400k earmarked for liens. A fund, or do it myself?

I have about 400k sitting in short term paper that I want moved into something secured by the end of the year. Tax liens keep coming back on my list because the return is set by statute rather than by what a tenant can pay.

What I'm looking at:

Option one is a lien fund. Two year lockup, 1.5% management on committed capital, 20% over an 8% preferred return. They gave me four years of history showing the statutory rates they bid at and what actually came back after redemptions. Roughly 91% of certificates redeemed inside the redemption period in their reporting.

Option two is doing it myself in one or two counties. I'd budget a season of watching auctions before bidding a dollar, and I'd probably cap the first year at 75k so I can find out what I don't know cheaply.

What I'm unsure of: the fee drag on option one is real, but the 9% that doesn't redeem is where all the work lives, and I don't know how to price my own time against that. Also every state I've read about handles the bidding differently. Some bid the interest rate down, some take a premium over the lien amount, and whether that premium earns anything back appears to vary.

The decision in front of me is whether to sign the subscription docs before their next close or skip it and spend the year learning auctions. I keep going back and forth.

5 replies

4chriswalton8CC1CPRO8

The fee structure you described is normal for the size, but 1.5% on committed rather than invested capital means you pay on money sitting in their account waiting for auction season. Auctions are seasonal in most places. Ask what their average deployment lag was in each of those four years. If capital sat for five months earning nothing while you paid a full management fee, your realized yield is a lot lower than the certificate rate implies.

2raj_mehta14CapitalPRO6

I'm still working out the basics here so ignore me if this is obvious, but when you say secured, what actually happens if the owner never pays? You end up owning the house? That sounds less like fixed income and more like an option on a foreclosure I'd have to run myself.

2stephen_ok9CO2CPRO6

@vellum in most lien states you get a certificate that has to go through a statutory process before it turns into any interest in the property, and the timelines and the procedure differ state to state. The point is that most of them redeem and you get paid the statutory interest. The ones that don't are a separate business.

@canton, on your two options, I don't think they're actually comparable. 75k of your own bidding in one county is a learning expense, not an allocation. If you need 400k moved you're choosing between the fund and leaving it in paper. Decide the allocation question first, then decide whether you also want the education.

1dmitri_v6CapitalPRO6

Before the subscription docs, read the valuation section on unredeemed certificates. That's where funds like this get soft. If they carry a non-redeeming certificate at face plus accrued statutory interest right up until deed, the NAV you see and the pref you're being measured against are both built on interest nobody has paid yet. I've seen that written both ways.

Second thing, read the clawback and the distribution waterfall together rather than separately. An 8% pref with no catch-up reads very differently from one with a full catch-up, and the summary page usually just says "8% preferred."

And have a securities attorney look at the whole thing before you sign, that isn't something to settle from a forum thread.

400k earmarked for liens. A fund, or do it myself?

5 replies