Questions Regarding The Seemingly Explosive Popularity
Please help!
Back in the Eighties, I lived in Florida and was looking at participating in tax lien/tax deed sales. At that time, they seemed to be a bit obscure. In the last few years, It seems as if every where you turn, there is some information about them. My questions is whether or not this new found popularity is going to drive the little investor out because of some of the large institutions that seem to be getting involved, or I am just more over reacting to what may never happen? Also, approximately what percentage of people that say they want to get involved with tax lien sales actually do vs. give lip service only to continue doing what they had been doing all along?
Thanks for any input you can give
Tonycsa------------------
You prediction has already come true. Whereever there are a lot of liens for sale the Wall Street houses are already buying them up.
Even where they aren't there are so many other people attending, mainly beginners, that it is difficult to get a good deal.
I posted a description back about Nov 8, 2003 or so, of a tax sale in El Dorado County, CA. I suspect you could find it by putting the county name into the search function at the top of this forum.
Good Investing**************Ron Starr*************
Ron,
Thank you for your response. I see you on another real estate investing board, and I respect your input.
Do you think that this will be a continuing trend, or with an uptick in the market, will people go back to chasing returns?
Tony
Ron,
I did a search for anything with El Dorado county, CA in the subject, no match. Could you give me the just of the topic/subject?
Tony
Tonycsa----------------
Here is my report.
Yesterday, Nov 7, 2003, I attended the El Dorado County, CA, tax sale. A huge turnout--over 200 people, the board of supervisor's chambers--which has just under 100 seats--was packed, with people sitting in the aisles, standing against the wall, and standing out in the hall listening on a speaker system.
There were apparently no improved properties for sale. There were about 46 land parcels, 31 of which the tax collector announced as having 1915 act bonds on them--that remain on the property after the tax auction--and they were in judicial foreclosure. These were lots in two failed subdivisions. There were also 195 timeshares at three resorts at South Lake Tahoe.
I had not researched the land parcels, as I was not planning on buying any, since I was there to experiment with buying time shares. However, I sat next to an investor that I have met several times at tax sales over several years: he said that he felt people were paying market value for the properties. From the ratio of opening bids to final bids, I have the feeling some of those properties were probably going for more than market value.
One property sold for $10,000, and somebody said "you just bought 20 square feet." I looked it up on the map, and, sure enough, it is one foot wide and about 20 feet long right next to a street. Sure does not look to me like a good deal. Lots more money than brains there, I would theorize. For that kind of money, I bought three houses in Oklahoma last June, two of which are producing rent. The other needs extensive repairs to be rentable.
Many people before the sale were looking at the assessor's parcel maps to decide upon what properties to bid. At least they probably avoided bidding on the 20 square foot property. But I find this to be folly. I recommend actually seeing properties before buying them at tax sales, even if you are only spending a couple of thousand dollars for them. Many properties going to tax sales are junk properties. As John Beck often says, sometimes those properties are being abandoned for their owners, and there is good reason they are doing so. Why continue to pay taxes on properties that have little or no value?
Of the 195 timeshares offered, 37 sold the first time through, many for up to about twice their opening bids, which ranged from $700 to $1,400, most opening bids being under $1,200. The highest price paid was $2,500 with several selling at $2,300. I bought seven, three for their minimum bids of $700, one for the minimum of $1,0 0 0, and two for $1,700 that had started at $700 and $800. These two had an assessed value of over $7,500, but I don't know if they will resell for that. I hope they may resell for about $2,500-$3,000, but that is from checking out comparable sales. It is an experiment, so I will see.
The timeshares were offered up again twice, all starting with $700 minimum bids, and 45 more sold, for a total of 82 out of 195 selling. A couple actually got bid up to over their original opening bids which were about $900 to $1,100. Most sold for the minimum or $800, a few for $900.
Tax sales now draw huge crowds, many of whom don't know what they are doing. During the latter part of the time-share sale, the tax collector asked how many attendees had been to a prior tax auction in El Dorado County. Only about 1/5 or fewer of the people raised their hands. Beginners, many of whom may not know what they are doing. Some, with more money than brains, overpay for properties.
The tax collector announced that they had sold more timeshares than ever before. I know that to be true, having seen about three or four other sales there, where only about 15-25% of the timeshares had sold.
Here in CA, a property owner can claim any excess proceeds from the auction of his/her property at the county tax sale--the difference between the price paid and the tax collector's bill.
Get on the right side of the tax sales when they are drawing so many foolish bidders.
