For good or for ill, county and municipal governments rely on property taxes to provide services to their residents. Police and fire protection and school districts all rely on homeowners’ timely payment of property taxes in order to fund their payroll and operations.
And that’s where tax lien investing comes in.
The county is happy: They have their money to pay their cops, firefighters, trash collectors and teachers. The rest of the community is happy – they are receiving the services they are paying for via their property taxes. The kids are … well, maybe not happy, but they’re in schools funded ultimately by property tax receipts.
And the investor is happy. In essence, the lienholder holds a debt secured by the property. The homeowner has a certain amount of time to repay the debt. If the owner refuses to pay, the investor has the power to foreclose on the home to recover his investment. So an investment of just a few hundred to a few thousand dollars in delinquent property taxes has substantial downside protection: The home can be sold to recover the debt.
Indeed, this could be a lucrative entry point into real estate investing for some with very limited budgets. It’s a lot easier to pay a $1,000 tax bill for someone who forgot to mail his check last year than it is to buy an entire house. And you can do it a whole bunch of times over.
Now, normally, what happens next is the lienholder goes to the homeowner and says, “I paid the property tax for you, so the county won’t have to foreclose on your home. You have some more time now, and here’s the interest rate.” Often, the interest rate is less than the statutory rate the county would charge, so it’s still a win for the homeowner, the county and the investor.
All is hunky-dory, right?
No.
Occasionally, the lienholders hit on a property owned and occupied by an elderly resident who may be struggling with dementia, depression, or other challenges. In these cases, the resident may not be able to look out for his or her own interests in court.
Meanwhile, some of these investors have been adding additional charges on top of the interest, including thousands of dollars in lawyers’ fees and court costs, and anything else they can lard on top of the original debt.
The Washington Post ran a detailed story about the dark underbelly of this kind of predatory tax lien investing last year – and uncovered a world of abusive practices that dwarf anything even the subprime mortgage industry’s fiercest critics ever imagined.
One egregious example included an elderly Marine Corps veteran who lost his $197,000 home to a tax lien investor – over a property tax debt of $134.
This is a jackpot for the investor. In a normal world, the investor could have foreclosed, recovered his investment plus court fees, and handed the remaining proceeds over to the veteran widower so he could start over.
But because of the way the law is written in Washington D.C., the original homeowner was entitled to nothing. He got to watch movers throw his life’s accumulations on the lawn when he was evicted from the home he owned free and clear and had been living in for decades.
True, this doesn’t happen often. Most homeowners won’t give up a home worth hundreds of thousands of dollars for a few hundred or a few thousand – and they will scrape up or borrow enough money to pay off the lien and keep the home. That’s the rational thing to do.
But in the real world, the homeowner isn’t always rational. In the real world, homeowners may be sick, struggling with dementia or Alzheimer’s, undereducated or lacking in financial savvy, unable to afford legal counsel of their own, and may not understand what’s going on at all.
Washington, D.C., in particular, had few or no safeguards in place to slow or halt the foreclosure process for the elderly or to prevent such a lopsided and absurdly unjust transaction as occurred here.
Among the Post’s findings:
- Foreclosures were concentrated in D.C.’s poorest wards – among those with the least ability to mount a vigorous defense in court.
- One in three foreclosures in D.C. were for original delinquencies of less than $1000.
- District officials mistakenly sold over 1,900 tax liens even after homeowners were current on their taxes. In one case, a 64-year-old woman was erroneously charged $8.64 in interest on a debt that was paid – and plunged into an expensive two-year legal battle to save her home.
- D.C. residents have lost entire homes over tax debts as low as $44.
Meanwhile, the nations’ most predatory lenders are flocking to the District of Columbia to take advantage of the lax protections. The Post found that 40 homes were seized by companies whose representatives had been caught breaking laws in other jurisdictions, including racketeering, market rigging, and demanding fees in excess of the legal limits imposed by jurisdictions smarter than the District of Columbia. Which is to say, almost all of them.
What is to be done?
There’s no black-and-white solution. Property tax collections must have teeth in them, or property owners will simply stop paying property taxes – leaving schools, police, parks, fire departments, ambulance services, county hospitals, and a thousand less glamorous but essential city and county services underfunded. (Think that will drive down property values in a hurry?)
There’s no need to coddle people here: Landowners, as a class, are hardly a downtrodden and oppressed group. It’s not unreasonable to treat them, in the main, like adults. However, it is clear that in Washington D.C., the pendulum has swung too far against the ordinary homeowner, particularly those in working-class districts who bought their homes in blue-collar neighborhoods back when ordinary working people could afford a home within the city limits. These aren’t legally savvy people and they don’t spend a whole lot of time thinking about the finer points of tax policy.
But there are some protections and safety valves governments can put in place, consistent with the purpose of ensuring compliance with property taxes and providing sufficient compensation for investors to attract them to tax lien investing.
1. Put a cap on legal and collection fees, reflective of actual costs to file collection and foreclosure notices in the county. In the wake of the Post’s expose, D.C. officials are considering imposing a $1,500 cap on attorney’s fees in tax lien cases.
2. Rely on the interest rate, not add-on charges, to compensate investors. The interest rate should be substantially above rates available in B-rated bonds, and allowances should be made for the economics of dealing with smaller debts of just a few hundred dollars.
3. Smaller debts should be dealt with by placing a non-foreclosable lien on first homes – especially homes below the median market value in the zip code. Interest on smaller debts should be substantial enough to attract investment, but treated as an encumbrance of title, only collectable upon the transfer of the property for owner-occupied homes.
4. Similar arrangements can be made for individually owned properties where the owner is over 65. The debt can accrue interest for some time and be collected when the estate is liquidated at probate. The family has the option of paying off the debt early.
5. Create an aftermarket for tax liens, so that investors with shorter time horizons can sell their interests to investors with longer time horizons without having to foreclose on homes and sell the property out from under the original owner/occupant.
6. Work with community outreach organizations to help elderly homeowners with counseling and advice. When they go to court to defend their homes, they will never have encountered the legal issue before, while opposing counsel will have closed on hundreds of such deals. A homeowners’ advocate would go a long way to leveling the playing field and keeping the unscrupulous investor honest.
7. If a home is foreclosed on, any equity after the debt is satisfied should be returned to the homeowner. Elderly individuals struggling with dementia forced from their homes should not be left with nothing.
8. Notices should be tightened up in some areas. Some owners are complaining that they were blindsided by hearings, and that notices were sent by regular first class mail, not registered mail, signature delivery or any kind of process service. This increases the likelihood of default judgments in favor of the tax lien investor, or tends to reduce the prep time that property owners have to prepare a defense. Where there were nearly 2,000 cases of mistaken lien sales in D.C. alone because of the ineptitude of officials, this prep time is crucial to the integrity of the hearing process.
Your thoughts? Ideas? Concerns? Sound off in the comments.
Tax Liens: A Lucrative Investment – With a Dark Side
http://www.engage360.me
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