by Mark Manoil, December 27, 2010

A Swiss man once explained to me his country's approach to remaining neutral in 20th Century European conflicts: prepare for war. The country made sure every able-bodied man was prepared to fight (trained and armed) in case of invasion. The Swiss had found that by being war-ready the need to actually defend themselves militarily seldom arose.

In the tax lien context, "being prepared for war" is having taken care of the prerequisite jurisdictional noticing, which must precede filing any tax lien foreclosure. In many cases, often more than fifty percent of a maturing or matured CP portfolio will get redeemed simply after the sending of the 30 day notice. That substantially cuts down on the need to go to "war" -- i.e., file the tax foreclosure suit. And noticing may prove to be a less expensive alternative to discounting the sale price of a tax lien to cash out from the investment.

Most tax lien buyers will willingly admit that they invest substantial resources in pre-purchase research and because they also incur non-refunded transaction costs, they might prefer to hold their CP investments a bit longer than a year to earn more interest and not have to find a reinvestment opportunity so soon. Besides, as a certificate holder they enjoy a statutory first right to subtax, i.e., pay the subsequent year delinquent taxes accruing on their CP parcels, on or after June 1 following the second half tax due date.

If a lien purchased at a February auction is not redeemed in three years, the holder  may initiate a tax lien foreclosure on the day after the third anniversary (assuming the notice of intent was properly given at least 30 days before). That means that in the interim between purchasing the tax lien and its maturing for foreclosure, the CP holder will have had the opportunitiy to pay and add to its CP three subsequent years of delinquent taxes--assuming the property owner did not pay any of those taxes--and earn the bid rate of interest for each susbseqent addition to the CP.

Each new subtax investment starts a new simple interest "clock" running on that portion of the investment. If all subsequent years are delinquent and subtaxed, the CP would represent four years of taxes, each year representing a different effective internal rate of return (because of the different starting date of that portion of the CP investment).

viagra generic brand The quality of interest earned on certificates of purchase degrades over time. Because Arizona law provides that the CP bid rate for interest accrues on a simple--not compounded--basis, over time that lack of compounding leads to a lower internal rate of return on the investment. Internal rate of return (IRR) is the compounded annual rate of return on the investment over its life, from and after the initial purchase date, applied to the principal amount of the purchase plus any subsequent contributions.

For example, a tax certificate purchased in February 2008 for $1000, and subtaxed for an additional $1000 in June and the months of June in the next two years, if purchased at a 16% bid rate, will have a January 2011 redemption value of about $5,227. The $4000 invested over three years will have earned about $1227 or a total return on investment of 30.67%. The internal rate of return, however, would work out to 14.37%. If the bid rate on the same CP was 7% instead of 16%, the final earnings would be only $537, an IRR of 6.62%. And if no subtaxes had been paid after the initial lien purchase, so that at redemption interest earnings were on the initial outlay of $1000 only, the $467 earned on the 16% CP would represent an IRR of 13.91%; the $204 earned on a 7% CP would represent a 6.52% IRR. Transactional and other costs, such as legal expenses, would further decrease the proceeds and IRR. (Setting up spreadsheets for these calculations are covered in Arizona Property Tax Liens -- Guide to Profit, Protection and Prosecution.)

Thus, to enjoy the highest rates of return (ignoring momentarily unrecovered transactional costs of investing), ideally a CP investor would experience redemption within twelve months from making its investment, and then get to reinvest those cash proceeds at the same or higher rate. In this way earned interest would be put to work as principal invested in the replacement and be the basis for additional future interest earnings.

Much has been written recently about large banks and hedge funds investing in property tax liens. Often the prime motivation for these investors is earning interest passively, not ultimately foreclosing on the tax lien parcels.

Historically, 80-90 percent of tax liens are redeemed before the three year anniversary that triggers foreclosability. What's left at the three year mark, then, often has a couple predictable features:
(i), the tax liens are less leveraged, i.e., more tax debt is owing against the property in relation to the property's value; and
(ii), the CPs are likely to need legal work to be either collected or foreclosed.

