Analyzing Arizona

I'll start this series of articles on my recent Arizona online tax lien auction results by focusing on the friends I mentored to their first tax lien purchase experience.

So these poor workmates have heard me talk about tax liens for the last couple of years. Once I found that Arizona had their lien auctions online, I dove in full force a few years ago.

Lunch and water cooler conversations turned really interesting once they saw the interest rates I was getting. Then when they understood the low risk and the possibility of ending up with the property if the owner never paid - they became fully engaged.

We spent several lunches together where I gave lectures on Tax Lien 101. We started with the basics of what a Tax Lien is, how they differ state by state, how they work in Arizona.

Then we dug deeper into parcel research, due diligence, how the auctions are run, risks, returns, etc.

Finally I gave my experiences and how I do analysis for online auctions in Arizona. I showed how I build my spreadsheet of past auction results, how I outsource the copy & paste work of data, how I build the spreadsheet for the certificates in the current auction once it becomes available.

Four of the friends decided to invest this year for the first time. We discussed strategies and I drove home the reality that they should be expecting the owners will pay back the lien.

The friends consisted of 2 guys, one in his mid 30's and single, one in his early 40's married with 2 grade school children. Also two women participated - both married and their 30's, both with grade school children.

The married people all decided to take some money they had in the kid's college accounts earning less than 1%. They had enough exposure to mutual funds and were looking for safe returns that were better than CDs. The single guy wanted to look at another investment option that was safe but better than CD's and money market funds.

Once the list of certificates came out for the Arizona auctions, I had my outsourcer add the legal description (vacant land, residential, commercial, etc) for each parcel to the spreadsheet of certificates. This allowed us to filter and search by Lien amount, or parcel number, or type of property.

Since each person was looking at only getting one lien to test the waters this year, they all picked their interest rate floors - that is the lowest rate of interest they wanted to accept.

In the northern Arizona auctions, you bid on a certificate by bidding the lowest interest rate you will accept. The lowest bidder wins.

You can end up with a higher rate if you are the lowest bidder - for example you might bid 4% - and the next lowest bid is 8%, so then the auction software awards you 7%. You were the lowest bidder, but since the next lowest bid was 8%, you get the rate right below the next lowest bid.

If there is a tie, then the computer randomly picks from the pool of bidders who all bid the lowest rate.

Part of the fun of tax lien investing is the dreaming "what-if" scenario where you imagine the owner never pays the taxes and you eventually end up with the property. I stressed that is probably not going to happen, but I also said you want to bid on parcels that if you ended up owning it, it was worth more than the taxes and expenses you would be putting into foreclosing.

Once they had their interest rate floor chosen, I pointed them to the spreadsheets of the past 2 years of auction results I had on the county. You see, while the current auction is open, you can place your bids (0% through 16% in round increments) online for any certificate you want to bid. You can only place one rate to bid for each certificate.

The only indication you have of the competition is the auction website shows you a total number of bids placed on each certificate. You don't know what rates other people bid, but you know how many bids are placed on the certificate.

Once the auction is closed, the website shows you how many bids were placed at each rate for each certificate. That tells you exactly what the competition bid. Since you can't see that during the current auction, the best you can do is gather the data after the auction and use it next year to create your bid strategy.

My spreadsheets are enhanced with the all the bid counts for every certificate that was sold in the previous year's auction. I have that data for the past 2 years.

What I've found is that parcels in the same geographic location tend to have the same winning interest rates each year. I can sort my results by parcel location (same neighborhood), by type of property (vacant, residential, commercial), and by total lien amount.

I can see from the past results if a certain neighborhood had a lot of bids and were sold at lower rates. I can see if vacant land sold at higher rates than residential or commercial improved parcels.

So I know if I want to get the highest rates (16% is the highest AZ rate) then I can sort the results from the previous year by rate, then look at the parcel numbers to see if the parcels in any geographic area consistently are won with high rates.

I can then further sort by type of property to see what types get the higher rates. Same with lien amounts - do large lien amounts get higher rates than low lien amounts?

"Bill" the married guy wanted to get as high of a rate as possible. We determined an area where the parcels consistently were won with high rates. We found vacant residential had the highest rates and the least amount of bids.

He then looked at the list of certificates in the current auction that were in the same area - you can sort by parcel number to get properties in the same geographic area.

He filtered that group to show only vacant residential parcels. From that manageable list he did research to see if the properties were not junk slivers of land or non-buildable lots. The auction website had links to the county records, Google maps, etc. We looked at the EPA website to make sure there were not brownfield issues, and we looked at Zillow or Trulia for an estimate of current value.

He then bid on several properties at 14% in that area. Results - he won a certificate and actually was awarded 16%. The lot is between two homes in a smaller town (few thousand people). A great certificate!

"Killer" the single guy wanted to get at least 10% and he wanted to get a certificate in a newer larger residential neighborhood.

He found several certificates based on previous year's results for 10% or above. He attacked the list of current certificates and started looking at the Google map links to see if the street photos were of newer homes.

He found a great area that had several certificates up for auction, that in previous years showed winning rates of 10% or above, and he placed his bids.

He won one and beat out 270 other bids and actually was awarded 11%. By seeing the bids from the previous years, he knew bidding 10% was a good bid. Once the aution was over and we could see where all the other bids were placed, we found all the other bids were above 12%. He found that by having the past results for that area, he had an advantage over the other bidders who would not have that data.

The two women did not fare as well. They both did not win any certificates. And the reason was that they wanted higher rates, but chose to bid on certificates in areas, that in the past, were won with lower rates than what they bid.

They liked the pictures of the properties, but despite what I taught, they bid rates that were higher than past year results. Thus, they lost out. They both have already said they will follow my advice next year.

In my next post, I'll talk about my own results this year.