Tax Lien MathematicsHow Do You Calculate Success?

VADAR SystemsRob Natale, COO

Jed Reitler, VP Sales

Feb 27, 2015

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#NTLAANNUAL15

WI-FI Password: NTLA213

Lien Math Principles

1. FoundationCollecting Metrics

2. FramingFactoring State Regulations

3. DevelopmentSystemize Calculations and Processes

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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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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

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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State Sampling

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CO FL IN NJBid 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%

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

Are You Making Money?

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Receipt – Purchase Price

Purchase Price

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

Val

ue

$1,000 Over Time

IRR and xIRR in Excel

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Date Cash Date Cash Date Cash Date Cash

1-Jan $ (100.00) 1-Jan $ (100.00) 1-Jan $ (100.00) 1-Jan $ (100.00)

2-Jan $ 101.00 31-Jan $ 101.00 31-Jan $ 101.00 1-Jun $ 105.14

IRR 1.00% IRR 1.00% IRR 1.00% IRR 5.14%

xIRR 3678.34% xIRR 12.87% xIRR 12.87% xIRR 12.88%

Date Cash Date Cash Date Cash Date Cash

01/01/13 $ (2,800.00) 01/01/13 $ (2,800.00) 01/01/13 $ (2,800.00) 01/01/13 $ (2,800.00)

02/01/13 $ 35.00 02/01/13 $ 35.00 02/01/13 $ (150.00) 02/01/13 $ (150.00)

06/30/13 $ 500.00 06/30/13 $ 500.00 06/30/13 $ 50.00 06/30/13 $ 50.00

01/31/14 $ 1,200.00 01/31/14 $ 1,200.00 01/31/14 $ 750.00 01/31/14 $ 750.00

12/01/14 $ 750.00 12/01/14 $ 750.00 12/01/14 $ 750.00 12/01/14 $ 750.00

01/31/15 $ 800.00 02/27/15 $ 800.00 01/31/15 $ 1,750.00 2/27/15 $ 1,750.00

IRR 4.65% IRR 4.65% IRR 2.70% IRR 2.70%

xIRR 12.13% xIRR 11.98% xIRR 6.49% xIRR 6.35%

1-Year Return

The Same Lien Feb 27, 2014 and Today

6.72% Rate of Return

2.83% Rate of Return

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Business Intelligence

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“When you buy your first lien, you enter the lien servicing business.”

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Learn More

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sales@vadarsystems.com

(978) 461-5855

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