it was explained in a little more detail, I had a better understanding about it (but no relevant experience). That approach is also referred to as “buying over the counter” (as opposed to “buying at the auction”). I’ve never done it, but there are several advantages to doing it this way:

  1. Your overhead is greatly reduced if you don’t actually have to travel to the county in question. Buy the list and send your order in by mail – much cheaper than driving to Phoenix and having to rent a motel room.
  2. You don’t have to bid the interest rate down until the competition gives up. In Maricopa County, for example, you can buy these and get them for 16% APR.
  3. The time pressure is reduced. If the taxes weren’t redeemed before the auction, they probably won’t be redeemed soon, so you can take your time doing your Due Diligence.
  4. There may be other advantages as well.

The disadvantage is that the items in the auction that everyone passed on will also get swept into this category. The stuff that’s universally rejected is rejected for a reason, and you’d better find out what that reason is. Again, this means do your Due Diligence!

Here’s something that Californians should be aware of. The auction in Maricopa County was the first time I’d ever attended a Tax Lien Auction. Previously, I had attended an auction of Tax-Foreclosed Properties, but was not a successful bidder. As a result of talking with the County Tax Assessor after that property auction, I found out that none of the counties in California auction tax liens, although the law permits them to if they want.

Follow-up: I just sent Maricopa County an additional US$9,727.82. This is for the same property – the owner still hasn’t redeemed their back taxes. As of June 1st, 2004, I was able to pay for the following year’s defaulted taxes and next year, if they still haven’t redeemed their back taxes, I’ll be able to get another year’s defaulted taxes, probably for about US$10,000. If that happens, I’ll be in a position to foreclose on the property. I probably don’t understand this correctly (because I’ve never done it before), but is it really possible to get ownership of a million-dollar property for a mere US$35,000? I’ll see.

In my opinion, this is an investment area that is worthwhile to pursue. To learn more about what happens, visit the offices of the county where want to buy liens and interrogate the bureaucrats until you have some background knowledge, then actually attend an auction. You might want to go as an observer the first time you attend an auction. Talk with the auction staff about their procedures. Ask them about what kinds of things can go wrong for an Investor and how to avoid those pitfalls. Talk with other Investors that are attending the auction; ask them about their ‘game plans’ and backgrounds in other investment vehicles. You’ll learn a lot – I did!

Remember that each county has their own way of doing things, so find out what the rules are before you play their game.

Copyright © 2004 by Kurt A. Schultz