Review of helpful book on tax lien and deed investing

The Complete Guide to Investing in Real Estate Tax Liens & Deeds, Revised Second Edition (2015) by Alan Northcott is a how-to guide for people interested in investing in tax sale and tax lien properties. Northcott, a tax sale investor himself, shows how liens, tax deeds, and tax sales work in different states and local jurisdictions. The book provides many tables and charts allowing investors to compare redemption periods by state and the variety of premiums associated with redemption, in other words, the different potential returns on investment (ROI). These charts allow investors to make more informed decisions about which jurisdictions best suit the individual investor’s needs.

As a property tax administrator, I felt that the book was also helpful to put our own practices as a municipality into a broader context. For example, I did not realize than many jurisdictions require investors to register before they can bid at tax sales. Also, I did not fully realize that some states are “tax lien” states, meaning that they authorize local governments only to sell tax liens, not the underlying deed, while other states are pure “tax deed” states, where ownership immediately transfers from the delinquent owner to the successful bidder after a tax sale. The book describes Georgia as one of 11 “hybrid tax deed” states, where ownership is transferred if the original owner does not redeem the property within the required time period. I also found it useful to see which states are most closely aligned with Georgia’s practices. Tennessee appears to share several traits with Georgia’s delinquent collections and tax sale law. This information could be helpful when building peer relationships in other states. In property tax world, opportunities for networking and professional development exist within states, but not usually across state lines since there is no national property tax.

One aspect of the book I didn’t agree with was its assertion that most property owners who lose their properties at tax sales redeem their property, resulting in predictable returns on investment for tax lien and tax deed investors. In my experience in our location, that is not the case. To illustrate, picture a property owner who cannot pay $5,000 in back taxes. The property is auctioned at a tax sale for $100,000. The redemption amount in Georgia would be $120,000. The original owner receives the excess funds from the sale minus the taxes ($95,000). Now the original owner is $25,000 short from the redemption price. If the owner couldn’t come up with $5,000 to prevent the tax sale in the first place, the owner will rarely be able to come up with $25,000 to redeem their property. Northcott’s statement may be correct in the context of states with smaller premiums, but investors should be aware of that may not be the case everywhere.

An unexpected bonus about 85 percent of the way into the book is a very helpful chart and explanation of “first liens.” In order to foreclose the right to redeem on a property, the holder of a “second tax lien” has to pay off the first lien. Somebody with a third lien would have to pay off the first and second liens. Mortgages and other private debts constitute lesser liens than tax liens. Lesser precedent liens and mortgages do not have to be paid off in order for the holder of a first lien to foreclose the right to redeem. This is an essential concept to understand in Georgia, where case law has indicated that a creditor who redeems a property previously sold at a tax sale obtains a first lien or “super lien” that trumps other liens.

I recommend this book to people considering tax sale investments and to property tax professionals involved with delinquent collections.

Court of Appeals: Property taxpayer failed to prove it could sue DeKalb

Raw Properties Inc (RPI) owns commercial property on Snapfinger Road in DeKalb County. In 2010, RPI failed to pay property taxes on one of its properties. DeKalb County sent several delinquent notices to an old Decatur address for RPI, but the property owner had moved to Sparta. RPI notified DeKalb of its new address, but most of the late notices went to the Decatur address. The DeKalb County tax commissioner’s office says it also notified RPI of the delinquency by phone several times over the course of one month in 2011.  The taxes remained unpaid; the property was subsequently auctioned at a county tax sale. RPI was able to redeem the property later but had to pay the 20 percent premium for redemption. RPI sued tax commissioner Claudia Lawson’s office in Raw Properties v. Lawson.

The trial court ruled in favor of DeKalb. During appeal, DeKalb County argued that they shouldn’t have been sued in the first place, because tax commissioners serve as ex officio sheriffs, and different standards apply for sovereign immunity for sheriffs in cases of improper paperwork. The Georgia Court of Appeals sent the case back to the trial level for consideration of the sovereign immunity claim. The trial court found that DeKalb was immune in this case. In February, the Court of Appeals affirmed the trial court’s decisions, writing that RPI failed to prove that the DeKalb County tax commissioner’s sovereign immunity was waived in this case.

While the original tax sale stands, the court left open the possibility that Raw Properties could still sue for damages through separate methods.

Although the decision isn't friendly to taxpayers, it serves as another reminder that, generally speaking, failure to receive a tax bill does not relieve you of your obligation to pay. Property ownership and its ensuing tax liability are not responsibilities to be taken lightly under Georgia law.

