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I attended my first tax deed auction yesterday at the local courthouse. There were about 25 people in the room and 3 properties out of the initial 10 had made it to the auction without being redeemed beforehand. When the clerk read out the names of the tax deed applicants, I became curious about the tax certificate holders themselves.

This morning, I've looked at the results for my Florida county from last year's tax certificate auction. The summary has raised some questions:

Cert Bid % Total Value of all Certs sold at Given %
18.00% $11,281.67
17.75% $177.96
16.75% $908.06
15.75% $360.16
14.75% $455.51
14.00% $11,420.53
13.75% $2,172.86
12.75% $1,328.44
12.00% $23.96
11.75% $1,716.43
11.50% $23,985.52
11.25% $2,165.20
10.75% $1,327.78
9.75% $623.11
9.50% $868.10
9.00% $2,054.42
8.75% $5,293.09
8.50% $37,204.38
8.00% $18,783.72
7.75% $4,310.05
7.50% $3,111.72
7.25% $1,857.20
7.00% $2,611.25
6.75% $202.23
6.50% $89.26
5.75% $1,893.97
4.75% $4,962.48
4.50% $19,325.74
0.25% $5,683,848.79
0.00% $8,455.60
Grand Total $5,852,819.19

That's the total of current certificates that have not been removed but includes ones already redeemed (subtract $500k from that total to account for redemptions to date). This represents just over 5,000 properties. The median value of the certificate is $574 and the average value is $1,064. There are 928 unique bid winners represented in the above totals.

I have a number of questions.

1 - Why on earth is there so much interest in bidding 0.25% on the vast majority of tax certificates? What is the attraction of investing $5.6M at 0.25% per annum on securities with first lien on real estate? There must be some hidden benefit to being a tax certificate holder other than the interest earned on your investment -- what is it?

2 - Looking at the names of the winning bidders in the 0.25% category, I see some related companies: "Gamma Tax 1, LLC," ..., "Gamma Tax 10, LLC," Gamma Tax 47, LLC," ... "Kappa Tax X, LLC,", "Sigma Tax X, LLC." Someone has incorporated X number of LLC entities to increase their chances of winning the lottery process when there are 2+ winning bidders at the same interest rate. Holy smokes, batman, someone wants these things so badly that they are willing to handle the overhead of forming 100+ LLC entities to increase the odds. Why?

3 - Other winning bidder names are of the form "XXX as agent for Equifunding Inc." Equifunding Inc had 37 agents in this particular sale, with names like "Van Buren Fin Corp" and "National Realty Acceptance Company, LC". What is this about? Is Equifunding employing these other investment companies to buy tax deeds around the state or country for them? Possibly related were the "Wachovia as TTEE for XXX" -- there were a lot of unique entities for which Wachovia was the trustee. What is that about?

4 - With so much interest at the 0.25% rate, why on earth would there be any tax deeds left at the rates above that? I don't see any real correlation between the interest rate and assessed value of the underlying real estate or number of prior certificates (many of the 0.25% properties had a high number of prior certificates issued). To win so many certificates, I presume a representative from these entities are issuing blanket bids on everything, so why would these few properties be left at higher rates?

Finally, there are two reasons listed that tax certificates could be "removed" from auction: "Paid" and "Struck to County." Under what circumstances would the county choose the latter and why? What benefit does the county have for owning tax certificates?

Travis
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1 - Why on earth is there so much interest in bidding 0.25% on the vast majority of tax certificates? What is the attraction of investing $5.6M at 0.25% per annum on securities with first lien on real estate? There must be some hidden benefit to being a tax certificate holder other than the interest earned on your investment -- what is it?


Because they expect the delinquent taxpayer to default, and then they can seize the property at way below market value.

they are willing to handle the overhead of forming 100+ LLC entities to increase the odds. Why?

Because it's profitable.

With so much interest at the 0.25% rate, why on earth would there be any tax deeds left at the rates above that?

Assessed value is meaningless. The only thing that matters is the difference between (total amount paid) and (market value of the property).

Under what circumstances would the county choose the latter and why?

If the county wants to acquire the specific property in question.
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Because they expect the delinquent taxpayer to default, and then they can seize the property at way below market value.

Caution: This is not a sale of real property. It is a lien for the amount of delinquent taxes plus interest. The holder of a tax certificate may not directly, through an agent, or otherwise initiate contact with the owner of property upon which he or she holds a tax certificate to encourage or demand payment until 2 years have elapsed since April 1 of the year of issuance of the tax certificate. F.S. 197.432(14). Contact or behavior of a certificate holder deemed unfair or deceptive may result in criminal prosecution. <underlined by county tax collector>A tax deed application is the proper and legal method to compel payment.</end underlining>

That's a quote from tax collector's office. My understanding is that after holding the certificate for two years, you may file an application with the tax collector's office to initiate sale of the property at a tax deed sale. When sold, the certificate holder is reimbursed for back taxes, interest, and fees paid to initiate the tax deed sale (clerk's fees, title search, advertising fee, etc.). The balance of the "overbid" is then held by the county until the original delinquent owner is found, then turned over to the delinquent owner. The tax deed buyer now owns the property. The tax certificate holder only stands to earn the original interest bid and has no other upside in the case of a "default." The rates being bid seem to indicate there is some other legal avenue for upside beyond the bid interest rate. What is it?

My understanding is that at no time can the tax certificate holder legally contact the delinquent owner.

Because it's profitable.

Show me the money, because it's not immediately obvious to me where it is.

Travis

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My other comment is that I'd be surprised these entities would want to seize some of this land at any price -- it's worthless. It would cost more in process to seize a $400 sliver of land with $25 in back taxes, like the one my HOA owns in a "dead spot" at the corner of our development than the property is worth. A simple screen on the tax certificates would help eliminate a lot of these worthless plots, yet these entities didn't screen them out when bidding en masse.

Travis
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I've been digging and I did find some answers.

I called the county tax deed clerk, and she told me that she can not remember a time in the last 18 months that a property subject to sale by the tax certificate applicant actually went to the certificate holder; she said the auctions have been well-attended and someone always purchases the subject property rather than letting it fall back to the certificate holder.

I called the county tax collector's office, and this clerk was a fountain of information. She said people are willing to bid 0.25% because Florida Statute mandates a 5% minimum fee is paid to the certificate holder if the interest rate bid is below 5%. She said that last year was the first time the county had conducted the sale online, and it was like the wild west gold rush had opened up. They'd never seen a certificate sale like it before. She said it is great for property owners, because the rates they had to pay on delinquent taxes are 5% rather than more usury 18%. She said they were aware of the issue of multiple bidding entities representing the same parent entity, but they had no plans to put a policy in place to make changes.

I then went and looked at some other Florida counties. Sarasota County is using the same system, and they publish some interesting statistics:

http://taxcollector.co.sarasota.fl.us/PROPERTYTAX_PAGES/PT_TaxSale.htm

Statistics from 2005 Tax Sale:
5,455 Certificates Sold ($ 9,292,913)
5,446 Certificates Sold to Individuals/Investors ($ 9,292,625)
9 Certificates struck to Sarasota County ($ 288)
1,022 registered bidders won certificates
Average interest rate: .582%

Apparently, there are truckloads of money pursuing Florida tax certificates. If the owner redeems in the first year, your return is greater than 5%. Redemption rates appear to be around 10% the first year. Otherwise, you have to pay additional fees to push the certificate to a tax deed sale, then you recover your fees and 5% fee.

This seems like a lot of work and risk to me compared to buying a T-bill.

Travis
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