Sole remedy for an invalid sale is a refund without interest. That reprices the county.

Question

Pulled the terms of sale for a county I've been buying in and read the paragraph everybody scrolls past. If the sale is later set aside, or the certificate is voided for a defect in the county's own process, the purchaser's sole remedy is a refund of the amount paid, no interest, no premium, no costs. Language like this is common in county sale terms, and what a court actually does with it depends on the state's statute, so anyone relying on it should have a lawyer in that state read it.

What interests me is the pricing consequence. Capital gets deployed, sits for some unknown number of months, comes back at zero. That isn't a credit loss, it's a duration loss with a zero coupon. If 2% of my certificates get voided and the average dead time is 16 months, my portfolio yield takes a real haircut that never shows up in anyone's weighted bid rate.

Counties differ enormously in how often this happens. Some are careful about notice and mailing and their sales stand. Some are understaffed and you can see the pattern in the number of certificates cancelled after the fact, which a good clerk will tell you if you ask.

So does procedural quality belong in the bid, or does it belong in a position limit? I've been treating it as a limit, no more than 8% of the book in any county I haven't watched for two seasons. Starting to think that's the lazy version.

hannah_west29 · Answer

Put numbers on it and it stops being an abstract worry. Take a $2M book at a 9% average bid, 16 month average dead time on voided certificates, refunds at par.

At 1% voided you lose the coupon on $20k for 16 months, about $2,400. Rounding error on $180k of gross interest.

At 4% voided it's $80k idle, roughly $9,600 forgone, and now you also have staff time chasing refund checks from a clerk's office that already proved it isn't organized. Call the admin cost $150 a certificate and on 32 certificates that's another $4,800. So the all-in drag goes from 0.12% to about 0.72% of book. That's most of the difference between two counties bidding within a point of each other.

So I'd say it belongs in the bid, and your 8% position limit is doing a different job. The limit protects you against a correlated event, a whole sale year getting unwound, which is the one that actually hurts. The bid adjustment prices the ordinary trickle. You need both and they aren't substitutes.

@fathom what's your source on cancellation counts? I've asked two clerks and got a shrug both times. If there's a public record of post-sale cancellations I'd rather pull it than estimate.

Sole remedy for an invalid sale is a refund without interest. That reprices the county.

1 reply