Super lien holders not necessarily entitled to excess funds

There are circumstances in which a super lien holder should not automatically receive excess funds from a tax sale according to a Georgia Court of Appeals ruling in the case of DLT List v. M7.  Brad Hutchins and Allie Jett from Weissman, Nowack, Curry & Wilco explain:

A super lien is created when a creditor to a property owner redeems a property tax debt before the original owner can redeem it.  Part of the reason the creditor does this is to obtain the excess funds.  This ruling could make it less desirable for investors to attempt to acquire a super lien in the first place.

Recap of Decatur’s tax sale

Deputy Police Chief Keith Lee presides over Decatur's 2015 tax sale

During the City's annual tax sale on Aug. 4, 2015, the Revenue Division auctioned 13 tax deeds to satisfy delinquent taxes owed. Four of the properties were bid on by investors, five were bid on by the City for potential greenspace, and four properties received no bids and will remain on the City's delinquent list. No owner-occupied homes were among the properties auctioned.

The City's collection activities are an exhaustive process lasting at least seven months and involving at least seven different attempts to notify the property owner of the repercussions for nonpayment. Tax sales are a crucial component in maintaining the City's 99.9 percent collection rate for real property taxes.

Decatur's tax sale scheduled for Aug. 4

The City of Decatur's annual tax sale for delinquent properties will take place next Tuesday, August 4 , inside City Hall (not on the courthouse steps) at 10:00 a.m.  Prospective bidders at the sale are encouraged to look over the information below.

Tax Sales and Redemption Information

As part of our delinquent collections processes, we are able to provide a list of properties scheduled for tax sale and balances owed upon request. However, we are unable to advise you on the quality or characteristics of the properties for sale, or potential financial or legal issues that may arise as a consequence of you bidding, purchasing, or losing a property at one of our annual tax sales. Tax sales conducted by the City of Decatur are “buyer beware” events.

Redemption procedures are governed by state law as follows:

§ 48-4-40. “Persons entitled to redeem land sold under tax execution; payment; time
Whenever any real property is sold under or by virtue of an execution issued for the collection of state, county, municipal, or school taxes or for special assessments, the defendant in fi. fa. or any person having any right, title, or interest in or lien upon such property may redeem the property from the sale by the payment of the redemption price or the amount required for redemption, as fixed and provided in Code Section 48-4-42: (1) At any time within 12 months from the date of the sale; and (2) At any time after the sale until the right to redeem is foreclosed by the giving of the notice provided for in Code Section 48-4-45…

§ 48-4-42.  Amount payable for redemption
The amount required to be paid for redemption of property from any sale for taxes as provided in this chapter, or the redemption price, shall with respect to any sale made after July 1, 2002, be the amount paid for the property at the tax sale, as shown by the recitals in the tax deed, plus any taxes paid on the property by the purchaser after the sale for taxes, plus any special assessments on the property, plus a premium of 20 percent of the amount for the first year or fraction of a year which has elapsed between the date of the sale and the date on which the redemption payment is made and 10 percent for each year or fraction of a year thereafter. If redemption is not made until more than 30 days after the notice provided for in Code Section 48-4-45 has been given, there shall be added to the redemption price the sheriff's cost in connection with serving the notice and the cost of publication of the notice, if any. All of the amounts required to be paid by this Code section shall be paid in lawful money of the United States to the purchaser at the tax sale or to the purchaser's successors.”

If you have further questions about redemption or any other aspect of the tax sale process, I strongly encourage you to consult with an attorney experienced in such matters. You can access a list of local attorneys by going to www.gabar.org, entering “Decatur” under Member Directory, and clicking Search.

Georgia Court of Appeals rules against tax sale buyers

Two people who bought multiple properties at tax sales in Newton County appealed and then sued to get a lower assessment on those properties. They argued that the amount they bid at the tax sales should have served as the basis for their assessed value the following year. The Georgia Court of Appeals has ruled against the buyers.  The court determined that tax sales doesn't constitute an arm's length, bona fide sale because 1) the original owner has a year to redeem the property, and 2) the original owner is not a party to the sale.

In training sessions and conferences I've attended, officials from the state Department of Revenue always emphasize that fair market value is what a willing buyer and a willing seller would agree to at an arm's length sale. In my opinion, a person losing their property at a tax sale isn't normally "willing" nor a "seller." So this seems like a pretty good decision to me. From the Newton Citizen last week:

COVINGTON — The Georgia Court of Appeals has upheld a ruling in favor of the Newton County Tax Assessor’s Office, affirming that a tax sale does not qualify as an “arm’s length, bona fide” transaction for the purpose of setting property tax values. 

