Arizona Property Tax Lien Primer

by

Mark L. Manoil, Esq.

Tiffany & Bosco, P.A.

Phoenix, Arizona
Revised 2002

Arizona Property Tax Lien Primer

Disclaimer
This publication is designed to provide accurate and authoritative information in regard
to the subject matter covered. It is provided with the understanding that the author is not,
simply by providing this information, engaged in rendering legal or accounting service.
If legal or other expert assistance is required, the services of a competent professional
person should be sought.

About the Author

Mark Manoil practices law in Phoenix with the law firm of Tiffany & Bosco, P.A. His
practice emphasizes property tax, real estate and business matters. He is the past-chair
of the Real Property Section of the State Bar of Arizona and the State Bars Internet
Committee, and a member of the board of directors of the National Tax Lien Association
(ntlainfo.org) . He is the author of Arizona Property Tax Liens: Guide to Profit, Protection
and Prosecution, published by Capital West Publishing, Inc., as well as other articles on
property tax and other real estate topics. For additional information, call (602) 255-6000,
or visit the Arizona Property Tax Lien Primer website at http://members.cox.net/manoil.
Tiffany & Bosco, P.A.
1850 North Central Avenue, Fifth Floor
Phoenix, Arizona 85004-4546
(602) 255-6000
URL: www.tblaw.com
email: mmanoil@azbar.org
1999, 2002 Mark L. Manoil, All Rights Reserved

Table of Contents
I. Basics of the Arizona Property Tax Lien Sale Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How The Process Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A High Priority Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption, Investment Payoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtaxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4
4
5
5
6
6

II. Risks of Arizona Property Tax Lien Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Property Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Inadequate Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Environmental Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Risks Associated with the Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Owner's Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Owners Military Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Lien and Process Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Other Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Government Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Administrative Inefficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Litigation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Uninsurable Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
III. Due Diligence and Investment Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due Diligence Depends on Investment Preference . . . . . . . . . . . . . . . . . . . . . . . . . .
Research Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assessment information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recorder's Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bankruptcy Court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RTC and FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sources of Property Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time as a Resource . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11
12
13
13
13
14
14
14
15
15
15

IV. Alternative Forms of Tax Lien Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pooled Investment Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What to Expect/Require of the Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16
16
18
19

V. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Email Subscription Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
More About Arizona Property Tax Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Arizona Property Tax Liens Order Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

1999, 2002 Mark L. Manoil, All Rights Reserved

Arizona Property Tax Lien Primer

I. Basics of the Arizona Property Tax Lien Sale Process

Sixteen percent interest on a fairly safe, passive investment is nearly impossible to
find. You won't find this investment at your local bank, stock broker or real estate broker.
Each year the county treasurers of Arizona's counties offer for sale liens on the property
of owners who have failed to pay their property taxes. The sale always occurs during the
month of February. The actual sale date is set by the local county treasurer.
How The Process Works
The sale of tax liens is actually the culmination of the governmental tax assessment
and collection process, and occurs approximately three years after the process begins.
Most property owners are familiar with the Notice of Valuation that the county
assessor sends out. The Notice indicates what assessed value the assessor intends to
assign to the owner's property for the following year's tax roll. The Notice is traditionally
the kick-off for the tax appeal season.
A lien for taxes attaches to the property as of January 1 of the tax year, even though
the amount of taxes due will not be determined until the following August-September,
when the County Board of Supervisors has set tax rates and when the county treasurer
calculates and sends out the tax bills. The first half of the tax bill, if not paid, is delinquent
after November first, and the second half, if not paid, becomes delinquent after the
following May first. (Under certain circumstances the tax bill may be paid in whole by
December 31 without interest or penalties for missing the first half payment deadline.)
If an owner is delinquent, Arizona Statutes afford him or her several notices from the
county treasurer of the delinquency and the impending sale. By December of the year
following the tax year, if there is any tax payment delinquency, the Treasurer compiles a
list of all the property upon which taxes are delinquent and then publishes the list the
following January or February - no more than three weeks nor less than two weeks prior
to the sale - in an officially designated newspaper of the County. The newspaper is
required to publish the list on the Internet.
The sale is usually held in an auction format. The Treasurer's Office Auctioneer reads
off the property's tax parcel number, and then interested buyers cry out their bidder
numbers. Bidder numbers are assigned by the County Treasurer's Office prior to the sale.
Unlike an auction where the bid price goes up, the bidders yell out lower and lower
interest rates for the amount of interest they are willing to receive on their investment.
The bidding starts at sixteen percent.
4

