Investment Opportunities in Real Estate Tax Sales

Investment Opportunities in Florida Real Estate Tax Sales

Or How to Cash in on Government Tax Sales

Every real estate owner in Florida knows the importance of the months of November and April. November is the month in which the Real Estate Tax bills for the current year are issued and become due and payable and the month of April in the following year is the last date on which the taxes can be paid without penalty. The real estate taxes are based on the value of the real estate. When property owners don’t pay these taxes, the counties have the authority to force the collection. The counties throughout Florida collect these unpaid taxes by allowing investors to pay the unpaid taxes on behalf of the property owner. Because the counties and municipalities want the taxes paid in time, the interest rate that must be paid by the property owner to the investor is high – providing an incentive for investors to pay the taxes with the expectation to receive a high return on his or her investment. This investment opportunity which provides a safe and high yield investment, is relatively unknown by foreign investors. Compared to the low yield interest rates at local banks, it is possible to generate 18% to 60% per annum simple interest from the date of sale depending upon the date of redemption.

The basic maximum annual interest rate of return for Florida certificates is 18% per annum. But Florida Statutes Annotated (FS) § 197.472(2) provides a scenario under which it is possible, that if a certificate is redeemed after one month in Florida, the annualized interest rate return is 60%!

However, the typical actual yield that a tax certificate investor will receive on a particular tax certificate may be less than the maximum potential yield allowed by statute. For example, the actual yield an investor will receive on a particular certificate will be determined by the "tax certificate" tax sales process itself. In Florida, if two or more bidders wish to buy a certificate being offered for sale at the annual tax certificate sale, those bidders will compete by bidding down the interest rate they are willing to take on the certificate until all but one bidder remains. In other words, each Florida tax lien certificate is offered “for sale” at an interest rate of 18% per annum. If two or more investors are interested in acquiring a particular certificate, they compete by bidding down the interest rate. Sixteen, fifteen, fourteen, thirteen, etc., until there is only one investor left – and that investor gets the certificate at the reduced interest rate.

Florida § 197.432(5) provides:

“Each certificate shall be struck off to the person who will pay the taxes, interest, costs, and charges and will demand the lowest rate of interest, not in excess of the maximum rate of interest allowed by this chapter. The tax collector shall accept bids in even increments and in fractional interest rate bids of one-quarter of 1 percent only.”

Despite this bidding process an investor will be able to obtain interest rates that are higher than the interest rates received from banks.

What about security? Each tax lien is secured by the particular property against which the delinquent property taxes are due. The property owner must then pay off the amount paid for the tax lien with interest (this is known as “redeeming” the certificate) or risk being “foreclosed” upon.

If the certificate isn’t redeemed before the expiration of the redemption period the statute provides:

“The holder of any tax certificate, other than the county, at any time after 2 years have elapsed since April 1 of the year of issuance of the tax certificate and before the expiration of 7 years from the date of issuance, may file the certificate and an application for a tax deed with the tax collector of the county where the lands described in the certificate are located. The application may be made on the entire parcel of property or part thereof, which is capable of being readily separated from the whole.” FS § 197.502(1).

In Florida, if the certificate is not redeemed, then an actual public oral bid foreclosure sale is held. Since certificates are secured by the local government real property tax lien and since that lien is a priority lien (i.e., senior to most all other liens), that tax lien will usually be a first lien. Further the amount of annual real property taxes assessed against any given property, coupled with any penalties and fees, is almost always a very small fraction of the fair market value of that property. Consequently, the amount of delinquent real property taxes and other penalties and fees including any foreclosure costs incurred foreclosing out that right of redemption, is generally a fraction of the property’s current fair market value. As a result, at the time of foreclosure (when it really counts), tax lien certificates can have (and generally do have) extraordinarily low loan-to-value ratios.

An investment really worth to consider. But the investment opportunity does not end at the redemption of the tax certificate.

If the tax certificate is not redeemed a second opportunity is created for the investor to cash in even more on his original investment. The investor may want to consider to also participate at the public auction of this property or any other property that is offered at the foreclosure. He may possibly be able to buy the property for the delinquent real property taxes or any other property for just a few pennies on the dollar.

This article is intended for general information purposes only and shall not be considered individual legal advise. Please consult your own attorney for your specific situation.

Thomas Baur is senior partner in the law firm of Baur & Klein P.A. He specializes in the representation of offshore clients and international businesses and practices in the areas of real estate, commercial and immigration law.

Miami: É: 305-377-3561; Naples: By appointment only; Fax:305-371-4380. E-mail: tbaur@worldwidelaw.com

Internet: www.worldwidelaw.com