Newton County Attorney Tommy Craig advised commissioners of the court’s ruling at the June 16 Board of Commissioners meeting. “I promised you we would win this case, and now we have,” he said.

According to the Appeals Court, property owners W.D. Ballard and Nancy Mock had purchased 22 parcels of land in Newton County at tax sales during 2012. In April 2013, the Tax Assessor’s Office sent Ballard and Mock the 2013 tax values of the properties, which did not match the 2012 tax sale purchase prices. Ballard and Mock unsuccessfully appealed to the Newton County Board of Equalization and to Newton County Superior Court, which granted summary judgment to the Board of Equalization. 

Ballard and Mock had argued that under Georgia law the 2013 assessed value should have been frozen at the tax sale value. According to the law, ” … the transaction amount of the most recent arm’s length, bona fide sale in any year shall be the maximum allowable fair market value for the next taxable year.” 

However, the trial court noted that the owner of property sold at a tax sale has a one-year right to redeem the property, which would essentially rescind the tax sale, and that the purchaser in a tax sale does not receive a fee simple title to the property. In addition, the court ruled that since the owner is not a participant in the sale, there is no arm’s length, bona fide sale. The Appeals Court upheld those findings. 

According to the Tax Assessor’s Office, Mock and Ballard purchased the 22 parcels, five of which included a house, between March 2012 and December 2012...

If the court had ruled the other way, it could have opened the door to confusion or discrepancies for properties that are sold in tax sales by a county and by a city during the same year.

Consumer advocates seek tax sale reforms

I recently came across a report from National Consumer Law Center that examined into property tax sales nationwide.  The NCLC described these sales over the past few years as a foreclosure crisis on par with the mortgage foreclosure crisis.  Their report is a bit dated now, but their findings are still relevant for review:

Overview All states have laws that permit local governments to sell property through a tax lien foreclosure process if the owner falls behind on property taxes or other municipal charges.

A tax lien sale may be started over nonpayment of a tax bill of only a few hundred dollars. A $200,000 home may be sold at a tax lien sale for $1,200 and then quickly resold for a huge profit.

Homeowners may lose not only a homestead but also hundreds of thousands of dollars in equity. This equity may represent their sole savings and security for retirement. As a result, foreclosures related to tax lien sales may destabilize entire communities.

Scope of Problem

• $15 Billion and Counting: As homeowners navigate a difficult job market, declining home values, and high foreclosure rates, property tax delinquencies are increasing. Annual tax lien sales are now approximately $15 billion nationwide, according to the National Tax Lien Association.

• Outdated Laws: Very few states have enacted procedures to protect owners' equity interests or to avoid windfalls to purchasers, and states rarely update tax lien laws to reflect current economic conditions or to ensure that proper safeguards exist to avoid unnecessary loss of homeownership. 

• Elderly and Disabled Most at Risk: Homeowners most at risk are those who have fallen into default because they are incapable of managing their financial affairs, such as individuals suffering from Alzheimer's, dementia, or other cognitive disorders. One government study also found that in 2011 property tax foreclosures in New York City were highly concentrated among low-income communities with large African American and Latino populations, groups also targeted by subprime lenders. 

• Wall Street Reaps Huge Profits: Individual tax sale purchasers and some of the same companies (Bank of America and JPMorgan Chase) are ramping up lucrative profit centers. Why? Buying tax liens can yield an incredible rate of return, up to 50%. Many state laws also permit tax lien purchasers to charge homeowners extremely high interest rates and fees to redeem their property and avoid foreclosure.

Key RecommendationsThe following recommendations reflect the goals of preserving homeownership and ensuring prompt payment of local taxes.

State Recommendations

• Make redemption costs affordable by keeping investor profits reasonable. State laws should be reformed to limit the maximum interest or penalty rate on redemption amounts to reflect current economic conditions. The interest rate should seek to discourage speculation and promote redemption. 

• Place reasonable limitations on additional fees and costs. States should not permit investors to pad their profits by charging homeowners unreasonable fees to redeem after the foreclosure process has been initiated. State law should establish a maximum fee schedule based on reasonable, market rates for title searches, attorneys' fees, and other fees. 

• Establish a tax sale procedure, with court supervision. States should limit the initial tax sale to the sale of a tax lien certificate, rather than granting an entire interest in the property to a purchaser. If a homeowner fails to redeem the property, state law should require the purchaser to seek a court order authorizing final sale of the property. The court should confirm the final sale results and ensure that the sale price is fair and that any surplus funds are promptly paid to the homeowner. 