Basics of the Process

Upon payment of the back taxes, penalties and charges, the winning bidder will be
issued a Certificate of Purchase ("CP") by the Treasurer's Office evidencing the sold tax
lien. The Certificate of Purchase is evidence of the debt from the property. The CP is like
a promissory note, but because it arises from an involuntary obligation of the property
owner, it is issued by the County Treasurer, not the owner, after the sale. The priority lien
on the real estate which secures the debt is created by operation of law, and is not
evidenced by any separate documentation to accompany the CP. It is not necessary to
record the CP, but this is the practice by some county treasurers.
It is the practice of some county treasurers to require the purchaser of the most recent
delinquent tax also buy out any prior year tax liens outstanding on the same parcel.
These purchases are treated like a redemption for the earlier year CP holder.
Any liens not sold to investors at the auction are deemed sold to the State. After the
auction these CP's are available for purchase from the treasurer's office "on assignment"
from the State. They automatically carry 16% interest.
A High Priority Lien
By law, the property tax lien is made senior to other liens on the property such as
mortgages, deeds of trust, judgment liens, and even IRS liens. Thus, because taxes
usually are only a fraction of the value of property, this makes the CP a very well-secured
investment. However, the statutory priority does not apply to other state liens such as
mortgages held by the State, or other property tax and improvement district assessment
liens on the same parcel.
Redemption, Investment Payoff
The CP investment pays off through redemption or foreclosure. If the property owner
or another interested party (including holders of other liens on the property) pays off the
taxes ("redeems" the tax lien) the investor receives a return of the principal invested plus
accumulated interest. If the CP is not redeemed and the owner succeeds in foreclosing
the right of redemption of all interested parties, the investor secures ownership of the
property that the lien was on.
The CP may be redeemed at any time up to the moment a judgment is entered
foreclosing the right to redeem. Thus, it is hard to predict when the investment will be
paid off, and accordingly what the return on investment will be. The foreclosure action
on the lien may not be commenced until three years after the date of the sale of the lien

1999, 2002 Mark L. Manoil, All Rights Reserved

Arizona Property Tax Lien Primer

at the public auction. Liens sold at the 2002 auction, therefore, will not be subject to
foreclosure until late February, 2005.
Subtaxes
Normally the lien sold at the auction is for one year of delinquent taxes only. If the
property owner fails to pay his or her taxes in subsequent years, it is possible for the CP
holder to pay those taxes and have them added to the CP and earn interest at the same
rate as the initial CP. The treasurer's office under statute is required to accept payment
of the subsequent taxes after June 1 of any year by any holder of a CP on the property.
Accordingly, the CP buyer at the February 2002 auction of liens for tax year 2000
may as early as June 2002 return to the treasurer's office to pay delinquent taxes from tax
year 2001 on the same property and have those amounts endorsed onto the CP.
Assuming the owners continuing delinquency, the investor can then return to the
treasurers office after June 1 of each succeeding year that the lien has not been
redeemed or foreclosed, and may pay the subsequent delinquent taxes, having them
added to the lien represented by the CP.
If the county treasurer who has sold the tax lien is one who requires payment of
earlier year liens as a condition of selling a tax lien, the failure to pay subtax may make
the buyers investment vulnerable to an involuntary transfer to the next delinquent tax lien
purchaser.
Foreclosure
As mentioned above, a lawsuit may be brought three years after the sale of the lien
at the county auction to foreclose the CP. Such a suit will often require the use of an
attorney. Alternatively, for liens originally sold through 1998, the investor can wait two
more years and foreclose the CP through an administrative action with the county
treasurer's office. While the latter course is less expensive, it does require waiting at least
two additional years, and the title to the property obtained as a result of the
administrative foreclosure is not usually as insurable with title companies as is the deed
resulting from a judicial foreclosure. Furthermore, Arizona statutes provide that property
owners who redeem their tax liens after having been served in the judicial foreclosure
lawsuit are responsible for the investor's attorney's fees, and costs of the action. This
statutory protection enhances the attractiveness of the judicial foreclosure and removes
a potential detraction from the investor's return on investment, in the event the CP is
redeemed.

Risks of Tax Lien Investing

Because legislative changes have provided that the administrative foreclosure process
will not be available to the public after December, 2003, liens first sold in 1999 and
thereafter will have to be foreclosed judicially.

The Arizona tax lien sale process provides a mechanism for the state to collect its
property tax revenues with minimal delay, while preserving the property owner's rights in
the property against immediate or unfair deprivation.
With a little bit of investigative effort, investors in property tax liens can achieve a
healthy rate of return with significant upside potential. However, there are some risks of
CP investing which we will take up in the next section.

II. Risks of Arizona Property Tax Lien Investing

Tax liens are perceived as a very safe and rewarding investment: They earn up to
16% simple interest and also have a very high priority lien position on real estate. As a
major source of revenue for schools and other local taxing districts, and an example of
the exercise of the State's police/tax power, property tax liens rank senior to first
mortgages and judgment liens. As most taxes are a small fraction of the value of the
property on which they are levied, that leverage works well in favor of the tax lien
investor.
But there can be a dark side to CP investing too. Here, we address some of the many
possible risks associated with this form of investment. Risks arise principally from three
sources: the property which is subject to the lien; the nature and acts of the owner of the
liened property; and the overall legal and procedural system for handling and foreclosing
the lien.
Property Risks
Inadequate Security. Considering the investment as a loan secured by real estate,
there follows the broad risk of inadequate security for the obligation. In other words, if
the lien investment goes all the way to foreclosure, the property may not be worth the
amount of all delinquent taxes accumulated on it. This risk area encompasses all those
issues affecting the liened property's inherent value. For example, the land may be
located in a flood plain where no flood insurance is available; zoning, deed restrictions,
or a conservation easement may prevent any meaningful exploitation of the property; the
1999, 2002 Mark L. Manoil, All Rights Reserved