It now becomes worthwhile to buy junk properties in CA, stop paying the taxes, and let them go to sale in the tax auctions. Suppose you had bought that 20-square foot parcel for a $100? The tax collector would have taken out about $600 for the tax bill and you, as the owner, could have collected over $9,400 of the sales price. And that property was assessed in value at $36, so it is likely that the property owner, whose last deed was recorded in 1965, might well have sold for $100, or even less. There are several other one foot wide parcels along that street. Might it be worth it to buy those and hope a similar buyer shows up at a future tax sale and overbids for them? I think so.
Last year I sold a property through the tax collector of Contra Costa County, CA, the county East of where I live. I bought the property many years ago for about $2,500 from the owner before a tax sale. I stopped paying the taxes about 7 years ago. It sold last year for $52,000 and I got over $47,000 from the excess proceeds this year. This was a 1.92 acre parcel between $1 Mill plus homes in an upscale community. That is the good news. The bad news? Half is vertical cliff, the rest is steep, unstable soil. There is a deep, steep canyon between it and the road. And it is landlocked, it does not have access to the road. So one would have to get the ajoining property owner to agree to sell or provide an easement over part of their land.
So, these days, if the tax sales in your area allow you, as the property owner, to claim excess proceeds from the tax sales, I recommend buying junk properties for no more than a few hundred dollars, do not pay the taxes, and wait to see what they sell for at the county tax auctions. You will be on the "right side" of the auction, and you might well make substantial money with minimal investment and little effort.
Good Investing***********Ron Starr************
I thought I'd contribute the following article, as it relates to Ron Starr's contribution:
Current Trends in Tax Liens and Other Disturbing Thoughts by Herb Spencer, CFS 10/1/2001
The substance of this article was originally published in the May, 1997, issue of the American Cash Flow Journal®. With few changes, the trends and disturbing thoughts explored in that issue still apply today. While some of the actual events have been updated to the current century and the new millennium, much of the article is printed today as it was four years ago.
At the recent Cash Flow, many of you were exposed to a wide variety of speakers and exhibitors who helped you better understand the many and varied opportunities in the cash flow industry. Most of the speakers told you of the great rewards to be seized and, hopefully, many exposed you to some of the realities. Based on your calls and letters, there is certainly a growing interest in tax liens. But contrary to what you may have heard elsewhere, tax liens are no longer the sure road to riches they once were. Times are changing!
Since writing about tax lien sale preparations in the February, 1997, issue of ACFJ, I’ve been an active bidder at some of the Arizona auctions and a passive bidder at others. Along with many other experienced bidders, I was appalled at some of the trends I saw. There appears to be more and more reckless bidding with little regard to payoff. But some of us also saw opportunities to take advantage of some of the special situations that we saw developing. In almost all counties, the bidding was as competitive as it has ever been. There appeared to be more institutional buyers than ever before with a mandate to spend all of their funds (translated: millions) at any interest rate. Certainly as many “newbies” or “wannabes” as in the past came to make their fortune without first learning the rules of the game. Returnees showed signs of more cautious bidding, and several of the more experienced bidders showed evidence of strategy changes.
The biggest and best-attended auction was the Maricopa County sale held in Phoenix with about 25,000 parcels being offered for sale. The bidding started at ten percent for most parcels with most selling for seven or eight percent interest and a few being bid down to six percent or lower. (In Arizona, the bidding starts at 16 percent interest and the rate is bid down to the lowest level of interest the investor is willing to accept on the lien.) Typically, the early bidding was very aggressive to establish a “pecking order” and settled down to slightly restrained levels for the next couple of days. However, with time and liens running out on the fourth day, the excess cash was forced to continue the aggressive bidding levels. It was interesting to note that many of the experienced investors who had been buying Maricopa liens for many years sat on the sidelines and watched. Knowing the typical redemption rates for most of the liens, they knew the math prohibited them from bidding below 11 or 12 percent except in special situations.
One investor who has been specializing in Maricopa County liens for over 20 years found a number of “special situations” that did not fit a typical parcel profile and was very successful with a number of bids at 16 percent. I have seen this particular investor researching liens in the treasurer’s office in August — and in October — and in December – and I have to assume in a lot of other months when I have not been in Phoenix doing my own preliminary research. You could say this particular individual stole many, many bargains.