In our experience, the 30-day noticing process often yields a fifty percent or greater rate of redemptions in the CP portfolio being noticed. (The redemption rate is directly related however, to the types of properties the tax liens are on. For example, CPs on residential properties are more likely to be redeemed than those on raw land.)

What remains after the noticing period will more likely require commencement of a lawsuit to trigger redemption (or convert the CP to title of the property).

Thus, encouraging as much redemption as possible before the third anniversary of the tax lien purchase accompllishes two goals:
(i), getting back to cash on the CP investments to enable new tax lien investments at the next auction (which in turn enables a compounding effect on the money collected); and
(ii), minimizing the exposure to legal costs, time for foreclosure activity, and potential real estate-owned management issues (such as eviction, securing the property, fix-up, marketing).

Our office is pleased to assist investors with their pre-litigation notices; for those CP buyers who wish to prepare their own notices, see our special report: "," at cpexchange.com.

October, 2010

The Arizona attorneys’ fees and costs law in property tax lien foreclosures was amended in this year’s legislative session. The new version, which took effect July 29, provides that if a person who redeems a delinquent property tax lien became an “owner” of the property after tax lien foreclosure commenced, and a notice of pending litigation was recorded, then that person is liable even if not formally served in the foreclosure.

We believe it will reduce tax lien buyers’ risk of stranded legal expenses in the foreclosure action, particularly when third parties attempt to circumvent the tax lien investment and foreclosure process by acquiring a deed from the delinquent property owner, and then redeeming the tax lien, also known as “title-raiding.”. ]]> mark.manoil@gmail.com (Mark Manoil) CP Buyer Update Tue, 03 Aug 2010 05:27:59 +0000 http://www.cpexchange.com/cp-buyer-update-blog/26-tactical-impacts-of-not-sub-taxing http://www.cpexchange.com/cp-buyer-update-blog/26-tactical-impacts-of-not-sub-taxing by Mark Manoil, January 29, 2010

Arizona property tax lien purchasers, by virtue of their Certificate of Purchase, are given a first right to purchase subsequent delinquent tax years on the same property and have those amounts added to their tax certificate, earning the same interest rate.  In some counties, however, the action is actually a requirement, inasmuch as the failure to pay subsequent delinquent taxes (“subtax”) will expose the holder’s CP to being re-sold at the next auction along with the next delinquent year.

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This latter treatment of subtaxes, i.e., making them a mandatory condition of retained ownership of the CP through subsequent tax auctions, is a policy set by the local county treasurer under an option given by state law.  The requirement is not imposed in Maricopa or Pima Counties, the largest tax lien markets in Arizona. In these, tax liens for different tax years may be sold and held by different tax lien investors.  The existence of separate CP’s creates special strategic considerations when approaching foreclosure of any one of them.

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The right to redeem (pay off) a tax lien is very broadly granted under Arizona law. It explicitly includes in the class of potential redeemers CP holders of different years. (The lien “may be redeemed by: 1. The owner. 2. The owner's agent, assignee or attorney. 3. Any person who has a legal or equitable claim in the property, including a certificate of purchase of a different date.”)

by Mark Manoil, January 27, 2010

Arizona law contemplates three principle ways to acquire a property tax lien: auction, assignment from the Treasurer, and assignment from another lienholder.  The evidence of the tax lien is called a “Certificate of Purchase” often referred to as a “CP”.

Tax lien auctions are required by law to be held during the month of February every year.  In our recent report, “,” we explained why we thought the February 2010 auction was likely to be historic in size and provide great opportunities for CP investors. Our expectations were confirmed last week when the delinquent parcel list for Maricopa County was published.

The purpose of this note, however, is to focus on assignments. While bidding at auction results in lower interest rates on the CP, investors who buy from the pool of liens not sold at auction, which becomes available after the auction, automatically get 16% rates on their CPs. Typically the liens to choose from are not as attractive as those bid for at auction, but may nonetheless provide valuable investment opportunities.

A CP is transferable, from one investor to another, by the process called assignment.  (Some county treasurer’s offices call this “reassignment”.)  All that is required is a notarized sale document signed by the seller and identifying the particulars of the CP: the underlying property’s parcel identification number, the CP number, and the seller’s identifying information.