Arizona Property Tax Lien Primer

property itself may simply be a useless strip of land or easement, left over from an
eminent domain proceeding or faulty legal description in conveyance of property; or the
property may have once had improvements causing a valuation that is no longer justified
because they were destroyed by fire. Similar to this last risk is the possibility that the
parcel is one of several that compose a single economic unit, but the assessor allocates
all the improvements value for the multiple-parcel economic unit to the subject, and it is
thus over assessed and over taxed.
Environmental Liability. A current, very real and imposing risk is that the property may
be contaminated and its owner subject to environmental liability for cleanup. Several
years ago a man in Kansas City bought a building for $380.00 in back taxes, and was
thereafter informed by the Environmental Protection Agency that the property was
contaminated and would need to be cleaned up.

Estimated cost of cleanup:

$600,000.00 to $1,000,000.00. Further, the EPA threatened the new owner with a
$25,000.00 per day fine if he failed to clean up the property.

Although federal

regulations have exempted lenders who end up taking title to protect their security
interest, which could easily be extended to tax lien investors, it may just be easier to avoid
this risk with a little pre-purchase research.
Risks Associated with the Owner
Owner's Bankruptcy. A property owner's bankruptcy filing looms large as another risk
to the tax lien investor. In most cases, bankruptcy courts respect property tax liens and
accord them high priority in the distribution or administration of an estate. However, an
investor who forecloses on his CP investment may find his foreclosure attacked as a
fraudulent conveyance under bankruptcy statutes, requiring a return of the property to the
bankruptcy trustee or debtor in possession with reinstatement of the lien as a claim in the
estate.
More frightening still, if the property owner files a Chapter 7 Bankruptcy or has a
bankruptcy converted to Chapter 7 the investor could lose its entire investment. Under
Chapter 7 statutes, the bankruptcy trustee may have the tax lien subordinated (effectively
extinguished) to administrative expenses in the estate. In this case the tax lien investor
would wind up as an unsecured priority creditor.
Less drastic impositions by Bankruptcy Courts have included the reduction or removal
of interest to be paid to the investor and extensions of time for making the payoff beyond
the normal three year redemption period.

Risks of Tax Lien Investing

Owners Military Service. The Federal Soldiers and Sailors Civil Relief Act provides
that limitations periods are suspended for persons in military service during the time of
their service. If the property owner is a soldier in military service it may be difficult to
terminate his or her rights of redemption, i.e., foreclose that interest, until the military
service is over.
Lien and Process Risks
Liquidity. From the investment point of view, the first risk is lack of liquidity. Given
that the tax lien cannot be foreclosed for at least three years following the date of its sale,
the owner of the property encumbered by the lien has at least that much time to redeem
the CP. Unless the investor has inside information about the property owner, it is difficult
to predict when the lien will be redeemed, if at all. This difficulty in predicting cash flows
may be intolerable to some investors.
While not always a solution, the willingness of some investors to buy others tax liens
may reduce this risk, if the lien is sufficiently desirable.
Other Liens. Besides risks inherent in the property and associated with the owner,
there are risks associated with the lien itself. First of all, there may be other State liens
which have equal or better priority against the property subject to the tax lien. Federal
tax liens enjoy the federal government's special 120 day right of redemption. Under this
right, even after the investor has successfully foreclosed on the tax lien, the Federal
government has 120 days from the date of judgment to pay the investor the amount of
the lien plus attorneys' fees and costs and any amounts necessarily incurred for the
maintenance of the property. In doing so, the Federal government then succeeds to the
tax lien investors interest in the property.
Government Property. If the lien is mistakenly sold on government property which is
usually exempt from taxation, the treasurer's office is likely to take the position that no
interest is earned and that the investor is simply entitled to the return of his or her
investment, even though we do have a statute that requires the Treasurer to pay 10%
interest or the certificate rate, if lower, if the sale is the result of a mistake or wrongful act
by the Treasurer because no tax was actually due. Recent legislation has also made clear
that tax liens continue and are enforceable against property which is acquired by a
governmental entity after the liens were imposed.
If the property is held by the Federal Deposit Insurance Corporation, as receiver or
conservator for a failed financial institution, the investor again is likely to see a reduction
or absence of interest accruing on his investment, as well as a restriction against any
1999, 2002 Mark L. Manoil, All Rights Reserved

