The spreadsheet says 16%. My gut says 6%. Which one is lying?

Question

Simple model, and I know it's too simple. 200 certificates, average face $2,200, statutory 16%, everything redeems inside 18 months. Spreadsheet says a hair under 16% because I did nothing but compound the statutory rate.

My gut says 6% and I can't defend it with a number, which is why I'm posting. I know I'm missing costs but I don't know their names, and I don't know which one is the big one versus the rounding error. If someone has run more than a handful of these, what actually comes out of the 16% between the auction and the redemption check?

Rena Guide · Accepted Answer

The gap between a statutory rate and a portfolio return comes from a handful of specific things, and they're not equal in size.

The biggest one is that you almost never get the statutory rate. In bid-down states the auction sets your rate, and on the desirable parcels it lands far below the ceiling. In premium states you pay cash over face, and where that premium earns no interest and isn't refunded on redemption, it comes straight off your yield. Which of those applies is set by state law, so check the statute and the county's bid rules for each place you buy.

Second is timing. Your model assumes money is working the whole 18 months. In practice you fund at the sale, then wait, and the redemption arrives when the owner refinances or sells. Uninvested weeks between sale seasons drag the annualized number down even when every certificate performs.

Third is the per-certificate cost of knowing what you bought. At $2,200 average face, a $150 title look and a $75 drive-by inspection is 10% of face spent before you've earned a dollar. That's why scaled buyers set a minimum lien size.

Then the small ones: registration fees, wire fees, certificate issuance charges in some counties, and the handful of parcels that turn out to be a drainage strip nobody will ever redeem.

Something your model doesn't have a row for yet: taxes come due again next year on anything that hasn't redeemed, and you generally have to pay them to protect your position. That's real cash out, and how it accrues varies by state.

brandonlee36 · Answer

I'm at roughly 40 certificates and the thing that broke first wasn't yield, it was bookkeeping. Redemption money shows up from county treasurers with no paperwork attached, sometimes a check with a parcel number and nothing else, sometimes an ACH labeled with an internal batch code. Matching payments to certificates by hand was fine at 12 positions. At 40 I lost a week. Multiply by your 200.

chriswalton8 · Answer

So the statutory rate is basically a starting bid, not a return. That reframes everything for me.

dpatel_re · Answer

@ledger your average face is the problem before anything else. At $2,200, diligence is 8-12% of the position and you can't underwrite your way out of that. Most people running this at size set a floor, $1,500 to $2,000 minimum on the lien and a minimum assessed value on the parcel, then buy fewer, bigger positions. Your 200 certificates at $2,200 costs the same to research as 200 at $9,000 and earns a quarter as much. Raise the floor and your gut number and your spreadsheet number start converging.

dmitri_v6 · Answer

Add a line for the paperwork on the exit. Redemption is easy, the county handles it. The 5 or 10 out of 200 that go the other way need a specific statutory sequence of notices, and in some states you're also recording assignments or affidavits along the way, at recording fees that vary by county. Budget attorney time per file rather than per portfolio, because each one is its own procedure and a missed notice can restart it.

wendy_park48 · Answer

Pull the bid rules document, not the FAQ page. I've read county rules where the premium is forfeited entirely on redemption, others where it's returned without interest, and one where a per-certificate issuance fee gets tacked on after the sale that never appeared in the bid amount. Small money individually. Across 200 certificates it's a real line, and none of it is in the deck a fund shows you.

The spreadsheet says 16%. My gut says 6%. Which one is lying?

6 replies