If liens at scale are really a yield business, should the operator be judged on bid discipline or on servicing?

Question

I manage properties, so I come at this from the paperwork end. A couple of the lien funds I've been sent materials on describe themselves as fixed income substitutes, and the pitch always splits into two halves that don't sit comfortably together.

Half one is bidding. The statutory rate is set by the state, so the only thing the buyer controls at auction is what they give up to win. In some states you bid the interest rate down, in others you pay a premium over the lien amount, and either way competition in the popular counties eats the yield. On that view the whole business is auction discipline. Show up with a number, walk away when the room goes past it, and the returns take care of themselves.

Half two is servicing. Once you hold hundreds of certificates you're tracking redemption dates, paying subsequent year taxes to protect position, watching notice deadlines that differ by state, and pushing a small share through to deed. Miss the calendar on a slice of the book and the bid discipline stops mattering. On that view the auction is the easy part and the back office is the business.

I genuinely don't know which one I'd underwrite an operator on if I were writing a check. The bidding is visible and easy to measure. The servicing is invisible until it fails. Both explanations fit the same track record for the first couple of years.

So where would you put the weight, and what would you actually ask to see.

laurenkim53 · Answer

Servicing, and it isn't close for the counties I look at. Rural certificates redeem slowly and a real share go all the way to deed, which means the operator inherits parcels and has to do something with them. A tight bid on a parcel nobody will buy at any price is still a bad outcome. I'd want to see what happened to the deed pile.

bmoreno23 · Answer

I'm new enough that I had to look up what bidding the rate down even means, so take my vote as a beginner's one. What convinces me on the servicing side is that the bid is a single decision made once and the servicing is hundreds of decisions made every month for years. More chances to be wrong. Though I suppose a disciplined bidder never gets into the bad positions in the first place.

jordan_ellis2 · Answer

@ember that's the part I'd push on. The bid isn't one decision, it's one decision repeated across every certificate in the sale, and the failure mode is systematic rather than random. If someone's ceiling is set two points too high they overpay on the whole book at once, and no amount of clean calendar work recovers it. Servicing errors are usually a slice. Bidding errors are the whole thing.

So I'd vote bid discipline, with the caveat that I want to see the walk-away rate. How many lots did they bid on and lose. An operator who wins everything they bid on is telling me their ceiling is soft.

derekj19 · Answer

The walk-away rate is a nice ask, @pike, I'm stealing that. What I'd add is that the two halves feed each other. An operator with strong servicing can bid on paper in counties where the process is slow and messy, because they can carry the timeline. An operator with weak servicing has to stay in the easy fast counties, which are exactly the ones where competition is worst. So the servicing capacity sets which auctions you can compete in at all. That's why I'm voting equal weight.

angela_burke · Answer

Running a small team taught me the invisible-until-it-fails part is real, and it fails in a specific way. It doesn't fail on the certificate that redeems. It fails on the twenty percent where something is unusual, a bankruptcy filing, a competing lien, a notice address that bounces. Those need a person who knows the statute in that state and states differ a lot on notice and redemption mechanics, so you want somebody licensed reviewing it locally.

When I'm hiring for anything, I ask what the exception process is rather than what the normal process is. Same question here. Tell me who touches a file that goes off script and how fast.

samantha_ruiz · Answer

@cobalt yes, and the numbers hide there. I've watched a small block of certificates where the gross statutory rate looked great and the net came in about four points lower once you counted the legal work on the handful that didn't behave. Nobody's marketing deck breaks out cost per exception file, but that's the line that separates a real operation from a hobby with a lot of money in it.

I'm voting servicing. But my honest reason is that I can verify servicing by asking specific procedural questions and I can't verify bid discipline without seeing every sale they didn't win.

tashaford30 · Answer

@keystone that last sentence is the practical answer to the poll. Verifiability isn't the same as importance, and I think we're all drifting toward voting for whichever one we can actually inspect.

I ended up on jurisdiction selection, which nobody has picked yet. The statutory rate structure, the redemption period, and the notice burden are all set by the state, and they vary enormously. An operator who picked six workable states has already decided most of the outcome before any bidding or servicing happens. The other two skills get exercised inside a box someone chose earlier.

devon_pierce · Answer

@quill I'd want to know how they chose the six, then, because the honest reason is usually that a person on staff already knew those courthouses. That's fine, it's just not portfolio construction.

On the poll I went with equal weight. @trellis, the thing I'd ask for is the redemption curve by vintage, month by month, not an average. An average hides whether a bad quarter came from overpaying or from missing a deadline. If they can produce that curve on demand it also tells you their systems are real, which answers half your question sideways.

If liens at scale are really a yield business, should the operator be judged on bid discipline or on servicing?

8 replies