A no-interest refund as the sole remedy for a voided tax lien sale reprices the risk, and it belongs in position sizing

Question

Terms of sale language that limits a certificate holder's sole remedy, if a sale is later set aside or a certificate voided for a defect in the county's own process, to a refund of the amount paid with no interest, no premium, and no costs, is common across county tax lien sales. What that language actually means in a given state depends on that state's statute, so anyone relying on it should have counsel in that jurisdiction review it directly. The pricing consequence is worth working through regardless of jurisdiction. Capital gets deployed, sits for some unknown number of months, and can come back at zero gain. That is not a credit loss in the usual sense, it is a duration loss with a zero coupon attached. If, say, 2 percent of a portfolio's certificates get voided and the average dead time before refund runs 16 months, the realized portfolio yield takes a real hit that never shows up in a headline weighted bid rate. Counties vary widely in how often this happens, largely tied to how carefully a county handles notice and mailing procedures, and a good clerk's office will often share the rate of post-sale cancellations if asked directly. That variability argues for treating procedural quality as a position limit rather than folding it into the bid itself: capping exposure to any county without at least two seasons of observed sale integrity is a more disciplined approach than trying to price the risk into each individual bid.

hannah_west29 · Answer

Put numbers on it and it stops being an abstract worry. Take a two million dollar tax lien book at a nine percent average bid, with a sixteen month average dead time on voided certificates and refunds paid at par. At one percent voided, the lost coupon on twenty thousand dollars over sixteen months runs about twenty four hundred dollars, a rounding error against total gross interest on the book. At four percent voided, that's eighty thousand dollars sitting idle, roughly ninety six hundred dollars forgone, plus staff time chasing refund checks from a clerk's office that hasn't proven itself organized. Call the administrative cost a hundred fifty dollars per certificate, and across thirty two certificates that's another forty eight hundred dollars. The all in drag moves from about 0.12 percent to about 0.72 percent of the book, which is most of the difference between two counties bidding within a point of each other. So this belongs in the bid, and a position limit is doing a different job entirely. The limit protects against a correlated event, a whole sale year getting unwound, which is the scenario that actually hurts. The bid adjustment prices the ordinary trickle. Both are needed, and they aren't substitutes for each other. A reliable public source on cancellation counts is hard to come by. Clerks tend to shrug when asked directly. If a public record of post-sale cancellations exists, pulling the actual data beats estimating from a sample of conversations.

A no-interest refund as the sole remedy for a voided tax lien sale reprices the risk, and it belongs in position sizing

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