Mortgage And Real Estate News

Sunday, January 24, 2010

Tax-lien auction may be lucrative

Unstable market often spells high interest rate
J. Craig Anderson The Arizona Republic Jan. 24, 2010 12:00 AM

This year's Maricopa County property-tax-lien auction is shaping up to be the biggest ever and potentially more lucrative for investors than others in recent years.
It's a prime example of how misery so often rubs elbows with opportunity in the Phoenix-area real-estate market.
Rampant home foreclosure and plummeting property values caused a dramatic spike in unpaid property taxes during the 2008 tax year. On Feb. 8, those unpaid taxes will be sold to investors hoping to earn interest on them until the property owners pay up.
Although rare, the investor can end up owning the property outright if no one else pays the overdue tax within three years.
"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," said Mark Manoil, a Phoenix lawyer who specializes in property-tax issues and has written a book about tax-lien investing.
Maricopa County is gearing up for its largest sale of delinquent property-tax liens on record, an estimated $70 million worth of unpaid taxes on about 42,000 homes and other properties.
That's a significant jump from 2009's record-breaking sale involving 33,500 available parcels valued at $47.5 million.
Bidding on property-tax liens occupies a relatively obscure niche in real-estate investing, but experts said the returns are more reliable than with other property-related investments and can be as high as 16 percent annually.
Manoil said that with so many tax liens up for bid and the real-estate market still unstable, relatively low demand for tax-lien certificates is liable to keep the average final bid as high as 10 percent.
In the bidding process, the interest rate to be earned decreases with each subsequent bid, he said.
The average winning bid in 2009 was 8.7 percent, according to the Maricopa County Treasurer's Office.
County Treasurer Charles Hoskins said the number and value of unpaid property-tax liens tend to increase during a market downturn.
Hoskins said that although the coming lien sale will be the largest ever in volume and value, it still pales in comparison with record-holder 1992 in terms of the percentage of overall property taxes represented.
The liens headed for auction represent 1.6 percent of the county's total 2008 property-tax levy, he said.
In 1992, after the savings-and-loan industry collapsed from too many risky investments in commercial real estate, a full 4 percent of the county's 1990 tax levy ended up on the auction block.
"This is by no means our worst year," Hoskins said.
This year's auction is entirely online, and early bidding already is under way, he said. An investor's guide is available at bidmaricopa.com.
Lien investors perform a vital function in the community, Hoskins said, by paying off other property owners' past-due taxes in the hope of making the money back with interest when the property is sold or the taxpayer ultimately pays it off with interest and penalties.
Manoil said the prevalence of home foreclosures actually bodes well for lien buyers because lenders tend to pay the past-due taxes after they foreclose.
An investor's goal is to receive a decent rate of return for a few years and then recoup the purchase money - an average of $1,784 per lien in 2009 - when the lien is paid off.
As with any investment, there are risks, Manoil said.
In some cases, a property doesn't sell for enough money to pay off all county tax liens, which can exist for multiple years and be held by multiple investors.
Investors who don't do their research could find themselves holding a lien on property that has been deemed an environmental hazard, and the investor could be liable for financing the cleanup.
A lien investor can initiate a foreclosure action against the property owner in court but not until three years after the lien is purchased, provided that it still has not been repaid.
Chandler resident Anne Galvi, 60, said that despite those risks, she is taking classes on tax-lien auctions and plans to participate for the first time this year.
Galvi said she wants to diversify her investment portfolio while helping the county pay for public services.
She also likes that Maricopa County is a long way from Wall Street.
"I could help pay for another egregious corporate bonus, or I could help some poor Joe who has fallen on hard times," she said.

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