Tax Lien Sale Partnering

In my experience, there two distinct groups of potential tax lien investors who can do very well by partnering with each other:

• Those who are cash-rich and time-poor (or simply don’t want to take an active role in tax lien investing)
• Those who are knowledge- and time-rich but cash poor (not necessarily “poor” in the usual sense of the word, but without hundreds of thousands in capital)

Obviously, the investor with cash to invest provides most or all of the cash, and the investor who is willing to do the work does all of the due diligence and maintenance of the tax lien portfolio.

Here is the typical profile of each partner:

Cash Partner

The cash partner, though sometimes experienced with tax lien investing, is most often just an ordinary person who wants to earn more than the paltry interest offered at banks.  Tax liens can be a suitable investment for retirement funds under many circumstances, so this is often source of the cash partner’s funds.  Even modest wage-earners can have significant sums available in these retirement accounts after many years on the job.

The cash partner, for one reason or another, does not wish to be burdened with the significant amount of work that is involved with selecting and maintaining tax liens.  Also, the allure of cheap properties is not part of their reason for investing – this needs to be the motiviation of the operating partner, who does all the work.  Cash partners need to be content with having a realistic way to earn over 10% interest on significant amounts of money, with manageable risk.

Operating Partner

The operating partner is usually a relatively cash-poor real estate investor, who has some experience already with tax liens.  This partner may have purchased tax liens of their own in the past – and realized that much larger lien purchases must be made before it’s realistic to expect to acquire properties.

The operating partner is willing to make the efforts required to properly select liens to purchase, to actually attend the sale and purchase the liens, and to ensure that ongoing obligations such as legal noticing are properly performed.

The Arrangement

The arrangement I’ve used, and seen others use successfully in the past is quite simple.

1.  The partners agree on an amount that will be available to invest, and the operating partner identifies suitable liens to purchase (no small task)

2.  The operating partner attends the sale and purchases the liens in the name of the cash partner

3.  As the liens redeem, the checks are sent to the cash partner, and the cash partner keeps all interest proceeds

4.  The operating partner coordinates any legal noticing and foreclosure actions necessary

5.  The operating partner purchases any foreclosed properties for “cost” from the cash partner – what the cash partner would have received if the lien had redeeemed

6.  (Optional)  As part of the arrangement, the cash partner provides additional 3-5 year financing for the properties to the operating investor.

The Benefits and Trade-Offs

The cash partner gets suitable lien purchases researched and maintained for free by the operating partner.  With a competent operating partner, the cash partner is likely to get double digit returns on their money with almost no extra effort, and very little unmanageable risk.  However, the cash partner loses out on the occasional windfall profit that active tax lien investors occasionally enjoy, when a property is acquired for a tiny fraction of its value.

The operating partner gets the windfall profits associated with the occasional property aquisition, with no cash outlay.  However, the operating partner must perform a great deal of upfront work, with the risk that no properties will be realized from the arrangement – in which case he will make nothing.

With significant volume, however, the operating partner will acquire properties, and the cash partner will enjoy truly above-market interest rates with acceptable risk – potentially spread out amongst many liens and even geographical areas.