By contrast, there was a large group of “newbies” who had attended a “how-to” workshop held just prior to the sale where new investors learned about purchasing tax liens. Each of the participants received a list of the 25,000 liens along with some special sorts that grouped liens with multiple years of back taxes and improved or vacant properties grouped by lien value. Using assessor information, the list also included additional information about some of the improved properties. A valuable addition to this list of parcels was a separate book that contained a recent photograph of all of the improved properties. Within the constraints of time available for research, the lists and book of photos had to be valuable research tools.
Workshop attendees were not the only ones to have access to the lists and photos. Many of the institutional investors had also purchased the same bound list during the sale. Many of the experienced investors also had the list to enhance their own research. And most of the experienced investors who purchased the list and photos compared them with their own research and calibrated the quality of the lists – and knew when to sit back and watch. While not checking all 25,000 parcels or all 3,400 photos, it was enough to know that many of the improved properties were not photographed and that, in at least a few instances, the same photo appeared for more than one property – an obvious defect in the list.
Who, then, benefited the most from this “valuable” research tool? Certainly, the experienced investors who used it to augment their already extensive research and knew how to find the special situations for which others were unwilling to bid benefited. Perhaps the institutional buyers who bid aggressively for all liens over $500 may have “passed” on a few marginal parcels may have benefited. It is doubtful, though, that many of the “newbies” that had to share their valuable research tool with everyone else – and saw the bidding go down to seven and eight percent – will realize enough in interest payments to recover the costs of their workshop tuition and travel expenses.
The other large sale was held in Pima County at which about 15,000 liens were offered. Unlike the other fast-moving sales, this sale in Tucson stretched over two weeks later in February. This drawn-out sale had the effect of sending all but the most serious of the buyers home at the end of several days. By the last day of the sale, only about four institutional buyers, six or eight serious individuals, and a very small handful of other investors had come to bid on a few select parcels. Those individuals who were willing to stick it out to the very end found they were able to buy most of their liens at 9 or 10 percent or higher; a couple of the institutional investors continued to fight it out with each other at 8 percent. A characteristic of the Pima County sale was that most of the large investors, both individual and institutional, knew each other and their preferences and knew from previous research the nature of the parcels underlying the liens. They knew what to expect and they prepared themselves accordingly.
One savvy local investor was buying an entire block of liens on a bankrupt condominium project at a 16 percent rate of interest until a couple of others realized what he was doing, and they all wound up buying the rest of the block at 14 percent. Why did this investor rush in where others were slow to tread? He knew the zoning and knew if he foreclosed, he would sell the lots to individual home buyers instead of trying to continue the condo development. He had spent time preparing for this sale, and he had done his homework on this group of liens.
Another group of counties including Cochise, Coconino, Mohave, Pinal, Yavapai, and Yuma Counties could be categorized as medium sized counties that had fewer than 10,000 liens to sell. These counties offered more opportunities for the experienced investor, although there were at least several institutional investors at these sales also. The bidding was quite aggressive in Yavapai and Coconino Counties – often down to seven or eight percent. In the other counties, institutional investors were bidding down to ten and nine percent – and sometimes to eight percent. But the savvy returnee buyers who had done their homework and could bid outside of the institutional “buy” parameters were often able to buy their liens at 11 percent and above.
In one county I was able to buy about 85 percent of my liens at an interest rate of 13 percent or higher — well over half of them at 16 percent. In another county I found myself bidding down to 8 and 9 percent on a group of liens that I had marked as very desirable while bidding 15 percent for the other liens that had been marked as “should” buys. To my surprise, I bought some, but not many, liens at the in-between bids of 11, 12, 13, or 14 percent. Why did these two bid and buy patterns develop?
An interesting pattern has developed in the past couple of years, however, in that investors are willing to bid down the level of interest rate that they will accept to zero percent. In fact, I bid several parcels down to zero percent and won the bid on another lien at one percent interest.
What’s going on? While I can’t speak for all of the other investors, it is apparent that most are not buying these tax liens for the purpose of realizing a profitable return of high interest and penalties on redeemed liens. They are obviously bidding with the hope of actually acquiring the property through default and subsequent foreclosure. It would appear that at least a few of the investors are becoming more astute — realizing that if they have to be more competitive, they also have to be much smarter.
The disturbing trend is that it appears that some of these bidders are also “tag-alongs.” They will watch some of the more astute investors bid to very low levels and figure that if they know something “good,” it must be a good investment. In many cases, that may be true, but it should also be “buyer beware” when it may be a case of the blind leading the blind.
