Subsequent taxes are eating the yield I bought the certificate for

I looked at this last year when I was trying to find something that pays without me doing much, and the subs are exactly why I backed off. I assumed the extra taxes just rolled into the certificate at the same rate and it was all one clean number. If that's not automatic everywhere then the "16%" on the brochure is a headline rate on part of my money only, which is a very different product than what I thought I was buying.

Run it both ways and you'll see how much it matters. $4,200 at 16% simple for three years is about $2,016. If your two sub payments of $3,800 and $3,900 also accrue at 16% from their payment dates, you pick up roughly $912 more, and your blended return on the $11,900 average-ish exposure lands somewhere in the low teens. If the subs accrue at a lower rate or only from the redemption date, the same certificate can blend down toward 7 or 8 percent, and that's before you price the reserve sitting in cash.

Which of those applies depends on the state and sometimes on the county's practice, so read the statute for the specific jurisdiction and get it confirmed by someone licensed there. On the reserve, I hold two years of expected subs on every open certificate as a rule, so my working assumption is I can only deploy about a third to a half of committed capital into face value. Everyone I've compared notes with who ignored that ended up letting a sub lapse on the one parcel that was worth protecting.

I want to make sure I've got the failure case straight. If you don't pay the sub, someone else buys that year's lien at the next sale. Does that new buyer's lien come ahead of yours, so they can foreclose you out? That's what I understood from a video, and if it's true then "optional" subs aren't optional at all, they're a subscription.

juniper, close but the direction varies, and it varies by state, which is the part that matters for underwriting. In some states each year's tax lien has equal or first priority so the later certificate holder can start their own foreclosure and you're the one who has to redeem them to stay alive. In others the earlier certificate holder gets notice and a right to pay off the junior. Either way you're spending money, so bramble's real question stands.

How I price it: I don't underwrite the statutory rate at all. I underwrite total cash out at the end of the longest plausible redemption timeline, including every sub, then ask what return I'd accept on that number. On your example that's $11,900 committed and change, and if 16% on the whole stack is the only thing that makes it work, the deal is thin. The parcels that redeem fastest are the ones with a mortgage servicer behind them, because the servicer advances taxes to protect its own lien. Bidding on unmortgaged parcels is where you find yourself three years deep funding somebody else's tax bill on a lot nobody wants.