Indiana recently passed a minor change to their tax sale system. 95% of it remains the same - but it may never be the same again.
In the "tax sale investing world", little changes made by the state can result in monumental differences in how the sales will operate moving forward.
The change? The return to tax sale investors for part of their bid has been reduced from 10% per year to 5% per year.
How could a small change like that - a 5% reduction on part of the bidder's investment, shake things up so much? Read on.
How Indiana Tax Liens "Work"
Indiana has a tax lien system. So the county sells a tax lien on each delinquent property to any investor who is willing to pay the amount of taxes owed, and the investor receives a tax lien against the property for security. The owner then has a strict one-year period to repay the late taxes they owed, plus a return to the investor.
If the owner fails to do this, the investor can trade in the lien they purchased for free and clear ownership of the property.
Which, of course, means the owner loses the property.
If the owner repays the taxes in the first 6 months, they must pay the investor a "flat" 10% return on the amount of taxes owed - even if they pay the day after the sale. If the owner pays 7-12 months after the sale they must pay a "flat" 15% return on this amount, whether they pay in month 7 or 12.
So the investor earns at least 15% annual return on the lien, on the amount of taxes owed...here's what the annual return (APR) is for the investor if he's paid off within:
1 day: 3650%
1 month: 120%
3 months: 40%
6 months: 20%
6 months and 1 day: 30%
12 months: 15%
Now of course if the investor is earning 3-digit rates of return, it's for a relatively short time. However, the funds are then available to invest again (perhaps several more times) before the year is up, at other sales.
So it's for real.
"Hey, I Want to Buy That Lien Too!"
Since the county is offering the chance to get properties for the cost of just a year or two of taxes (and offering a good return on the investment if the property isn't obtained), many investors often want to buy the same lien.
When this happens, the county accepts higher and higher bids for the lien until one highest bidder remains. All the additional money the county takes in when competitive bidding occurs on a lien, is called an "overbid".
The county sets this overbid money aside in an escrow account during the one-year period the owner is allowed to repay the taxes.
If the owner wants to pay the lien off, they must now pay the flat 10% or 15% on the taxes they originally owed, and ALSO pay the investor interest on the "overbid" they have deposited with the county.
Even if that overbid was $200,000 or $1,000,000.
Annual Percentage Rate For Overbids
However, the interest payable on the "overbid" portion of a bid, is not a flat percentage like what the investor earns on the taxes actually owed. It's calculated on an "annual" basis.
So the investor earns a little bit every day, not the whole thing upfront, on any "overage" money he had to deposit to win the lien.
Likewise, if the owner pays off their lien in 1 day, they only pay one day of interest on the overbid portion. Which is next-to-nothing for even a large overbid. If they pay the lien in 3 months, at least they're only paying 1/4 of one years' interest on the overbid amount.
Indiana Overbid Rate of Return Falls from 10% Annually to 5% Annually Starting Now
We've now come full circle - the change is a 5% drop in the interest earned on some of the amount bid... on some of the liens sold at a typical sale
Previously the owner had to pay 10% interest annually on the overbid.
Now that amount has dropped from 10% to 5%.
That's all that happened?
That's the main change of any substance. And yes, it should have a huge impact on everybody who invests at the sale!
Answer this "simple" question:
Why is this going to make such a big impact, and which "tax sale players" will be affected?
The best answer (in my sole opinion) wins. Just comment below.
NOTE: You will only see your own answer when you submit it, until the contest is over. Nobody else will see your answers and you will not be able to see theirs (no copying!).
When the contest is over this weekend, I'll announce the winner and unblock everyone's answers.
Some hints and points to ponder:
Looking forward to your comments and will try to respond to everyone I can. Over the next few days we'll go over all the ramifications of this change, why such a small change could impact the auctions so greatly and most importantly, how you will be able to use it to your advantage no matter what your goals are!