There were some liens that were obviously desirable because of their neighborhoods and lien cost ,and the bidding could be expected to be competitive. Although I avoided as many bidding wars as possible, on those I bid aggressively, I did so because I felt they offered more value to me, the investor, than did the other liens in the same price range. There were other liens I was able to purchase at a high interest rate simply because I knew where some of the bargains were hidden in the county, and I was willing to walk where others feared to tread. And sometimes I got lucky.
For instance, I went looking for a special situation in a vacant lot in an area that had been, a few years ago, a less than desirable rural area. In the last two years, however, new subdivisions have sprouted up, and I felt it necessary to determine where this lot was located. I couldn’t find the vacant lot. After double checking the maps, I found a brand new $95,000 house sitting on a $20,000 lot. I also found a corporate owner with financial troubles instead of an individual owner with bank financing. Since the lien value was less than $150, I was able to buy it uncontested for 16 percent interest. Without the house, the lien would have been an excellent buy; with the house, it is an outstanding buy with an outside chance the tax obligation may get lost in the cracks by the corporate owner.
In another special situation, I went looking for a nice home in a fast developing rural section of the county that had not yet attracted the attention of most tax lien buyers. The house was not on the lot where the maps indicated it should have been — an obvious property defect. I did not bid on the lien. However, there was a mobile home a few blocks away that was also on the drive-by list. What I found was a burned out hulk left on the lot. And the owner lived out of state. This presented another special situation where one had to look at the value of the lot in a developing area instead of the value of a previously so-so improvement and then consider the revised Investment-To-Value ratio I have previously discussed. The new ITV was still less than 2 percent and, given the probable attitude of a burned-out out-of-state owner, this was probably a good lien on which to bid very aggressively – perhaps as low as two or three percent. I successfully bid 16 percent for the lien.
If there is an underlying message to what happened at the Arizona tax sales, it is that the rich (institutional buyers) will continue to dominate the bidding while the experienced buyers will continue to adjust and change their strategies and do very well, thank you. The investors just starting to buy tax liens will either rush in and bid on anything and everything and will probably never be heard from again or they will cautiously proceed and learn their craft before betting the farm. I met both kinds during my travels to the different counties.
I had some new buyers talk to me after some of the sales with very frightening questions. Questions like, “What do I do if the owner doesn’t pay the taxes and I have to pay them for him?” Answer: “Come see me and I might be able to buy this ‘worthless’ lien from you if my research pans out.” Or questions like, “How much interest will I receive if the owner comes in and pays his taxes next week?” Answer: “Not much. Probably not enough to pay your expenses to the auction and, incidentally, it may very well happen next week.” Or what is your secret to the liens you bought? My secret? I didn’t share it with them but it was to be flexible. I researched available liens fitting several different parameters. Early in the bidding I determined what the inflexible institutionals were buying, and I was very comfortable bidding for what they did not want.
A few of these new buyers may learn from their experiences and be back next year. Most of them will not be seen again.
I’ve had several ACFJ readers contact me and I’ve been able to share some of my ideas about learning the game and the subsequent research, research, and more research. Hopefully, they will be better prepared to find their niche in the tax lien industry for asking these questions. I’ve had the opportunity to review most of your questions since my return from Arizona, and most of them fall into two categories. Some of you understand some of the potential in tax lien certificates and are genuinely trying to learn what it takes to be successful. A few of you still believe that there are great riches to be reaped if someone just shares their secrets with you. Most of you realize that both time and hard work are involved, and a few are still looking for the genie in the bottle.
Specializing in tax liens is really no different than making your fortune in real estate or business notes or invoices or lotteries or mobile home paper or viaticals or the other niches in the cash flow industry. Some of you will realize that the secrets are education, hard work, opportunity, and a little bit of luck. And those of you with that realization will probably be successful like those who have gone on before you.
Regardless of your chosen specialty, your best opportunity to learn right now what it really takes to succeed might have been to attend the recent Cash Flow Convention in San Diego. I was speaking on tax liens, and I was meeting with many of you between sessions at the Marriott Hotel. I was also listening to some of the other speakers and my peers to improve my own skills in related areas. I know that some will argue that the time and the cost is too prohibitive to meet with and learn from those who have “been there.” But I don’t know when it will get any cheaper. And if the experience of some of those buying tax liens last February is any indication, their ultimate education could be a lot more expensive.
Clearly, times are changing in the cash flow industry — tax liens being no exception. If you plan to be an active participant — either as an investor or as a service provider — you need to learn the fast changing rules. As my friend Jimmy Napier has often observed, “If you think education is expensive, consider the cost of ignorance.”
