VADAR Systems presentation at the National Tax Lien Association (NTLA) annual show 2015. How do you calculate your tax lien investment returns? Do you factor irregular payment periods? Do you calculate all state regulations and business rules? Learn more here!
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How Do You Calculate Success?
1. Tax Lien Mathematics
How Do You Calculate Success?
VADAR Systems
Rob Natale, COO
Jed Reitler, VP Sales
Feb 27, 2015
theNTLA.com | vadarsystems.com 1
#NTLAANNUAL15
WI-FI Password: NTLA213
2. Lien Math Principles
1. Foundation
Collecting Metrics
2. Framing
Factoring State Regulations
3. Development
Systemize Calculations and Processes
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3. Yield Calculations
Business Rules Factored Into Algorithms
• Interest and Accrual
• Penalties and Fees
• Premiums
• Redemption Periods
Each State is
Its Own Market
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4. vadarsystems.com 4
Continued from NTLA 2014
CO Investment Strategy
• Suggested “Slow Play”
• Accruing interest needs
time to offset costs of lost
premiums
NJ Investment Strategy
• Suggested “Quick Play”
• Longer redemption periods
decrease the return offsets of
the fixed penalties
Based on analysis of anonymous sales data from LienSource, SRI, and TSR
5. Market Factors
• What is the Bid System?
• What are the Interest Rates?
• What is the Redemption Term?
• What is the Accrual Term?
• Do Penalties Exist?
• Are Premiums Allowed? Recoverable?
• What are the Rules for Subsequents?
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6. State Sampling
theNTLA.com | vadarsystems.com 6
CO FL IN NJ
Bid System Premium Bid Bid Down Premium Bid Bid Down w/
Premium
Interest Rate Fed disc. + 9 pts 18% 18%
Redemption Term 36 months 24 months 12 months 24 months
Accrual Term Monthly Monthly Every 6 Months Daily
Penalty 5% Minimum 10% then 15% Fixed
Premium Allowed Yes No Yes Yes
Premium
Recoverable
No No Yes Yes
Premium Interest No No 10% No
Pay Subsequents Yes No Yes Yes
Subsequent Interest Fed disc. + 9 pts N/A 8% - 18%
Fees • Fed disc + 9 • Property Search
• Tax Deed App
• Property Search
• Recording
• Tax Sale
• Property Search
• Recording
• Penalty 2%-6%
7. Calculation Factors
• Bid-Down and Overbid
• Cash Flow and NPV
• Interest Rate
• LTV, IRR, xIRR
• Penalties & Fees
• Premiums
• Redemption Period
• Subsequents
• State-Specific Process
• Operating Expense
• Opportunity Cost
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Real World Complexity
8. Are You Making Money?
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Receipt – Purchase Price
Purchase Price
9. Time Value of Money
For Cash Flows with Fixed Time Intervals
For Cash Flows with Variable Intervals
Reflects the Real World of Lien Portfolios
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Today 1 Year 2 Years 3 Years
Value
$1,000 Over Time
Agenda
NOT a boring list of 29 states to list all calculations
3 Principles of Lien Mathematics
State Market Factors and State Sampling
Revenue is Wonderful, but Cash Flow is King (xIRR)
Optimizing Your Business Intelligence
Data and Metrics: redemption AND payment … 1st dollar AND final dollar
State Regulations: factoring the nuances of premiums, penalties, accruals, subsequents, etc.
Systemization: consistent, repeatable, efficient methodologies and processes
Interest – Fixed vs. Variable (Bid Down)
Accrual – Monthly vs. Per Diem
Penalties & Fees – Recoverable or Non-Recoverable
Premiums – Recoverable or Non-Recoverable
How do you currently account for ______? [Fee mix of recoverable and non-recoverable, different accrual rates, etc.]
Review of sale lists and assumption of redeeming full portfolios @ 1 Year, 2 Years, or Partial every 6 months for 2 Years
Frank Natale, panelist and speaker
Quickly demonstrate factors and their impact on Yield calculations for every variable
Set up the State Sampling of these factors and calculations
29 States – each with different calculations
Sampling –6 states to represent and encompass all variables and rules in the industry
CO –Lost premiums need time for interest to accrue
FL – 0.25% interest is very common …
NJ –Majority with 0% interest … 1-time flat rate penalties change the game
Framing the Valuation House considers nuances of State Lien regulations
Doing more than a simple calculation of (all the money out – all the money in)
Asset Performance – Are You Making Money?
Example: $100 lien and $112 redemption = 12% ROI
Time Value of Money – Factoring in the Time Element and Cash Flow is crucial
How close are your time-factored returns to state Interest Rates?
[Choose an image to convey TVM, variable payment, free cash flow] Lack of bias
If your Return/Yield doesn’t factor for irregular payment intervals, your valuation may not be accurate.
xIRR – annualized yield for cash flows occurring with irregular time periods; iterative technique of cycling through changing rates
Walk through the BIG differences between IRR and xIRR
The reality is Tax Lien Investments have IRREGULAR time periods of cash flow.
If you’re not accounting for more than simple annualized IRR, you’re imprecise and less than credible.
A Year Before Today and Today
Instant Return analysis
How Would Your Investment Strategy Change If Your Business Intelligence:
Could Calculate xIRR from Any Time Past, Present, or Even into the Future
Spent Less Time Tracking Liens and More Time Perfecting Your Investment Strategy
Factored In State-Specific Processes In Addition to Business Rules
Factored Your Redemption Payment Float by County or Parcel Type
Do you measure your costs of servicing?
Man-hours of entry, error checking, and analysis
Man-hours of notices and other paperwork
Opportunity cost of servicing vs. due diligence
Thank you for your time, and we look forward to answering any questions you may have.