Risk And Expected Returns

I find it curious that nobody ever talks about the returns that realistically can be expected investing in tax liens. Numbers like 15, 16, 18% are always bandied about, but I haven't talked to anybody who would confirm making returns like this in real life. Maybe there's a reason for that...

Let me give you some of my own experiences, hopefully to start a discussion. The first risk, as has been discussed many times over on this board, is due diligence. Ideally, you want to do what everybody tells you, check out the property, look at liens, bankruptcy etc. In real life, you are confronted with hundreds or thousands of liens of which you will get a tiny fraction. It depends on what your time is worth, but you need to make an allowance when calculating expected return.

In my experience, the majority of individual investors skip due diligence and sacrifice some of their return by ending up with right of ways, common areas, land under water, or assessor's mistakes. Many of those still seem to make a return on their money, although it may be in the small single digits. Personally, I check on the assessments, and trust the assessor to at least do a reasonable job. It lets you eliminate most, but not all of the garbage. Then I take my chances. Out of 500 or so liens I invested in I only have two that have not been redeemed. In one case, a tree fell on a vacant house, in the other , a preacher had taken over the house of a deceased fan, collecting rent without paying taxes. A prime candidate for going to deed, but believe me, it's not worth the hassle. Again, those failures cut into your expected return but it's a clear tradeoff with the amount of work you put in.

The second area of concern are the laws governing the tax sale, and how they are interpreted by the county. It is well known that you can't get those 18% returns in FL or the 16% in AZ because the bidding systems won't let you ( in contrast to, say, IA or LA). But it is less obvious that state laws also can mess up your return in more subtle ways, by putting in onerous notification requirements (see my earlier post on LA)
or by making you responible for clean-ups - and I'm not just talking about toxic stuff. In AL, you are responsible for city-mandated clean-ups of vacant lots or homes, and it's not clear if you get your money if the lien is redeemed (which it most likely won't).

Finally, there are the real screw-ups on the county level. In my experience, this is far and away the biggest impediment on return, mainly cause it's completely out of my control. First, there are refunds of your money after one, two, or three years - without interest - because of all kinds of errors - double assessments, notification errors, not following procedure etc. In some counties, I get refunds on more than 10% of the liens. In Hancock County, MS they just cancelled a whole tax sale from three years ago because a clerk didn't follow procedure. Sometimes, state law gives you some protection, but you can't count on it, and in some states you are lucky if you actually get a refund without having to go to court - which may cost you many times the amount of the lien.

So, after all this, what is the return you can reasonably expect? In my experience, with my procedures as described above, it's around 10% annualized. These are tax liens spread over 4 states which pay between 12 and 17%.

It's about the same return I get investing conservatively (no high tech etc) in the stock market. Which, for me, is much less work. Would love to hear from people who get consistently higher returns.