Herb Spencer, CFS, is the President of Capital Growth Tax Liens, a company specializing in Tax Lien Education and Research and located at 22617 Ventura Blvd., Suite 233, Woodland Hills, CA 91364, (818) 929-4400. He has personally invested in tax liens for his own account and for major clients for three decades. He has written numerous articles on the subject and is the author of the newly revised tax lien text, Creating Wealth to Change Your Lifestyle”. Although the information in this article is believed accurate, both Mr. Spencer and American Cash Flow Journal recognize that state laws and county interpretations of those laws are frequently changing and are not responsible for any individual investment decisions that may result from these comments. Mr. Spencer can be reached by e-mail at ****Must Reach Freshman Investor status before posting URL's***@worldnet.att.net
Current Trends in Tax Liens and Other Disturbing Thoughts by Herb Spencer, CFS 10/1/2001
[ Edited by Bulletbobb on Date 05/08/2004 ]
BulletBob--(CT)-----------------
Thank you for generously sharing that article with us. Not once, but twice, even.
My advice now: buy cheaply junky properties in states where the property owner at the time at tax sale is able to claim the excess proceeds. Then let them go to tax sale and let the beginners bid up the price to ridiculous levels. Then collect the excess proceeds. Whenever the market shifts, move to the other side. The side opposite when the crowd is. That is what this strategy does.
Good Investing*********Ron Starr************
Interesting and well said.
However as of six months ago I have explored the other side of the fence.
Target: The Tax Sales here in Los Angleles County. March 1,2nd 2004.
I will not be bidding these sales, We will merely pick up the list of new owners as they record on their purchases after the tax sale. Research has been completed on all parcels offered.
We will allow a period of time to pass approx three months. We will then begin to contact a selected number of new owners these persons due to present abundance of capital and lack of proper research will be upside down.
We will offer to buy the properties at reduced prices and of course with a great deal of Seller supported financing. due to the exposure of their capital with no chance of recovery..
The important item at Tax Sale is knowing what you are going to do with the property after you gain ownership and or control. Bidding on tax sales without contemplating its ultimate use is super risky.
Having an on site inspection of each parcel and the full research as to its true value and use we expect this to be a most profitable venture.
We take this position after examining the turnout at recent sales and the calibre of knowledge exhibited by the bidders. The turnouts are super high. Emotional non judgemental bidding and the actual preparation super low. Indeed errors in available distributed lists and pictures are considerable.
Seeing this situation we elect to bypass the sale and enter Transaction with the successful Bidders. Caveat Emptor.
Lucius et Barabas
Lucius et Barabas --(CA)--(AKA Lufos)---------------
Yes, an interesting approach. As I said in my earlier post, when you find the crowds appearing, you have to get on the other side of them. I recommend doing so by buying junk properties, trying to resell while not paying the taxes, and claiming excess proceeds after the tax auctions. Your approach also puts you on "the other side" of the crowds. You are offering to buy from them, making them sellers. You select those who are likely to have buyers remorse.
A couple of my thoughts. Since you have researched every property, you might go prepared to buy, just in case a few properties do not get bid up too high to make them good deals.
Also, you might want to send a letter to your targeted buyers within a week after the tax deeds recorded. This might be a time to hit them while they are feeling emotional about their foolishness. Although I can certainly see waiting for a while for them to get some distance from their purchase and come to the conclusion that they would be wise to get out of the properties. Perhaps two missives to them would be optimal?
Good Investing********Ron Starr**************
lufos,
great approach. i'm going to the sales as well to see what happens in California. More than likely, there will be many, many losers not knowing what they are getting themselves into. Great strategy. It will pay dividends. I see it everyday on Ebay as sellers try to sell parcels that are landlocked or worthless. caveat emptor, indeed.
pete
Yes, I do agree with most of what was sad above but not with everything because both theories are at list resembling a baby Swiss Cheese.
Never the less, what amazes me the most is where and how those emotional brainless buyers get the money to waist?
Another thing that I know happens is that bidders bid but do not pay. They do deposit 10% go to see their new steal and when they cannot clime on the top of lot with their 4X4 Chevy Suburban, away they go and simply do not come with the rest of the cash so do not hold your breath that your cheep lot that you've been paying the taxes NOT, will sell for gold 5 years later. Stupid people with money often have the tendency not to be so smart ... and that's probably why they have money.
Good Luck!