Arizona Property Tax Lien Primer

foreclosure of the lien. Under federal regulations, FDICs permission to sue is generally
required before any interest it holds may be subjected to foreclosure. Obtaining this
permission may be close to impossible. A decision from the Arizona Court of Appeals in
July 1999 suggests that the tax lien may be invalid and unenforceable if it was sold at the
time the Resolution Trust Corporation had an interest in the property even if that interest
was merely a mortgage lien originally held by a failed financial institution.
Administrative Inefficiency. Administrative problems and inefficiencies can also reduce
the investor's return. If the investor fails to notify the treasurer's office of a change in
address, the investor may fail to receive the Notice of Redemption and after redemption
will no longer be earning any interest on the investment. For the same reason, if the CP
is not promptly returned to the treasurer's office after receipt of the Notice of Redemption,
the treasurer will effectively be holding the investor's money without paying interest on it.
A paperless certificate system adopted by some county treasurers offices in the last
couple years has reduced this risk. Finally, in some counties the Treasurer's Office simply
does not process the redemption quickly and thus substantial time may pass when the
investor's money is not earning interest.
Litigation Expense. And then there are the risks inherent to litigation, if the judicial
foreclosure avenue is chosen. If the owner of the property is a minor or is incompetent,
Arizona statutes require that the action be prosecuted against the disabled person
through a guardian or a court-appointed guardian. This could doubtless complicate and
extend the time necessary to achieve foreclosure.
As with any litigation there is also the risk of attorney's fees and costs. Arizona
statutes provide that if an interested party redeems the tax lien after having been served
with process in a foreclosure lawsuit, then that party is responsible for the foreclosing
investor's attorney's fees and taxable costs. If contested, the court ultimately determines
what fees are reasonable, which may not be as much as the attorney has charged his
client. Statutory "costs," which typically include filing fees and process server fees, may not
cover all of the costs which the investor-client is obligated to pay the attorney. Usually,
however, the party redeeming a tax lien will settle with the investor's attorney for the
amount additionally owed for attorney's fees and costs.
Uninsurable Title. The investor who decides to employ the administrative foreclosure
route loses the use of his investment for two additional years. Moreover, the deed
received as a result of the administrative foreclosure may not be deemed insurable by
local title companies. In such a case, the investor would be required to file a quiet title
lawsuit to clear the title to the property in order to have the title insured.
10

As the

Due Diligence and Investment Criteria

administrative foreclosure process will no longer be available to investors after December,
2003, liens sold in 1999 and afterward will have to be foreclosed judicially. If the judicial
foreclosure is handled properly, there should not be a problem getting title insurance
afterward.
Success
A final risk is the risk of too much success. If an investor succeeds in foreclosing on
too many lots within one subdivision, he or she may become subject to subdivider
requirements under State law. This would include the requirement of preparation and
filing of a public report in compliance with the Arizona Department of Real Estate Rules
and Regulations, and possibly having to spend significant monies to provide basic services
to the subdivision. Fortunately, there are exemptions for certain bulk sales of lots which
the investor might be able to take advantage of. Also, a successful foreclosure of
developed property may require property management time and attention, as well as
additional fix-up capital.
While this is a frightening list, we should acknowledge that the worst of these risks,
which would cause the investor to lose principal, happen rarely. And the bright side of
this litany of risks in tax lien investing is that many of the risks are avoidable with research.
The research tools are readily available. Contrast this to the retail marketplaces of stocks
and bonds or real estate. In these letter areas, research cannot have as enormous an
impact in avoiding risk and ensuring reward as it does in the tax lien investment domain,
or the research tools are not readily available. In the next section, we provide a survey
of "due diligence" resources to help the tax lien investor pick the right liens and avoid the
bad liens.

III. Due Diligence and Investment Criteria

Arizona property tax lien investors will likely recognize themselves in one of three
categories:
1. Investing for high interest return;
2. Investing with the goal of foreclosure on the property subject to lien;
3. "Playing the numbers" (if I buy lots of liens, enough will go to foreclosure so that
I profit from their eventual sale).

1999, 2002 Mark L. Manoil, All Rights Reserved

11

Arizona Property Tax Lien Primer

Investors in the last group typically do not (or cannot afford the time to) thoroughly
research the properties under the liens they will purchase. In other words, this is the
throw-the-money-against-the-wall approach, seeing what sticks in the form of foreclosed
properties worth owning, or hoping for redemptions at high interest rates. Naturally,
buyers consciously targeting liens that more likely will go to foreclosure look at more than
the history of non-payment of property taxes on the parcels or the mailing address for tax
bills. But if, as a tax lien buyer, you participate in the process simply for the prospect of
earning a high interest rate of return on your investment, how much research should you
do to at least minimally protect yourself and be fairly assured that the lien will be
redeemed?
In the previous section, we examined some of the risk areas of property tax lien
investing. Those risks arise from problems with the real estate under the lien, other liens
on the property, bankruptcy of the property owner, and risks associated with
administrative inefficiencies and the general costs of litigation. Not all of these risks can
be avoided through pre-purchase investigation ("due diligence"), but many can. And
reducing the possible risks enhances the potential return on investment.
Due Diligence Depends on Investment Preference
Our shotgun-approach investor decides against investment of time (for research) in
favor of investment of money with broadest coverage possible, and without considering
redemption or foreclosure potential. Going back to the other currents of thought, then,
perhaps it is elementary to say the investor for interest return should look for parcels more
likely to be redeemed, and the investor buying for lien foreclosure should identify and buy
liens not likely to be redeemed.
Liens more likely not to be redeemed would be those where: The property has been
abandoned; the owner of record has died; there is free and clear ownership (otherwise
mortgage holders on property also have the right to redeem the lien to protect their
interest); several years of taxes are delinquent; and the tax bill mailing address for the
property owner is outside the state.
By contrast, liens more likely to be redeemed will be on properties that:

