By Stephen Seal
Founder and CEO, Voyager Pacific Capital
Since launching Voyager Pacific’s Fund I last summer, I have had the opportunity to discuss tax lien certificate investing with hundreds of investors. And, during many of these conversations, the discussion takes one of two directions: one explaining what a tax lien certificate is, and the other conversation is around the expertise required to succeed in them.
Spotlighting opportunities in tax lien certificate investments
Tax lien certificates are an unknown opportunity to most investors. Despite the sheer size of the industry and the opportunity they represent ($4-6 Billion annually), and despite the fact they are offered for sale by counties in 29 states across the U.S., they still are not an investment vehicle on most investors’ radar.
Even seasoned real estate investors frequently have a very vague understanding of what these liens are, how they function, what the pitfalls are, and how to profit from investing in them. It can be an eye-opening experience when they begin to understand the superior position these liens hold relative to mortgages and deeds of trust. Another point in their favor is that they carry such a high rate of return, typically between 12-18 percent.
The second conversation, and the focus of this blog, concerns investors who already have knowledge about tax lien certificates. These investors are aware of tax lien certificates, have a keen interest and a desire to invest in them, and, in many cases, they have already attempted to invest in tax lien certificates on their own.
Frequently, the conversation with these investors starts with a few, straightforward questions about where Voyager Pacific’s buys its tax liens, what states our company likes to work in, and the kinds of yields we are receiving from Voyager Pacific’s current portfolio.
But next, the topic often quickly turns to their own investment experience, their story, and what happened to them when they attempted to invest on their own.
Recently, I spoke to an investor whom I’ll call Jeff. He had heard about tax lien certificates from a friend who was financially successful, and he was interested. Jeff did some research and identified a state with attractive interest rates. This state is in the Midwest, a long way from where he lives, but the interest rate being offered was so high, he decided it was worth his time to do the research and attend the tax lien auction.
Getting to work
Jeff ordered a list of liens that were being offered by the county and, when he received the CD of records from the county’s tax collector, he was excited. This was the first tangible progress in his quest to invest in tax lien certificates. But he soon found himself overwhelmed: while the CD had the list he requested, it contained more than 23,000 records. Twenty three thousand records? How would he find the time to sort through that volume of records to determine what to buy? Which liens were secured by valuable properties, versus nearly worthless parcels? How could he work through such a massive amount of data in time to be prepared to bid at the auction? Not to be deterred by a little bit of hard work, he persevered.
Because the sale was only three weeks away, he had a lot of work to do and very little time to do it. Jeff told himself that this was going to be a case of short-term pain for long-term gain. So he set aside many nights and weekends to research the liens and associated properties.
Two weeks later, he was exhausted but excited by the prospect of going to the auction and putting his cash to work. He worked through as much of the list as he could stomach, and he prepared to take a couple of days off from work to attend the sale.
The big day arrives
Jeff flew to the city where the sale was taking place, and brought cashier’s checks with him, prepared to buy. At the auction, he obtained his bidder number and entered the room where the tax lien certificates sale was to take place.
However, while listening to the conversations around him, he grew concerned.
Other bidders were talking about issues and topics he had never heard of. The term “subs” or subsequent liens came up, and he didn’t really know what that meant, or how they work, or what impact they can have on the liens he planned to bid on. He learned that many of the liens that he had so carefully researched had already been paid off, and were not going to be offered for sale. He heard talk about IRS liens, contractor’s liens, and property owners who go bankrupt to stop the sale of the lien on their property. Suddenly Jeff began to realize there was much he did not know about this process.
Jeff has always been a very successful person. He is highly educated, earns a sizeable six-figure income, and has not made very many poor financial decisions. An intelligent businessman, Jeff can dissect just about any problem that has been presented to him. But sitting in that room, and for the first time, realizing all of the moving parts that come with tax lien certificates, he realized that he had waded knee-deep into murky water, and he was overwhelmed. He did not want to make a mistake, and he did not want to invest in a problem property.
Instead, at the sale, Jeff wisely decided to take a deep breath, and just sit and watch. He did not bid on any liens. He just observed the process, and took it all in.
Gaining a new perspective
He walked away having learned a few things about tax lien certificate investing. The first thing he realized is that it is a real opportunity, and that there are high returns to be made in tax liens. But knowing the lay of the land is a full-time job and is a ton of work. It requires specific, industry expertise, and the sheer volume of liens requires a massive amount of time, skills, tools and manpower to properly identify the great liens to invest in, and the poor liens to avoid.
One might think that Jeff emerged from his venture feeling discouragement, frustration and disappointment. But nothing could be further from the truth: As Jeff related his story, the smile on his face got bigger and bigger. He became more animated, and his interest level in investing in tax liens became even stronger.
You see, Jeff already knows about tax liens, and he already likes the investment. But he doesn’t want another full-time job. He doesn’t want to spent weeks doing research, seeking out individual liens, researching property characteristics, identifying other subsequent liens that may be on the property, and taking days off from work to attend the sale.
What Jeff wants is a way to invest in tax liens without having to do all of the grueling underwriting or without having to fly out of town to attend the sale. He he wants someone else to do the work, someone who has the industry knowledge, expertise and understanding of the individual lien states. He wants the high return and relatively low risk of investing in tax lien certificates, without all the downsides that equate to a second full-time job.
Let Voyager work for you
The conversation I had with Jeff is one I have had dozens of times with various investors throughout the country. For these investors, the missing piece of the puzzle has been a fund (or some other structure or partnership) whereby they can invest in tax lien certificates, passively, via a mechanism that would allow them to reap the benefits without the intense workload.
At Voyager Pacific, we cater to this type of investor. It is with this intent that we have carefully structured, designed and crafted Voyager Pacific’s Fund I.
Voyager Pacific’s Fund I is managed by a professional, competent and engaged team of experts who have years of experience. It’s a fund where the interests of the investor and those of the manager are aligned. It provides a vehicle by which the needs, wants and desires of the investor can be matched up very closely with the expertise, systems, tools and team orchestrated by the fund manager.
It is my conviction that the service and value we are creating at Voyager allow investors to avoid all of the grief, effort, and wasted time and money they would otherwise have spent on their own. What we offer at Voyager allows our clients to do what they do best, while we do what we do best.