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Wyatt Yates, vice president at Farrell-Roeh, said his firm has purchased more than 20,000 tax liens over the past seven years a $75 million investment. (Cyrus McCrimmon, The Denver Post)

Local hedge funds and equity investment firms some run by well known stock-pickers are buying delinquent property-tax bills at county auctions as a means of landing stable returns in a tight market.

The trend has been happening nationally for about five years but is just now settling into Colorado. Oft-overlooked property-tax liens are becoming a bigger part of portfolios managed by large firms, rather than just investments for small-time investors and retirees.

As a result, competition to purchase the liens has gotten fierce in Colorado. Profit margins the difference between what a buyer pays to acquire the lien and the interest they can collect on it from the property owner are at the lowest levels in at least a dozen years, according to data reviewed by The Denver Post.

Interest rates are down, and funds are looking for yields on secure investments, and the tax lien is like the security of bonds, said Wyatt Yates, vice president of investment firm Farrell-Roeh Group in Littleton, which years ago saw value in tax-lien investing.

As more institutional buyers come into the market, the competition is driving them into other states, and they’re just now coming to Colorado, said Yates, who runs the firm’s tax-lien investment arm.

Investment funds have been criticized for profiteering on the backs of the distressed through their tax-lien purchases. In theory, if the funds were to take possession of all their properties under lien, they would be one of the area’s largest owners of residential and commercial properties.

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But few properties in Colorado are actually deeded over because of nonpayment of a lien, and large investors make no more money than others who buy them.

The Post reviewed auction data in Denver, Arapahoe and Adams counties, and also reviewed historical data covering several years for Denver, the most readily available.

The biggest buyer the past two years is a subsidiary of Denver-based Arrowpoint Asset Management, a $1.7 billion hedge fund owned by David Corkins and two other former fund managers who worked with him at Janus.

In the past two years, its AP PTL bought up 886 Denver property tax liens nearly a quarter of all those for sale, records show.

And in 2012, AP PTL purchased 789 tax liens totaling $2.14 million in Denver, Arapahoe and Adams counties, auction records show, the most of any other buyer for those areas combined.

Corkins who managed the $12 billion Janus Fund and his partners, Karen Reidy and Minyoung Sohn, did not return calls for this story.

The buyer with the next highest total and a new name to Colorado tax-lien auctions is an unidentified New York-based investment company operating under the name Cheswold (TL), records show. Its purchases are managed by American Tax Funding in Florida, one of the nation’s biggest tax-lien investment companies.

Efforts to reach Cheswold and ATF were unsuccessful.

Yields on tax liens aren’t as high as typically expected from a hedge fund’s investments, but they carry less risk.

On a risk-adjusted basis, tax-lien portfolios provide higher yields than other fixed-asset alternatives, said Brad Westover, executive director of the National Tax Lien Association. It’s a portfolio that if purchased correctly will generally have higher returns that are better than CDs or other vehicles.

Delinquent property tax bills are auctioned each year in 28 states, where buyers pay the bill in return for a fee, usually a percentage set by law, that the property owner is required to pay. Although rare, an investor can foreclose if the bill and fee remain unpaid for a certain period of time three years in Colorado.

And those foreclosures are free-and-clear of any mortgage or bank lien that might be on the property.

Governments that are owed the taxes don’t lose because buyers pay the whole bill shortly after the auction, which usually occurs each fall.

Tax liens are the perfect hedge, with a predictable interest rate that’s not at all impacted by the mechanizations of Wall Street, said Howard Liggett, president of Distressed Real Estate Consulting Services, a Florida firm that services tax lien purchases for hedge funds.

It’s a performance curve that’s very predictable, and single-family residence liens have a high redemption rate of about 75 percent in the first two years, he said.

With a three-year redemption period the time given to property owners to either pay the bill and interest or lose it to a tax-lien foreclosure an investor doesn’t need to sit long to get their money, Liggett said.

In Colorado, buyers can claim ownership of a property from three years and up to 15 years after buying the lien if the property owner has not paid it back and are entitled to interest for each year. In Denver, there have been just 56 deeds given on a tax lien, called a treasurer’s deed, in the past dozen years, available records show.

The objective, Liggett said, typically isn’t to acquire the property a rarity in Colorado but to earn the interest.

There’s really no down side, he said. And the up side for communities is they get their tax dollars to fund infrastructure demands and basic services that are even for those who didn’t pay.

Yates at Farrell-Roeh said his firm has purchased more than 20,000 tax liens over the past seven years a $75 million investment and has acquired fewer than 100 properties.

Denver property owners since 2006 on average have redeemed a tax lien within nine months of the auction. A spokeswoman at Wells Fargo in Denver said the bank is likely to pay off a lienholder in order to protect its interest in the property from being lost to a treasurer’s deed.

Margins are definitely shrinking because there’s more money chasing not enough product, Westover said. With a lot more folks interested in investing in this space, more than ever before, competition is heated.

That’s not to say some investors aren’t looking for a property deal but they compete with funds seeking only returns.

They’re chasing yields, and that’s a percentage that’s way better than they’ll get elsewhere, said real estate attorney Jerrold Spaeth, who last year co-founded MDT Investments for tax-lien buying.

MDT last year purchased 72 tax liens in Denver, records show. This year it was only 12.

We were really surprised, Spaeth said, not relenting to a challenge. There’s only so much maneuvering the monsters can do, and us little guys have to outsmart them.

Denver tax lien sales

Though the number of property tax liens sold at auction has dropped steadily the past four years, the amount buyers are willing to pay Denver for those liens, known as the premium, has gone up. Here’s a look at Denver sales since 2008.

How to invest in tax liens

Buying a delinquent property-tax lien isn’t tough. Buying the right one is.

It’s not very difficult to go into this on a small scale, said Wyatt Yates, vice president at Farrell-Roeh Group in Littleton.

If you’re retired and in your spare time, it’s not too bad, he said. But like anything, you have to do your homework or you could get caught losing your money. A lot of people try it and aren’t around in a couple years.

The devil, as it’s said, is in the details and knowing how Colorado’s tax-lien-auction process works.

First, don’t do it with the expectation to get a property at fire-sale prices. It hardly ever happens, and when it does, the properties are often junk.

Several Colorado counties contract with RealAuction.com. a Florida company, to run the lien sale. Bidders can register and must have a funded account to pay for any winning bids.

Other county treasurers run the sales at their offices, much like a regular auction.

Bidders offer a dollar amount, called a premium, that they’re willing to pay for the right to collect a lien. If successful, they will pay the county taxing body the value of the lien as well as the bid amount.

By law, winning bidders can collect a statutory annual interest rate this year it was 10 percent.

In Denver, the average time for a property owner to redeem a tax bill is about nine months. That means buyers can likely bid as much as eight months of interest and still make a profit that first year.

Of course, if a property owner pays the lien just after the sale, as often happens, the bidder loses money.

Winning bidders can apply for a treasurer’s deed basically foreclosing on the property if a lien remains unpaid after three years. Lienholders can foreclose any time up to 15 years after the original auction and still collect interest on the lien.