are

improved; are owner-occupied or rented out; have other liens (such as mortgages or
deeds of trust) encumbering them; or the tax delinquency arises simply from a failure to
send the tax bills to the correct address (e.g., where the property changes hands shortly
after the tax roll is finalized).

12

Due Diligence and Investment Criteria

These are generalizations and there are exceptions to both profiles. Nonetheless,
they should help the investor determine investment goals and strategy.
Research Tools
After the investor has settled on a preferred approach, the following tools can be
consulted to accomplish the chosen objectives and to avoid the tax lien risk areas:
Assessment information. The assessor's office has tax parcel maps which will help the
investor visualize the location and dimensions of the tax lien parcel. A review of the
assessment will also provide some indication of the tax lien leverage to property value,
depending on the use classification the assessor has assigned to the property. For
example, because the assessment ratio for commercial property is 25% and the
assessment ratio for residential property is 10%, comparably valued properties of the two
classes would have different tax burdens. Because the taxes on the residential property
would be lower in relation to the property's market value, the investor could conclude that
tax lien investments in residential property are better leveraged than in commercial
property.
After the investor has settled on the approach he or she wishes to take, the following
tools can be consulted to accomplish the objectives and to avoid the tax lien risk areas:
A review of the assessed valuation would also indicate whether the assessor has
assigned value to improvements, that is, buildings or other structures on the property.
Some investors form conclusions about likelihood of redemption based on whether
the property is used as a personal residence, is raw land, is developed commercial or
industrial property or is a strip of real estate.

Other criteria often employed are

examination of the tax bill to see if the listed property owner has an out-of-state address.
Finally, the assessor's office will have information on neighboring parcels which may
suggest what values and uses exist on properties comparable to the liened parcel, or
whether the subject parcel is one of several that comprise a single economic unit.
Recorder's Office. With the name of the property owner according to the assessor's
records, it is possible to do a lien search on that individual at the county recorder's office.
Using the name, the investor can determine if there are federal income tax liens or other
liens, such as court judgments, against the named owner. Unfortunately, names used on
titles to real estate and thus the tax roll are not always identical to those used by
government authorities when they record liens.

1999, 2002 Mark L. Manoil, All Rights Reserved

13

Arizona Property Tax Lien Primer

The recorder's office will also have a copy of the vesting deed for the current owner.
It may be possible to tell from this deed, especially if the property is located in a
subdivision or condominium complex, whether there are deed restrictions affecting the
property. If document references are available in the vesting deed, it will then be possible
to double check those deed restrictions directly. Otherwise, a title search or report could
be ordered from a title company to determine this information, although the expenses
would probably be unwarranted given the preliminary nature of the due diligence.
Bankruptcy Court. To investigate the potential bankruptcy risk, the investor can call
or travel to the office of Bankruptcy Court Clerk for the district in which the property is
located and in the district, if different, where the owner is located. The automatic stay
against tax lien foreclosure would be effective even if the owner is out of state and filed
in a different district's court. Bankruptcy court jurisdiction is national.
RTC and FDIC. When the Resolution Trust Corporation officially went out of business
its operations and interests were taken over by the Federal Deposit Insurance
Corporation. The FDIC makes lists of properties it owns available in paper and electronic
format. These could be double-checked if there is any concern a financial institution
owner of property is in receivership or conservatorship. The name of any financial
institution mortgage holder on the property could also be reviewed against the FDIC list
of institutions. Recent case law developments (July, 1999) cast a shadow on the validity
of tax liens against parcels where there is such a RTC or FDIC interest.
Sources of Property Information. Naturally, the investor should consider whether the
property liened is something worth owning, or at least adequate security for the back tax
debt.

To address any potential or suspected environmental problems, the Arizona

Department of Environmental Quality can be contacted. Zoning of the property can be

checked with the applicable town or county zoning authority.
Also, the city or county highway (or streets) and engineering departments would be
able to provide information on whether there is public roadway access to the property,
whether the property is in a flood plain, and whether an engineer's water report is
available. The engineering or health department might further have information of any
percolation test results on the soil of the property.
The Arizona Department of Real Estate might have an existing Subdivision Public
Report on the property, that would contain alot of useful information about the property,
including the nature and extent of improvements, and utility and water availability.