]]> mark.manoil@gmail.com (Mark Manoil) CP Buyer Update Wed, 27 Jan 2010 22:46:20 +0000 http://www.cpexchange.com/cp-buyer-update-blog/23-upcoming-tax-lien-sales-to-be-historic http://www.cpexchange.com/cp-buyer-update-blog/23-upcoming-tax-lien-sales-to-be-historic Normal 0 false false false MicrosoftInternetExplorer4

by Mark Manoil

November 25, 2009

Given the big chill in the real estate market – whether from residential foreclosures or an inactive commercial sector – many property owners have not paid their 2008 year property taxes.

In a new report published this week at cpexchange.com, "2010 and 2011 Arizona Tax Lien Sales Promise to Be Largest in History," we examine property tax indicators and trends from the last decade, and conclude that in delinquent tax dollar terms, the 2010, and very probably 2011, annual property tax lien sales promise to be the largest in state history. Moreover, tax certificate buyers are likely to be rewarded with higher average interest rates.

Increasing property valuations leading up to the recent real estate bubble popping had resulted in increased property tax assessments and tax liabilities on properties. The bubble popping meant that many properties dramatically lost value, faster than the county assessor could accurately reflect on the tax roll.

So, just as the 2009 tax sale (for unpaid 2007 tax year liabilities) showed a nearly 50 percent jump over the February, 2008 sale for unpaid 2006 taxes, the 2010 increase of delinquent taxes advertised for sale over 2009 tax sale maybe as much as 100 percent.

Unpaid property taxes have put control of more than 150 homes in a polygamous community in jeopardy and more may soon be at risk -- part of a growing financial crisis that has reignited a rift between sect members and a court-appointed overseer.

Investment interests in 35 large, communal properties that are part of the United Effort Plan Trust were auctioned in a Mohave County tax lien certificate sale in February. The sale was triggered after about $124,000 of the $1.2 million total tax bill in Colorado City went unpaid in 2007.

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Statutes of limitation provide a finite time in which to bring suit on a claim, and after that period, the claim is barred. In the tax lien context, the certificate of purchase “expires” if not timely enforced.

Arizona has three different statutes pertaining to limitations on foreclosure of property tax liens. Multiplicity of statutes is the result of different legislative sessions treating the subject of tax lien expiration prospectively first (i.e., not applying to already-issued tax liens), then retrospectively. Because there are differences among them, the statutes create both redundancy and ambiguity.

]]> jamesmhenley@yahoo.com (Administrator) CP Buyer Update Sat, 14 Mar 2009 21:38:35 +0000 http://www.cpexchange.com/cp-buyer-update-blog/14-working-with-qregisteredq-certificates-of-purchase http://www.cpexchange.com/cp-buyer-update-blog/14-working-with-qregisteredq-certificates-of-purchase March 14, 2009

Do not be alarmed if you recently purchased tax liens from one or more of the Arizona County Treasurer’s back tax auctions and you did not receive a physical certificate of purchase. Arizona law allows county treasurers to adopt a “registered certificate” system. Under this system, they no longer issue paper certificates of purchase. Instead, they periodically send out a portfolio statement that indicates the certificate of purchase number, tax parcel number, date of purchase, interest rate, and amount paid, as well as the name of the bidder, and bidder number, if one is used.

]]> jamesmhenley@yahoo.com (Administrator) CP Buyer Update Sat, 14 Mar 2009 20:59:53 +0000 http://www.cpexchange.com/cp-buyer-update-blog/11-pledging-to-not-raise-taxes http://www.cpexchange.com/cp-buyer-update-blog/11-pledging-to-not-raise-taxes by Mary Jo Pitzl, Political Insider

azcentral.com/The Arizona Republic

February 18, 2009

At least 38 of Arizona's 90 lawmakers have signed the State Taxpayer Protection Pledge promoted by Americans for Tax Reform.

That means they have promised to "oppose and vote against any and all efforts to increase taxes," according to the wording of the pledge.