Subsequent taxes eat the yield a certificate was bought for

The subs are the reason a lot of passive money looks at certificates and walks away. The common assumption is that the extra taxes roll into the certificate at the same rate and the whole thing becomes one clean number. Where that is not automatic, the 16 percent on the brochure is a headline rate on part of the money only, which is a very different product from the one most buyers think they are getting.

Run it both ways and the difference is plain. A $4,200 certificate at 16 percent simple for three years earns about $2,016. If the two sub payments of $3,800 and $3,900 also accrue at 16 percent from their payment dates, that adds roughly $912, and the blended return on the $11,900 of total 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 is before pricing 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, a sound rule is to hold two years of expected subs against every open certificate, which means only about a third to a half of committed capital can actually go into face value. Buyers who skip that reserve tend to end 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 by state, and that 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 the earlier holder 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 money is going out, so bramble's real question stands. The way to price it is to ignore the statutory rate entirely. Underwrite total cash out at the end of the longest plausible redemption timeline, including every sub, then ask what return is acceptable on that number. On your example that is $11,900 committed and change, and if 16 percent 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 how a buyer ends up three years deep funding somebody else's tax bill on a lot nobody wants.