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Due Diligence and Investment Criteria

It is always best to visit the property in person to see if any other questions (or
opportunities) associated with the investment come to mind, such as neighboring off-site
conditions that might affect the value or use of the property.
Market Information. An indication of comparable values to that of the liened property
might be available in the assessor's tax roll, by the investor's simply looking at neighboring
parcels (if they are similar) and finding recent sales information. Besides contacting a real
estate broker for the same information, the investor could also determine preferred
geographic areas of investment (depending on his or her investment criteria) by consulting
U.S. Census Bureau data.
Census data and tract maps are available at U.S. Government Document Depositories
(at most large or university libraries) or through the Arizona Department of Economic
Security. Data compilations in the census include reports on median home values in the
tract, as well as other potentially relevant demographic information.
Internet. Many of th government offices and other sources of property-related
information described above have made some or all of the records available over the
Internet. A listing of such links is beyond the scope of this Primer, but the reader is
encouraged to explore Internet search engines for these resources.
Time as a Resource
Exhausting these due diligence sources could be, well, exhausting! Particularly if the
investor is attempting to prepare for the auction sale, much of the time invested in doing
this research will be lost if another bidder succeeds in buying the CP the investor is
interested in. This doesn't necessarily suggest the throw-the-money-against-the-wall
approach is best. Instead, the diligent investor may choose to forego the opportunity to
purchase at auction to take more time in investigating the liens left over after the sale.
These CPs become available for purchase over the counter from the treasurer's office, and
carry a 16% simple interest rate. Liens available for purchase this way ("on assignment")
are sold shortly after the auction is completed until a week or two before the next one,
although some county treasurers may further restrict the sales period.
Maybe identifying a tax book from which to buy is all the effort you wish to devote to
identifying CP's for purchase. Buying in the center of town or on the edge, a tax book
number might be enough. If the goal is successful lien foreclosure with minimum risk,
however, a pre-purchase review of the property securing the lien is warranted. Assuming
one values the time invested in researching the lien, the more time spent looking at the
property, the lower the eventual rate of return. Deciding how much time can be devoted
1999, 2002 Mark L. Manoil, All Rights Reserved

15

Arizona Property Tax Lien Primer

to that process is part of the balancing of risks and benefits every investor in tax liens must
make.

IV. Alternative Forms of Tax Lien Investing

Some investors, although attracted by a potential 16% interest rate of return on the
back tax lien investment, may be concerned about the investigation required to invest
cautiously and securely their funds in CPs. These investors might be willing to sacrifice a
portion of their return in exchange for management of their investment by other parties.
Accordingly, pooled investment vehicles and investor representatives/advisors have come
into existence to serve just this market. Please note that the author and the publisher of
this article make no representations or warranties as to the safety or success of any
investment made through the parties described in this article; the description of their
services is made for illustration purposes only, and the tax lien investor is advised to
investigate any agent thoroughly before entrusting money to that agent.
Pooled Investment Funds
Promoter-managers set up pools to raise a cash fund for investing. The form of the
investment may be a unit in a limited partnership, a trust certificate, a membership
interest in a limited liability company, or simply a promissory note, but typically the
investment is not tied to any specified asset (in our case, any specified CP). Assuming the
pool is competently managed, one is relieved of the need for investigative effort, and his
or her risk is diversified over many different lien purchases. The investors due diligence
would be limited to reading the offering circular or other written materials offered by the
fund manager and judging track record and prospects. By owning many CPs, the risk of
a loss in value due to any one of them becoming worthless would be less significant to the
pool of investors as a whole, and chances of the pool funding CPs that actually go to
foreclosure would go up.
However, the risks involved in tax lien investing (described earlier in this Primer),
would still be present for the fund managers, and could affect the performance of the
fund. Where the manager handles several pools, the investor might also question whether
the quality of liens purchased for each pool is comparable. ("Quality would depend on
the investor's preference, be it high interest return or property foreclosure.)
While liquidity often remains a problem for the investor, there being a limited (or
restricted) resale market for their investment units just as there is a limited secondary
16

Alternative Forms of Tax Lien Investing

market for tax liens, the problem could be compounded if the fund earns interest income
which is passed through for tax liability purposes to the investment holder, without actual
cash distribution.
Also, even though fund managers suggest that tax liens will be redeemed on the
average of 18 months after their purchase, a shortage of cash reserves could make it
difficult for the fund to pay subsequent taxes on purchased CP's. This cash management
problem could manifest itself in several ways:
1. An additional capital call could be required of investors.
2. Subsequent taxes are not paid as soon as possible, creating the risk that a
holder of a CP from a different year may pay "subtaxes" first.
3. Subsequent taxes are not paid at all. This creates the likelihood that the
subsequent delinquent tax will be sold at the next auction as a separate CP, or, in
some counties, that the CP investment will be cashed out and sold to another.
In the last case, if the lien is purchased by another CP buyer, that party will have a
right to redeem the pools lien, if the pools lien has not already been transferred on the
treasurers books to the later purchaser (thus, decreasing the chances of the pools lien
going to deed).
In those Arizona counties where the treasurer forces an assignment to the subsequent
tax lien purchaser of the pools earlier CP, the positive side is that the pool will succeed
at having its position cashed out and will have the opportunity to reinvest the full
proceeds, thus enjoying possible compounding of its interest rate of return.
Busy professionals might wish to invest ERISA funds in a pool vehicle. However, ERISA
regulations may complicate matters substantially by imposing ERISA fiduciary
responsibilities on the managers of the investment fund if they have any profits or equity
interest in the fund. This aspect of any offering should be brought to the attention of the
investor's financial and legal advisors.
Other strengths that the investment manager can offer are better research and
property evaluation tools. It is not uncommon for such pools to have research tools such
as an electronic/computerized database with the Assessor's roll, aerial photographs,
zoning information, flood insurance rate maps, and other information sources too
expensive for the occasional investor to acquire.

