By Alan Prendergast
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In Colorado, property-tax bills are due April 30; if they are not paid, the landowner receives a delinquent tax notice a few months later. In Denver, which has approximately 171,000 separate pieces of taxable property, about 10,000 people--just under 6 percent--were late on their payments and received such a notice last year.
If, by the following October, the homeowner still hasn't made an effort to pay his taxes, the next step is for the county treasurer to publish notice of the derelict bill in the local newspaper. In case anyone forgets to read the paper on a given day, this notice must be published not once, but three separate times.
At this point, many people who neglected their tax bills in the spring--whether on purpose or because they forgot--come up with the money, and about 70 percent of the outstanding bills are cleared up. In October 1997, for example, Denver Treasurer Steve Hutt published just 2,841 delinquent tax notices.
In November, if the taxes are still unpaid, the bills--called tax liens--are sold at public auction. There, bidders compete for the right to pay off the tax bill to the county and later collect the money, plus interest, from the property owner. By now, about half of the people whose outstanding bills were published in the paper have coughed up the money and paid off at least part of their property taxes. Last year Hutt printed up 1,382 tax liens to be sold at auction--less than 1 percent of the total properties in Denver County.
As an investment, buying a property owner's unpaid tax bill sounds about as savvy as purchasing Florida swampland. After all, if the deadbeat didn't pay the government, why would he decide to pay some faceless private investor? But in fact, business is booming.
The main reason is that buying up tax liens and then charging interest promises a tidy return--in theory, anyway. Colorado law sets the amount of interest an investor can collect; this year it was 14 percent.
One group drawn to that profit margin has been a slew of small-time investors hooked by enticing infomercials promising quick and easy money. Catherine Jensen and her husband, who live in unincorporated Jefferson County, started buying up tax liens three years ago on a lark. This year Jensen paid off the bills on forty Denver County properties in the hope of getting her money back with a hefty interest charge. She also made her first profit: "a dollar something."
Still, for Jensen, investing in tax liens is about more than the money; she likes the rush that accompanies wild bidding. "It's that feeling like when you're at an auction, the excitement," she says.
Mom-and-pop investors in search of kicks or a little extra spending money aren't the only ones crowding the ranks of the once-cozy group of locals who only a few years ago dominated tax auctions. Today, big corporations and investment funds drawn by the double-digit interest rates send agents to circle county tax auctions like sharks prowling an easy meal.
Scott Shires is one of them. A West Point graduate and financial adviser who today works out of a van and his Arapahoe County home, Shires agreed to help out a client who was facing bankruptcy about ten years ago. He quickly learned about the sweet profit potential from tax liens (helping him figure it out was his neighbor--then the Arapahoe County treasurer).
At first Shires bought tax liens on his own. Now he works for a large Florida corporation, traveling from county auction to county auction to buy up promising liens as part of a broad investment strategy. His first year in the business he purchased $82,000 worth of tax liens. This year Shires snapped up about $6 million worth. His busiest year was 1995, when he laid out $20 million for tax liens in several states.
Shires declines to discuss how much money he earns from such investing. But the potential for good money is there. Three years ago Shires began buying up the outstanding tax liens for Cinderella City Mall in Englewood. They were redeemed last month; Shires walked away with a profit of just under $80,000.
While predicting which properties ultimately will pay off is a crap shoot, Shires says, it's possible to align the odds in your favor. "You have to know everything you're bidding on," he explains. "Who is the owner? What is the house worth? What is the zoning on the property?"
A favorite Shires target is property awaiting development. Occasionally, developers don't pay the taxes due on their land: Up-front fees are large, and the land won't start generating income until later. But in order to develop the land, the landowner eventually must pay his taxes. When he does, the result is a big chunk of interest--and profit--for Shires, who holds the lien.
Yet as the field has grown more crowded--about eight people showed up to bid at the Denver County auction this past November--a number of factors have conspired against investors interested in easy money. One is the strong economy. More people working for better wages means that fewer people miss their tax bills; those who are forced to postpone paying their taxes temporarily are able to repay them quicker.