Fractional bidding at a tax sale auction

by Chris on February 4, 2012

Generally when we think of an auction we think of selling to the highest bidder. But a tax sale auction turns this notion on its head. The price of the property and the amount the purchaser pays is always going to remain the same. The concept of “bidding” arises when competing purchasers bid down their percentage of ownership. It is referred to in the Louisiana Constitution where it states the collector shall “sell immediately the least quantity of property which any bidder will buy for the amount of the taxes.”

This concept is sometimes referred to as “fractional bidding.” It is similar to co-ownership or what lawyers call “ownership in division.” When someone bids down their property interest they are conceding that they will take less ownership interest. The first person may bid 100%, but another bidder may be willing to take 99%. In some tax sales the purchasers will immediately jump to 1% to end the bid promptly. Other horror stories of fractional bidding include competing for 0.00001% ownership, which is outright ridiculous. When a tax purchaser bids anything less than 100% they are essentially becoming co-owners with the tax debtors.

Fractional ownership is not ideal for those looking to acquire ownership of the property. If a purchaser wants to obtain merchantable title, it must eventually withstand the scrutiny of an attorney who must decide whether or not to issue a lender or owner title policy. It seems hardly feasible that a bank, lender, or buyer will want anything less than 100% ownership. An alternative option may be to file a partition suit, but attorney’s fees, court costs, and the sheriff’s commission may very well exceed the value of your 99%-1% interest.

Ultimately, there is more than enough property being sold at tax sale for every bidder. Although it is an accepted practice, fractional bidding is not an ideal strategy from an investment standpoint. Deeds of less than 100% ownership indicate uncertainty, reduced bargaining power, and higher risk. With all the other variable risks to your tax sale investment this is one that you can actually control. Often times other bidders are courteous and will refrain from fractional bidding because they are thinking three and four years ahead, and as a smart investor you should do so also.

 

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