1999, 2002 Mark L. Manoil, All Rights Reserved

17

Arizona Property Tax Lien Primer

The manager of one firm that has set up several private placements and other
managed-investment vehicles for passive investors in tax liens explains that the cash pools
it organizes are usually set up as investor/grantor trusts, and securitized in the form of
private placements. Tax reporting is on a pass-through basis (like trust or partnership
reporting). To avoid or minimize ERISA concerns, the trustee has no equity or profits
interest in the performance of the trust.
To address the potential liquidity problem, unit holders may choose from several
reinvestment/cash distribution plans and can liquidate their unit if cash is available. Based
on historical experience of an approximate 5% cash flow on the pool each month from
redemptions, the pool is able to meet most unit-holders needs, and to pay subsequent
taxes when deemed strategically wise to do so.
Offers of participation in any of the pools can only be made through a private offering
memorandum, upon the investor's showing of qualification under securities regulations.
In these cases the minimum investment has been $20,000.00 to $30,000.00 per unit.
Interestingly, the participation of investment pools in tax lien auctions during the
1990's has made the bidding for liens more competitive and consequently the CP interest
rates are often lower. This result follows a frequent marketing message to investors
centered around CPs high interest rates. In evaluating an investment pool, determine
whether there are any strict criteria about CP interest rates, that is, does the pool refrain
from buying if the bid rate drops below a certain point, or is the pool simply investing with
a view toward eventual foreclosure of the liened properties.
Investment Advisors
The investor who prefers to see which liens she has bought, without undertaking
time-consuming due diligence, may want to consider hiring an investment advisor. The
advisor carries out the research function and administers the CP investment for the
investor -- handling redemptions, reinvesting, or notifying the investor of subsequent tax
amounts for payment. Typically, the advisor maintains or has available most, if not all of
the research tools that the pooled funds use. In contrast to pooled investment vehicles,
some of the companies and professionals acting in the role of investment advisor have
found it administratively less burdensome to keep investors' interests segregated, and
account to investors with respect to their specific, individual investments.
Advisors often charge clients an up-front annual management fee based on a
percentage of the amount being managed. Similar to the investment pools, advisors
usually accept clients only if they meet an investment threshold.
18

Alternative Forms of Tax Lien Investing

Another source of tax lien investment advice, and perhaps management, is the
knowledgeable real estate broker. Well-equipped real estate offices have much of the real
property information necessary to conduct thorough due diligence, and brokers often
bring a good sense of market values for the properties upon which they suggest CPs be
bought. A big difference in return on investment, suggests one broker, depends on
whether the advisor requires payment in the form of an up-front fee on assets managed
or on the back-end, being compensated on the basis of the investments performance. In
the latter case, more principal is at work and thus ultimate returns can be higher.
What to Expect/Require of the Agent
The investor entrusting monies to an investment agent, in any form, should receive at
least quarterly reports, if not monthly, concerning the investors portfolio or the pooled
fund in which he has participated.
In pooled investment situations the report should indicate performance through
amounts received on redemptions and sales of foreclosed property. Reports should also
provide regular statements of the pools CP portfolio, breaking out the age of the CPs held
in it. Because such an arrangement probably constitutes the sale of securities, the investor
is entitled to the protections of the federal Securities Act and Securities Exchange Act, and
similar state laws, which may require additional disclosures.
Those working with investment advisors/managers should know explicitly what liens
they have in portfolio, including tax parcel identification information and dates the liens
become mature for foreclosure. An agent who keeps his client in the dark about any of
the particulars of the clients investment is not a satisfactory agent or fiduciary.

Tax lien investing offers an exciting opportunity for high rates of return. Due diligence
requirements for prudent investing, however, may make the investment prohibitively
expensive to a professional or other investor whose time is limited. While there is no
guarantee of return or other success associated with managed CP investments, these
approaches do remove the time-cost of participation that many investors may be
concerned about. Thus, the pooled investment vehicle, or hiring an investment manager,
although often requiring a substantial minimum cash investment, is an option worth
consideration for those unable to scrutinize closely and continually the status of their tax
lien portfolios. No less a due diligence effort should be made, however, in choosing the
investment vehicle or advisor.

