Well, despite rising interest rates, the Pima County tax lien sale saw interest rates hit historic lows – down to one and two percent on improved properties. Arizona real property tax liens are sold on a bid-down basis. This means that each lien starts at a potential 16% statutory maximum and is bid down to a level that an investor is willing to accept for that particular lien.
While banks (JP Morgan most notably) have long invested in tax liens, shortly after the financial crisis, hedge funds started to show up at Arizona tax lien sales in full force. As recent as 2013, the lowest bid for tax liens (most notably on residential lots with valuations above $100,000) was around 6%. Starting in 2014, bid rates started to go down considerably, as large hedge funds purchased large numbers of liens.
What has remained a bit of an enigma among many tax lien investors is why hedge funds and other large investors are willing to accept rates as low as one and two percent when a 10-year Treasury is now paying nearly three percent. Given the substantial administrative time to research, bid, and manage a tax lien portfolio, it seems hard to justify bidding one and two percent. Perhaps there is simply a need for these hedge funds to simply place money, even if at rates that make no sense. Nonetheless, for the last five years, the Arizona tax lien market has been dominated by a few hedge funds gobbling up tax liens. As rates continue to rise, it will be interesting to see if these same hedge funds continue with tax liens or chase higher returns somewhere else.