From Dickson Pratt: “In my home state of Colorado, the tax lien game is a little different from what you described. One makes premium bids at auction for the right to buy the lien and earn 14% simple interest. The catch is that the premium you pay doesn’t earn interest and isn’t refunded. If one pays an 8% premium and the lien is redeemed the following week one gets a month’s interest (about 1.1%) but loses the premium. So buying liens is a question of odds. What are the odds that this lien will remain unredeemed long enough to cover the premium (and opportunity cost) and start to make money? The goal for the investor is to get liens that make it into the next year since one can pay the subsequent year’s taxes without any premium and earn that fat 14% from day one.
“This used to be a good game when bids were in the 6%-7% range; the chances of a few liens making it into the next tax year offset the losers that were redeemed early. The last couple of years, however, the premium bids in my home county have been in the 10% range and the numbers just don’t work. So I thought I’d check out the tax lien sale in a mountain county where I own property and know the area very well. To my astonishment the premium bids for those liens were mostly in the 80-200% range! Now, one doesn’t have to be mathematically gifted to know that it is impossible for an investment paying 14% simple interest to make back a 200% premium bid unless one actually ends up owning the property. But the odds of having a lien go all the way to Treasurer’s Deed are about 0.2% in my area (and many of those are worthless, such as a 10 foot wide remnant strip of land along a road or “mineral rights only”). It was clear from the pattern of bidding that these unsophisticated “investors” really believed that they were going to end up with the property. They seemed to view the auction as a giant lotto game (“This time we’re going to hit the big one!”). Although I left the auction without cracking my checkbook I could console myself with the knowledge that revenue the county earned from the sky-high premiums would go to lower my own property taxes next year (we have revenue limitation in Colorado).
“It would appear that my tax lien buying days are over, sad to say. It was fun while it lasted.”
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Beware of little expenses. A small leak will sink a great ship.~Ben Franklin
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