This is a wonderful article written a couple years back about the world of Tax Liens:
Vulture Investing: What You Need To Know Before Bidding For Tax Liens
Two years ago Jack Gelin, 55, owner of a Brooklyn IT consulting company, decided to invest in tax liens. Still leery of stocks after taking losses in the 2008 crash, he became intrigued when he heard a self-styled lien guru pitching double-digit returns on cable TV. So he shelled out thousands for the man’s courses and attended his first tax lien auction in New Jersey. “I was shocked,” he recalls. Bidders were offering more than the face value of the unpaid tax bill underlying the lien. Gelin stuck with it, found a new advisor and expects to earn 5% to 6% this year on the $500,000 he has invested in New Jersey and Florida liens.
With three-year bank certificates of deposits paying 1.3% and ten-year Treasurys yielding 1.6%, investors are searching every nook and cranny for a higher yield. But tax liens? “It’s a little bit safer than the stock market right now,” Gelin says.
Some $426 billion in state and local tax on real estate is owed in the U.S. each year. If a property owner doesn’t pay up, a tax lien can be slapped on his property. Twenty-eight states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands allow those liens to be sold to private investors, and about $6 billion in liens come up for sale each year. The local government gets its cash immediately, and the buyer gets the right to collect the delinquent tax, a penalty and interest on the late payment that can (in theory) run as high as 12% to 36% a year, depending on the state.
Those high-sounding rates have led late-night pitchmen to promise enormous returns and consumer advocates to decry foreclosures by predatory investors. The reality, however, is both less sexy and less sinister. After all expenses are figured in, individual investors typically earn 4% to 7% a year, and 99% of sold liens are redeemed by the property owners, says National Tax Lien Association Executive Director Brad Westover. “A big part of my job is dispelling the myths,” he adds.
Intrigued? Here’s the lowdown.
BIDDING LOWERS RETURNS
There’s usually stiff competition for liens, not only from individual investors, but from lien investment funds and big money managers like M.D. Sass, which offers them as an alternative investment. So while a state statute might allow delinquent homeowners to be charged a usurious-sounding rate, bidding brings down the actual rate charged. (Or, at least, it’s supposed to. The Department of Justice has an ongoing investigation into past bid-rigging at New Jersey tax lien auctions; so far eight individuals and two corporations have pleaded guilty.)
INTEREST ISN’T EVERYTHING
In Florida, where lien auctions are conducted on the Internet, rates have been bid down recently to an average of 2.4% for liens on single-family homes. But buyers also get to collect a 5% penalty on the amount owed. In New Jersey, where individual municipalities sell liens at 500 in-person outcry auctions a year and interest rates can legally be as high as 18%, bidders have sometimes brought rates down to 0% and paid a premium, too. (That’s extra cash, above the face value of the tax bill, for a municipality’s coffers.) Why? The buyer not only gets the right to collect a 2% to 6% penalty but also first dibs on any subsequent tax liens on the same property at the full 18% interest rate. So in New Jersey, where taxes are owed quarterly, bidders sacrifice returns on a first lien on the bet that the property owner will pay late in subsequent quarters, too.
To read more at: http://www.forbes.com/sites/morganbrennan/2012/11/26/vulture-investing-what-you-need-to-know-before-bidding-for-tax-liens/2/