What is a Tax Sale?
After writing the previous post, Tax Sale Results part 1 I realized that some readers may not know what a tax sale is, so I will give a brief description and then the results.
The bulk of the income for most municipalities is property taxes. To encourage people to pay their taxes on time cities and counties generally charge high interest and penalties. They will also put a lien against the property so that it cannot sell without the taxes being paid off. Ultimately if the taxes are not paid then the county can take the property for non payment of the taxes.
But counties need money to pay the teachers, policemen, and garbage collectors etc. Payroll comes every two weeks. They can’t wait for someone to take their good ol’ time to pay their taxes, they need the money now. So the tax sale was developed.
Municipalities auction off tax lien certificates to investors, or in some cases tax deeds. The holder of these certificates has a lien against the property and essentially takes the place of the government tax collector. They get to collect interest on the amount due and have the right to foreclose on the property if the lien is not paid off. In the case of tax deeds, the investor gets a deed to the property and no foreclosure is needed, but usually the previous property owner has a redemption period.
Investors generally buy tax certificates for two reasons; to collect interest, or to get discounted properties by foreclosing on the lien. Yes you can make good money in tax sale but it is not as easy as “Pennies on the Dollar” that the infomercial guys would have you believe. It is an auction after all and it can be quite competitive as you will see below.
How Does it Work?
The specific regulations and interest rates will vary by state and sometimes jurisdiction. Here in Maryland we are a tax lien state and the nominal interest is 6-18% depending on the county. I say nominal interest rate because it is an auction and the effective rate depends on the bid and a complex formula called the “High Bid Premium”. This premium must be deposited with the county and does not earn interest.
The bidding determines three things:
1) The price you will pay if you foreclose on the property, this is your bid amount.
2) How much you have to pay the day of the auction, you must pay both the lien amount and the high bid premium.
3) Your effective interest rate. Because the high bid premium does not earn interest the more you pay the lower your effective interest rate.
Baltimore City 2008 Tax Sale Results, part 2
Well the City did pretty well last Monday, 9026 liens were sold at the Auction May 12th. The total lien value was $23 million and the high bid premium was $42 million for a total to the city of $65 million.
Almost 1200 properties received no bids and the liens revert to the City of Baltimore. You can go down to the city now and get one of these liens for face value. Most of these leftovers are junk liens. One of the worst case examples is 2620 Frederick Ave. with an assessed value of $11,600 with a lien of $606,616.
Yes you read that right – one half million dollars in taxes owed on a property worth $11,000! On average the liens on these leftover properties are 96% of the assessed value!
The top bidder in dollars was #189 ETS Maryland. They spent $17 million to win 2111 liens. Based on their bids, they will earn an effective interest rate of 6.91%
The next highest bidder was #30, 2008 City Holdings LLC, represented by Heidi Kenny an attorney who does tax foreclosure work. She spent $16 million last Monday. Her effective interest rate was 4.65%.
One bidder bid their interest rate down to .48% although that was an extreme 18 bidders did down to less than 5%. However 15 bidders bids will allow for the full 18% interest. The average interest rate received is 6.26%
You’ve heard of the 80/20 rule right? Well the bidding was even more lopsided than that. The top 10% won 95% of the liens. There was a total of 177 bidders. Ninety Nine bidders won at least one lien.
So How Did Ned Do?
I was in the top 20 bidders. I am certainly not one of the big guys but I have grown out of the one-sie, two-sie stage. My goal is to acquire properties. So I won’t really know for another year or two how I really did. However I got the most liens ever and I paid much less in high bid premiums than last year. My effective interest rate is about 13%, so that’s pretty good.
How About Some Good News for the Small Guys.
Well 9 bidders were able to win 1 lien for a total cost of under $1000. They all will earn the full 18% if the lien redeems. Thirty eight bidders were able to bid low enough to get a 15% effective rate or higher. Many bidders bid on 5 or fewer liens and still won at least on lien. Over 1/2 of the bidders bid on less that 12 liens and many won something. So you can play at this game on a small scale with a modest amount of money. But you better learn the rules and know how to play the game. You are playing against the big boys.
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