Recommendations for Cities and Towns

• Implement redemption payment programs. Local tax offices should collect redemption payments to eliminate the possibility that an unscrupulous purchaser may thwart the owner's attempt to redeem. The local tax office should accept partial and installment payments. 

• Adequate notice should be given at every stage of the tax sale process. Notifications should be used as a tool to avoid loss of homeownership Comprehensive notices should use plain language; include information about tax exemptions, abatements, and repayment plans; and note the consequences of each stage of the tax sale process. 

• Provide detailed notice of redemption rights. The notice should give all of the essential details on how the redemption right can be exercised, including the name and address to which the homeowner can remit payment; itemized costs; and the deadline for the redemption payment.

Georgia law provides for a redemption amount of 120 percent paid by the property owner to the tax sale purchaser. My office will take a look at the proposals made here for cities. That being said, at least since 2008 if not much earlier up to the present, Decatur hasn’t had to auction off owner-occupied homes. Normally our tax sales involve vacant or unbuildable lots. We seldom get questions about redemption because usually the owner has decided to “walk away” from the property. The 120 percent redemption amount probably is a big hurdle for owners who weren’t able to pay their taxes in the first place.

No properties sold at Decatur’s tax sale

Decatur conducted a tax sale yesterday for delinquent property taxes owed for 2013 and prior tax years. By the time of sale at 10:00 a.m., the only properties left were seven land lots of various size, quality, and accessibility. No buildings or homes—either occupied or vacant—were put up for auction. The number of delinquent properties by the time of our sale was consistent with the number auctioned over the past couple years.

Four potential bidders attended the sale at City Hall, but made no bids, meaning that the taxes for these lots are still owed and there will be no change of ownership at this time. Generally, buyers don’t want tiny land lots that cannot be easily built on (although neighboring property owners are sometimes interested). The minimum required bid is the amount required to pay off the back taxes and collection fees owed. If there had been any bids, the buyer would have had to pay the taxes, then we would have filed a tax deed on their behalf, and the original owner would have had a year to redeem the property from the tax sale buyer.

Contrary to popular belief, the seven properties do not automatically transfer to ownership by the City now. The properties remain on the tax rolls under the existing owners’ names, and the parcels can be included again in future county or city tax sales.

Though unpleasant, the deadline of a scheduled tax sale is the only thing that will ensure payment by certain property owners, so the tax sale is a crucial component in maintaining Decatur’s 99.9 percent real property tax collection rate.

Open letter to prospective tax sale bidders

Decatur’s annual tax sale is scheduled for August 5 at 10:00. As part of our delinquent collections processes, we are able to provide a list of properties scheduled for tax sale and balances owed upon request to interested parties.

However, we are unable to advise you on the quality or characteristics of the properties for sale, or potential financial or legal issues that may arise as a consequence of you bidding, purchasing, or losing a property at one of our annual tax sales. Tax sales conducted by the City of Decatur are “buyer beware” events.

Redemption procedures are governed by state law as follows:

§ 48-4-40.  Persons entitled to redeem land sold under tax execution; payment; time
Whenever any real property is sold under or by virtue of an execution issued for the collection of state, county, municipal, or school taxes or for special assessments, the defendant in fi. fa. or any person having any right, title, or interest in or lien upon such property may redeem the property from the sale by the payment of the redemption price or the amount required for redemption, as fixed and provided in Code Section 48-4-42: (1) At any time within 12 months from the date of the sale; and (2) At any time after the sale until the right to redeem is foreclosed by the giving of the notice provided for in Code Section 48-4-45…
§ 48-4-42.  Amount payable for redemption
The amount required to be paid for redemption of property from any sale for taxes as provided in this chapter, or the redemption price, shall with respect to any sale made after July 1, 2002, be the amount paid for the property at the tax sale, as shown by the recitals in the tax deed, plus any taxes paid on the property by the purchaser after the sale for taxes, plus any special assessments on the property, plus a premium of 20 percent of the amount for the first year or fraction of a year which has elapsed between the date of the sale and the date on which the redemption payment is made and 10 percent for each year or fraction of a year thereafter. If redemption is not made until more than 30 days after the notice provided for in Code Section 48-4-45 has been given, there shall be added to the redemption price the sheriff's cost in connection with serving the notice and the cost of publication of the notice, if any. All of the amounts required to be paid by this Code section shall be paid in lawful money of the United States to the purchaser at the tax sale or to the purchaser's successors.

