Buying Subsequent Year Tax Liens?

[Ross Carpenter]

Summary: I have the opportunity to purchase several tax liens which return 9% at face value (no premium). They would typically sell for a 5-6% premium at auction, so should I exercise my right of first refusal with the thought that I could re-sell the notes later on if I needed liquidity (and on what market)?

I know what this answer would be if I were a "typical" lien investor pursuing yield, but this situation is a bit nuanced. I was curious if anyone who has institutional experience in lien investing could provide feedback. Our investment strategy has been to target a very specific type of unimproved land and specific types of commercial property primarily for potential foreclosure rights, but we have also purchased several liens for a yield hybrid since they could be acquired at par value.

We currently hold a few dozen tax lien notes in several counties purchased at sales last year. Over the next few weeks, we have the first right of refusal to purchase the lien note for this years’ taxes. I can’t find any info online related to the pros and cons for purchasing the liens for subsequent years, and I was curious for feedback on your thoughts. Below are the pros and cons of purchasing the subsequent year liens on properties for which I own the prior year as I understand them:

Pros?:

- You are effectively purchasing a note at par value which will immediately yield 9% interest (i.e. there is no premium bid like you would typically pay at auction)

- Assuming you think there is an opportunity to eventually foreclose on the lien, by purchasing the lien in subsequent years it will keep the property off the sale list and therefore will keep other investors from contacting the property owner?

Cons?:

- Capital is tied up with an unknown repayment period and relatively low liquidity (I understand that liens can be sold/assigned, but I am not aware of any real secondary market for them).

- Limit’s capital available for purchases of new liens this year.

- Purchasing subsequent liens doesn’t improve rights to ultimately foreclose on the property as the senior lienholder would just pay off junior lienholders in the event of a foreclosure.

Most of the institutional investors I have seen at the larger auctions were purchasing liens at a 5-6% premium last year (on a 9% note). Therefore, couldn't I purchase this year's liens at par value and then re-sell them at a 5% premium (assuming they meet the general criteria of the institutional buyers and I pay for all transfer fees)?

I would prefer to have all of my available cash ready to invest in additional liens at the end of the year, but if it is possible to re-sell/assign some liens on the market if needed, I will probably exercise all of them.

Any thoughts or advise would be helpful.