With increasing property tax delinquencies, many local governments have turned to tax-lien auctions to collect the money and avoid budget shortfalls. It’s not much of a business story until you look at who’s buying the liens – which is what Megan O’Matz and John Maines of the Sun Sentinel did.
Historically, individual investors bought the liens to save for things like retirement, college educations and vacations, Megan says. But now, banks and hedge funds have dominated Florida’s market, which is worth about $1 billion, she says. The reason: Florida tax liens can generate annual returns of as much as 18 percent, Megan and John write.
Online auctions have helped larger companies outbid competitors in tie bids, Megan says. They create “tens and hundreds of thousands of shell companies to bid on their behalf. That way, one hedge fund can have, for example, 450,000 chances of being declared the winner in the tie vote,” she says. “An individual investor, by comparison, essentially has only one shot.”
If you’re interested in pursuing this story, start by asking your local officials how they conduct tax lien sales, Megan says. In-person auctions can decrease the number of bidders. However, a group of bidders illegally can decide upfront which liens they want to avoid the competition, she says. “Look for whether there is competition in bidding and whether the liens are sold repeatedly at the highest interest rate,” she says.
If your area does online auctions, ask if “subaccounts” or proxy bidders are permitted, which could indicate whether shell companies are bidding, Megan says. She says they found one bidder had set up 20,795 affiliated companies, which had names such as Polka Dot Cupcakes, Cricket Trapper, and Ms. for Ms. Onetwothree. “Others were named after superheroes,” she says.
You can trace the companies by using state incorporation records and Securities and Exchange Commission filings. For instance, they linked one bidder, which had more than 450,000 affiliates, to US Bank, Megan says.
Megan says most homeowners don’t realize their debts have been sold to private companies. “They simply thought they were paying interest and penalties to the county, not to some odd company named Toad LLC or Pork Chop Sandwiches!” she says.