1999, 2002 Mark L. Manoil, All Rights Reserved

19

Arizona Property Tax Lien Primer

V. Conclusion
The Arizona property tax lien investment opportunity can be a valuable and attractive
one, but it can also be fraught with risk. The process requires active and on-going
involvement with government offices, and significant research or good luck to make it
work. Attorneys skilled in the foreclosure of tax liens are an invaluable part of the
equation - for reducing the ultimate cost and time to foreclose or realize redemption.
As investments go, this one requires detailed knowledge of a relatively esoteric area
of law, as well as of the properties in which the investment is made. Professional advisors
are available to help in both areas.
Because the investment is so dependent on the state of the law that provides the
opportunity, it is critical for the investor to stay abreast of legal developments in the courts
and in the legislature. This can be done by monitoring legislative amendments to the tax
statutes and reading new case law and legal treatises as they are published.
The Internet provides access to much of this material and other means for learning
about the tax lien investment process in Arizona and elsewhere. At the Arizona Property
Tax Lien Primer website (http://members.cox.net/manoil) we are committed to bringing
current information about this area to the tax lien investor community. Please consider
signing up for our free email alerts and announcements on the form that follows.

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Email Subscription Form

Sign me up to receive email alerts and announcements about Arizona property tax
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to Profit, Protection and Prosecution (see order form on page 24).
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1999, 2002 Mark L. Manoil, All Rights Reserved

21

Arizona Property Tax Lien Primer

More About Arizona Property Tax Liens

If you have enjoyed this Primer and want more information about Arizona property
tax liens . . .
Add the ultimate reference to your investment tools.
Arizona Property Tax Liens: Guide to Profit, Protection and Prosecution, by Mark L.
Manoil, Capital West Publishing, Phoenix. June, 2002. Approx. 280 pages,
comprehensive Index, many illustrations, footnotes referencing statutory and case law
information. Price: $139.00 plus tax and shipping (see order form on page 24).
Phoenix real estate attorney Mark Manoils new book represents more than ten
years of practical and legal lessons learned about investing in and foreclosing Arizona
property tax liens. In 17 chapters (see summary table of contents on the next page),
the book covers basics to advanced issues of the statutory and judicial processes, the
investors research and decision-making tools, profiles of profitable investing
techniques, foreclosure forms, and useful statistical and data resources.
Basics:

How the tax lien sale works

Property research checklist

What the investor buys

Foreclosure checklist

Risks of tax lien investing

Flow chart of foreclosure process

Advanced issues:

Foreclosure problems and how to deal with them

Resolving priority of liens, e.g., IRS liens, judgments, other government claims

Computing lien values and double-checking earned interest reported by

Treasurers

Arizona county tax collection statistics

Dealing with interests of Arizona financial institutions resolved by RTC/FDIC

Information resources for researching, valuing, and selling property

Treatment of tax liens when property owner in bankruptcy

In addition to example forms from government offices and websites, the book
contains valuable appendices:

22

Key legal forms for prosecuting a judicial foreclosure

Directory of Arizona County offices

Select Arizona Census 2000 data

Spreadsheet templates for

estimating unredeemed lien
value and calculating return
on investment in effective
yield (compound interest)
terms
Explanation of Arizona Tax
Classes and Department of
Revenue Use Codes

Statistics of Arizona
Counties assessment rolls
and their tax collection
experience

List of Arizona failed

financial institutions under
FDIC receivership/
conservatorship

Sample forms and relevant

IRS publications

To benefit from this singular

resource, fill out and print the form
on the following page and mail it
with your check or money order to:
Capital West Publishing
5515 North Seventh Street
PMB 5-159P
Phoenix, AZ 85014.

Summary of Contents
Table of Contents
List of Appendices
List of Illustrations
Preface
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.

14.
15.
16.
17.

Introduction to Arizona Property Tax Liens

Overview of the Property Tax Lien Sale
Process Beginning to End
Risks of Arizona Property Tax Lien Investing
Background Functions of County
Government Offices
State's Authority to Assess Taxes
Preparation for Lien Sale
Pre-purchase Investigation ("Due Diligence")
Tax Lien Sale
Treasurer's Records Subsequent Taxes
Redemption Rights and Procedure
Judicial Foreclosure of the Right to Redeem
Administrative Foreclosure of the Right of
Redemption
Taking Care of Business - Measuring
Performance of Tax Lien Investments
Alternative Forms of Tax Lien Investing: For
the Time-Challenged and the
Entrepreneurial
Sale of State Tax Deeds
Conflicts in Lien Priority and Other Issues
Lien Status With Owner of Record or Other
Lien Holder in Bankruptcy
Treasurers Survey and Secondary Research
Opportunities

Appendices
Index
For the detailed table of contents, see
http://members.cox.net/manoil/contents.htm.

1999, 2002 Mark L. Manoil, All Rights Reserved

23

Arizona Property Tax Lien Primer

Arizona Property Tax Liens Order Form

Fill out this form and fax or mail to:
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Arizona Property Tax Liens - Guide to

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Profit, Protection and Prosecution, 2002
edition, by Mark Manoil
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24