If you have further questions about redemption or any other aspect of the tax sale process, I strongly encourage you to consult with an attorney experienced in such matters. You can access a list of local attorneys by going to www.gabar.org, entering “Decatur” under Member Directory, and clicking Search. There are many fine attorneys in Decatur who are knowledgeable about the applicable statutes.

A look behind the scenes in the lead up to a tax sale

The trend in Decatur over the last several years has been that about 95 to 97 percent of real property taxes are paid by the end of the 2nd installment grace period in early January. We collect the remaining 3 to 5 percent owed between then and early August.

Several steps occur between January and August to collect on the taxes that are owed for the prior tax year. Shortly after the grace period ends, my office sends out what we call “courtesy notices” to property owners with past due accounts. It’s considered a “courtesy” because sending these notices is not required by law. Of the 3 to 5 percent that is owed, about one-third of past due taxes are paid on the basis of these courtesy notices.

Around February we send an “Intent to FiFa,” to the property owner, which means that we intend to set a lien in 30 days if the taxes have not been paid by then. About another one-third of the past due accounts get paid after these “Intents” have been sent.

When we actually do set the liens and file them with the DeKalb County clerk of superior court, we send levy notices to the property owners. We call that “Stage One,” and accounts begin accumulating execution fees beyond the normal penalties and interest owed.

Later on in the spring, our delinquent collections partner, Government Tax Solutions, begins conducting title work on delinquent parcels. They determine who may have a security interest in the property apart from the owner, such as a mortgage company. Typically in June, “Stage Two” notices are sent to the property owners again and to those creditors.

In July, we advertise the remaining delinquent properties in the Champion as required by law. We also put up signs on the actual properties themselves. A final 10-day notice goes out to the property owner.

On the first Tuesday in August, we have a “tax sale.” We do this in City Hall—not on the courthouse steps like DeKalb County does. By this point, we normally have about 10 or fewer properties remaining, which are generally vacant properties and small tracts of land. The tax sale is an auction-style event at which the minimum bid to acquire a property is the amount of back taxes owed. The winning bidder has to pay off the back taxes in full with certified funds (cash or cashier’s check) by noon that day. The original owner of the property has a year to redeem the property (to buy it back) with a premium.

The time period between Stage One through the day of the tax sale itself is when Decatur’s Revenue Division collects the remaining one-third of the 3 to 5 percent of taxes that weren’t paid by the original deadline, bringing us up to a 99.9 percent collection rate on real estate property taxes for the prior year.

This year, we’re seeing the same basic pattern in delinquent volumes and the timing of payments that we saw in 2013 and 2012. This year’s tax sale is scheduled for Aug. 5 at 10:00 a.m.

Buying properties at tax sales

A few items have popped up on the web recently about buying tax lien property in Georgia. The message board of auctions.org shows this unfair but entertaining exchange on May 15:

Q: I live in Ga. Does anyone know the process for acquiring tax lien property? The vacant lot next to me is going up for auction the first week in May because the owner has not paid his property taxes. Is it true that if I win the property through the bidding process, that the owner has at least a year in order to try and get the property returned to him?

A 1: loslunas87031 says:

have you ever been to a tax auction ? Its a zoo of idiots who watch too many late night tv infomercials, run the bids past market value and then realize they do not automatically own the property and the owner has up to several years to pay the tax and recover it.

A2: acermill says:

Yes, it is quite true. Georgia offers a one year redemption period for the delinquent taxpayer after the tax lien sale/auction. The delinquent payer need only pay the tax delinquent, plus a 20% penalty, and the ownership reverts to the original owner.

That conversation highlights the risks of buying properties at tax sale, but on May 22, http://www.financemoz.com/tax-liens-vs-tax-deeds-which-is-the-best-investment.html described the potential benefits:

If you are interested in either owning the property or getting a very good return on your investment and you live in or near a redeemable deed state, than you should consider investing in redeemable deeds. Redeemable deeds are kind of in-between tax liens and tax deeds. You purchase the tax deed at the sale, but there is a redemption period in which the previous owner can come back and redeem the deed from you. They have to pay a pretty hefty penalty in most redeemable deed states in order to do so, and the penalty is on the total amount that you bid at the sale. In Texas the penalty is 25% and in Georgia it’s 20%. Not a bad rate of return!

It should be kept in mind that whether it’s a good or bad investment, ultimately tax sales are unfortunate events. They signify that for whatever reason, somebody is in jeopardy of losing their own property, investment, or even their own home because they couldn’t pay the taxes.