Sweet Redemption

Last year so many Dade residents forgot or refused or otherwise failed to pay their property taxes that the sum total of delinquency -- $73 million -- outweighed the entire property tax revenue of most North Florida counties. This year looks like a repeat.

Instead of twiddling their thumbs and hoping people pony up, Dade tax collectors place liens on the late-payers' properties, then auction the debt to private investors in the form of tax lien certificates. The annual free-for-all is going on now in a back room nine floors above Flagler Street downtown.

E.W. "Bud" Brodie, a mild-mannered accountant with snow-white hair, has helped administer the tax auction since 1946, missing only a few. "We handled it about the same way back then, but there wasn't any air conditioning," Brodie recalls. "Some years we would hold it outside on the courthouse steps."

Brodie and the auctioneer sitting erectly behind a desk on a raised platform are the only people in the room wearing neckties. The 40-odd investors -- retirees from points north, a few young couples, representatives of big out-of-town banks and insurance companies -- dress in shorts and sneakers or polo shirts and polished wingtips. Their laps are full of scuffed briefcases and fat, bound copies of green-and-white-striped computer printouts. Each bidder has paid a $2000 deposit for the privilege of participating in the auction and holding a homemade placard with a number written on it. Some of the placards are just scraps of cardboard scrawled with Magic Marker, others are neat plastic rectangles stapled to long sticks and adorned with the kind of metallic press-on numerals you'd see on a rural mailbox. According to Brodie, the monthlong auction usually generates one or two minor injuries that result from someone's placard being waved too smartly.

The bidding begins at 8:30 a.m., the yelling and placard-thrusting ebbing and flowing for eight hours, Monday through Friday, as the auctioneer works through an enormous master list of thousands of properties, disposing of more and more overdue taxes.

The happy winner of each bid must immediately pay off the overdue tax on that particular property A a few hundred to thousands of dollars. As a reward, he or she will get a percentage of the overdue taxes (compounded annually) when the owner pays off. The big question is what this percentage rate will be. By state law, the bid begins at eighteen percent and drops as participants compete to see who's willing to accept the lowest return on investment.

The catch: The owner of a tax lien certificate collects only when (and if) the property owner gets around to paying off the lien, which includes a penalty that covers the bounty due the investor.

The auction is an important opportunity for Dade County to unburden itself of delinquent debt and generate millions of dollars quickly. "This time of year, the government's broke," Brodie notes. "It's the end of the fiscal year, and the county really depends on the revenue from the tax sale."

For amateur and professional profit seekers, the auction is a chance to make a modest killing -- or get killed. "There are a lot of little potholes you can fall into," warns chief tax collector Richard L. Gardner, Jr. "It's not risk-free."

Some bidders hope debtors will turn around and quickly pay their taxes (a so-called quick redemption). In that event, regardless of his winning bid, the investor who holds the tax certificate gets an automatic five percent return on his money, better than if he'd put the loot in a bank for an entire year. Of course, because the percentage penalty keeps accruing, buyers lucky enough to get a tax certificate at eighteen percent might like to drag matters out a little longer.

After two years, the holder of a tax lien certificate has the option of forcing the property owner into foreclosure. If the property is sold at a foreclosure auction, the certificate owner gets his payoff. Sometimes he winds up actually owning the delinquent property, if no one buys it. (This isn't always the good thing it appears to be. The property might turn out to be a condemned crack house or a tiny unsellable lot next to a freeway. Worse, it could be an abandoned gas station contaminated by chemical spills, whereupon the smug investor suddenly finds himself fined thousands of dollars by federal regulatory agencies.)

Sometimes a taxpayer avoids paying his taxes for seven years, at which point the tax lien certificate expires and its owner loses every penny of his investment.

"The smart investor does a lot of research," says Gardner. Bidders might investigate the financial history of a property (mortgages, deeds, liens, past certificates bought and redeemed) as well as its physical and social condition (size, age, value of surrounding structures, blight). But even the research can be risky. "One of our investors got mugged researching a property," Brodie recounts. "He came back and sold all his certificates to someone else and said he'd had enough, he was getting out."

Investors research properties to make an educated guess about when and if the owner might pay his taxes. Increasingly the research is done by computers at giant banks, not by individual entrepreneurs shedding shoe leather. Still, one ruddy duffer with thick bifocals says he's sticking with the old-fashioned way: "I remember back in Chicago the first time I went to the racetrack. All these people got off the elevated train and went in this little room filled with toteboards and numbers and betting windows. They never even saw a horse! That's exactly what's going on here."

In recent times, big institutional investors such as Palm Beach-based Capital Asset Research Corp. discovered the tax auction and showed up in force. Their presence is the cause of some grumbling.

"In the Seventies and early Eighties, it was almost strictly individual investors and small investment groups," says Gardner, a calm, friendly man who doesn't personally attend the tax auction raging five floors beneath his office. "Now it's big banks. They make no bones about it A they're buying for volume, not quality."

By using sophisticated statistical and demographic models of probability and buying tax certificates in enormous volume to spread out risk, the banks have forced bidding lower and lower -- as low as one-quarter of one percent -- and squeezed out many small investors. The remaining nickel-and-dimers say they're mystified at how such lowball bids can result in profit. So is Gardner. "It's very strange," he concurs. "My fellow tax collectors around the state have talked about this. Six percent doesn't surprise us a lot, but when bidding gets below five it starts raising eyebrows. One theory is that they're actually trying to lose money for some taxation purpose."

Grumpy old-timers speculate that big investors are generating quick redemptions by calling or writing delinquent taxpayers and scaring them into paying their taxes. That way the investor gets the fast, guaranteed five percent bounty. Another possibility is that banks make money on the investment during a little-known window of opportunity A the time after a certificate holder moves to foreclose on the delinquent taxpayer but before the foreclosure actually takes place. This period can drag on for months, and in the meantime the rate of return on the tax lien certificate automatically jumps to a juicy eighteen percent.

But paradoxically, the big players often shy away from entire neighborhoods, allowing small investors a chance. Last Wednesday the bidding on Fontainebleau, a Hispanic enclave near Florida International University in West Dade, was fast and furious. And the day before, institutional investors seemed queasy about Brownsville, a largely black neighborhood northeast of Miami International Airport. Investors express their mistrust of certain properties by refusing to bid on them. Those who do bid stand a better chance of buying certificates at a high rate of return.

Once in a while, good deals arise through pure luck or superhuman alertness. On Wednesday, while the polished professionals scribbled notes and the exhausted amateurs daydreamed of riches, a diminutive gent sporting a guayabera and a hearing aid split the stale air with his placard, nearly jumping out of his chair. In a fraction of a second the auctioneer awarded him an eighteen-percenter and moved on. Whoever owns the property at 2029 SW 103rd Ct. just gained a new and invisible friend.

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