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February 1, 2009
"I bought a tax lien at the auction in February and it was
redeemed right away, before the end of February. My refund check was less than what I paid in the first place. I thought I
was supposed to make money with this investment. What happened?"
Your negative return on investment
was likely caused by two factors - an unreimbursed transaction cost, and no interest earned in the sale month.
TIF fee. Most of the penalties, interest and fees charged in the tax lien sale process and included in
the price of the certificate of purchase are reimbursed to the tax lien buyer upon redemption. But there is one that is not
reimbursed: the tax payer information fund. The tax sale law authorizes a “processing fee” of “not more than $10.00 per tax
lien.” (ARS § 42-18116C). This processing fee is required to be deposited in the Taxpayers Information Fund (ARS § 11-495)
which is set up to defray the cost of converting or upgrading information systems for the Treasurer’s Office. Authorized
expenditures are purchasing computer hardware and software, training employees to operate the system, maintaining the system
including purchasing maintenance agreements, and updating the system hardware and software. In Maricopa County, TIF monies
may also be used to notify property owners of strips or other parcels next to theirs that are about to go to deed sale.
The Maricopa County Treasurer charges $5.00 for tax liens sold at $600.00 or less and $10.00 for larger tax
liens.
Whatever the amount, the TIF fee is a bigger hit on smaller tax liens, and even if the lien is not
redeemed for several months, interest earned on it may not cover the TIF fee.
Interest. Most
Treasurers (particularly Maricopa’s) used to interpret Arizona law to provide that your CP earned interest on a monthly basis
for any portion of a month it was outstanding. And the former version of the successful purchaser statute made clear that
interest on the CP was to be calculated from February 1 (i.e., to include interest for the month of the lien sale). This
provided some return to apply to the TIF fee if the lien was redeemed immediately after the auction.
A 2006 Court
of Appeals case (Ulan v. Pima County Board of Supervisors, 213 Ariz. 553, 145 P.3d 650 (2006)), though, originated in Pima
County, holds that the investor is not entitled to interest on the CP in the month of sale, because interest for that month
has already been included (computed) in the price of the CP. The Court reasoned that compounding of interest (interest for
the post-sale period on the interest included in the CP price) was not intended by the legislature, when it recodified the
law in 1997 (taking effect January 1, 1999).
In 2008 the Court of Appeals’ position was codified, in a statutory
amendment explicitly stating: “The lien bears interest at the bid rate from the first day of the month following the purchase
of the tax lien.” A similar amendment to the subsequent delinquent tax statute was also adopted. It therefore makes sense to
pay subtaxes as late in the month as possible to minimize the time the investment is not earning interest.
While generally one does make money with tax lien investments (assuming a bid greater than zero per cent interest on the CP),
this scenario does illustrate how you can lose money on a tax lien investment.
ARS §§ 42-
18114 , 18116C
ARS § 11-495
Ulan v. Pima County Board of Supervisors,
213 Ariz. 553, 145 P.3d 650 (2006)
Laws 1997, Chpt. 150
Laws 2008, Chpt.
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