Someone to Lien On
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.
And speedy reimbursement cuts deeply into an investor's profit margin. That's because, by law, the 14 percent interest is divided into monthly chunks. Say the tax lien is $1,000; a 14 percent return would result in a $140 profit--but only if the bill is outstanding for a full year. If the derelict landowner pays off his $1,000 bill in one month, the tax lien investor earns a mere $11.66 for his efforts. For investors, the trick is to buy tax liens from property holders who definitely will pay off the bill--but over a long period of time.
Some businesses postpone paying their tax bills intentionally, treating the few-month delay as a no-hassle loan. These businesses can spell trouble for uninitiated tax-lien investors.
Say that, at the end of the year, a business is temporarily short of cash. "Would you, as a businessman, want to go to the bank, fill out a bunch of forms, come up with collateral, go through all the business headaches of borrowing money--or just not pay your taxes for a couple months?" Shires asks. Later, when money is less scarce, the business owner pays his tax bill and everyone is happy--except perhaps the lien-holder, who eats the loss. (Among the reputable entities that have run up tax bills and then paid them off are Fiddler's Green, the Gondola at Telluride, Bear Creek Golf Course and Arapahoe Waterpark.)
But the biggest challenge to today's tax-lien investors are the investors themselves. The business has become so competitive that at tax auctions across the state, investors try desperately to outbid each other, paying premiums on desirable liens.
Thanks to the increased competition at tax lien auctions, profit margins have become extremely meager. Joyce Montabon, a supervisor in the Denver treasurer's office, says that four or five years ago investors paid counties about a 4 percent premium to buy tax liens--or $1,040 for the privilege of owning that $1,000 tax bill. At Denver's tax lien auction this past November, the figure was closer to 9 percent, meaning the $1,000 lien now cost $1,090.
For counties, which get to keep the premiums paid by bidders, the fierce competition has been great news. Last year Denver County earned $115,444 on such overbids. (The money goes into the county's general fund.) For investors, however, the premiums have brought a new variable to the tax-lien equation: It has now become possible for them to lose a lot of money.
Take that $1,000 tax bill again. Say an investor pays the going 9 percent premium--$1,090--for the lien. But what if the property owner pays off the bill in just one month? The investor "earns" $11.66--but suffers a final loss of $78.34.
Losses can accrue quickly. So far this winter, Catherine Jensen has already had seven property owners pay off their tax bills, including her largest lien, a $2,000 bill. Because of the premiums she paid to acquire the liens at auction just two months ago, Jensen has lost money on all of them. Multiply that by hundreds of thousands of dollars, and an aggressive tax-lien investor can take a heavy fall.
Although the community of tax-lien bidders remains relatively small and outwardly friendly, resentments have begun to build against newcomers who drive up premiums and cut profits. (The exception is very large tax bills; Shires says he seldom has any competition when he bids for tax liens of $100,000 or more, because not many investors have that much money to burn.) And action on the county auction floor can get vicious.
Shires recalls one Jefferson County property owned by a member of the prominent Stevinson family. "Every year he was delinquent on his office buildings in October, but he'd pay them off in December," Shires says. "So some of us would try to drive up the premiums and then try to stick people who didn't know that with the liens." Those people, of course, would lose big when Stevinson paid the bill just a month or two later.
While most tax-lien investors get into the game for the profit they can earn from interest payments, some welcome the opportunity to acquire a real estate portfolio for next to nothing. Making this possible is a Colorado law that stipulates that if a property owner doesn't pay off his tax bill after three years, the lien-holder gets the property in place of the money.
In practice, though, this almost never happens. Last year, only twenty pieces of real estate in Denver County changed owners in this manner. (The number was about the same in the preceding three years.) Most of the properties were vacant strips of unusable land simply abandoned by the previous owners. A few were dilapidated buildings in lousy neighborhoods, desperately in need of repair.
And even when a lien-holder manages to acquire a building that is still standing, there is no guarantee he will cash in. Over the past decade, Shires says, he has taken possession of 45 properties, only about 30 percent of which he later sold for a profit. Many of the rest he simply walked away from, he says, leaving them as someone else's problem.
Occasionally, though, a lien-holder really does hit it big. Between 1989 and 1997, Hannah Investment and its sister company, ADA Corporation, put $15,068 into 103 West Byers Place. Among other costs, that includes about $9,400 in Bennett's unpaid property-tax bills, $1,200 in eviction-related expenses, and approximately $800 to keep the place boarded up. If Bennett loses her court case, the company will acquire the house.
From there it's a short trip to the bank. ADA Corporation has already found a buyer for the property. At the agreed-upon sale price of $75,000, the company is looking at a profit of five times its investment.
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