High Uncertainty

Part I describes how I derived an estimated rate of redemption from my liens. Next came determining which liens to buy; there were thousands to choose from.  Time to start building a script.

The goal, obviously, is to maximize returns on liens.  There are two ways to lose out on liens:

1. Property owner redeems the lien too early.  This scenario was covered in Part I — the interest rate accrues at 0.83% monthly, and so in order to make a profit, the lien must be held for as many months as it takes to overtake the premium.
2. Property owner never redeems the lien on an unprofitable property.  In Colorado, when a property is passed to a lienholder, it comes free of most debts including mortgage debts, so responsibility for old debts is usually not a worry.  Rather, the worry is that the lienholder could end up with a property that is unable to be turned over for a profit — for instance, a house that is actually a hollowed-out meth factory or more commonly, a parcel of desert land no one would ever buy.

Looking through the list of available properties showed a surprise: many property owners were corporations, businessmen, or real estate speculators.

Begin Tangent: Ethics of Investing in Liens

People have this mental image of a 85-year-old woman who loses her home because she forgot to send in a tax payment, but that is not true at least in the state of Colorado.  These “evil lienholders” stories mostly come from D.C., hardly a right-wing investor’s paradise, because D.C. for some incomprehensible reason allows “expenses” to be rolled into liens.  This results in opportunistic lienholders rolling in questionable “legal fees” into the amount owed.

Most states have a more sane approach to liens, one where opportunities are repeatedly given to the property owner to redeem liens.  Colorado takes forty months at a minimum for the property to go to the lienholder, and the state claims less than half of one percent of all liens ever pass hands in this manner.

End Tangent

I speculated that the reason that so many deep pockets were on the list of liens for sale was because these properties were failed projects that are purposefully going into arrears.  I probably wasn’t going to succeed where they failed.

So, the first regular expression that went in my script was any name that appeared more than once, under the assumption that such a person had to be a speculator cutting his losses, and any name that looked like a business such as LLC or Incorporated.

Second, I had to avoid empty lots of land, as desert land isn’t exactly a booming commodity.  The vast majority of cheap liens (sub-$100) were tracts of land.  So that particular regular expression went into my script as well.

Next, I had to narrow down my list further to people that weren’t likely to pay these taxes anytime soon.  The list of liens for sale included an asterisk to denote properties that had municipal liens (e.g., person failed to pay for water) and also had “PTL,” Prior Tax Liens, to denote properties that had a prior lien from the beginning of the year.  It seemed likely that a property with neither designation probably had a merely forgetful owner, so I included only liens that had the asterisk or PTL.

Even after all these filters, I was left with an unmanageable number of properties.  Narrowing the search down to an up-and-coming neighborhood, Pueblo West, yielded a very manageable 30 or so liens that I could bid on.

So to sum it up, this is the criteria I used to filter the liens down to a more manageable list of two dozen or so:

• Property owners could not be businesses or investors.  This minimized the chances of getting stuck with an unprofitable property.
• Liens had to be worth more than $100.  Most cheap liens belonged to empty tracts of land.
• Liens had to be recurring, or had to have a municipal lien.  This cut down on the risk of early redemption.
• Liens had to be in an up-and-coming neighborhood.  In my case, this was Pueblo West.

In Part III, I will describe the Monte Carlo simulator I wrote to predict my returns, and Part IV will have the conclusion of what actually happened.