During the financial crisis and Great Recession, thousands of Americans lost their homes to foreclosure when they were unable to pay their monthly mortgages. But now, a new type of foreclosure crisis is emerging in which people are losing their homes as a result of delinquent payment of their property taxes.
How Tax Liens Work
When homeowners do not pay their property taxes in full or on time, city and county governments may place a tax lien on their home in an effort to try to collect these taxes. However, governments usually are not in the business of collecting debts, so they often sell these property-tax liens to private debt collectors who then assume responsibility for collecting them. This type of property-tax lien sale is currently legal in 30 states and the District of Columbia.
Once they buy property-tax liens, debt collectors can charge high rates of interest (up to 50 percent) on past-due property taxes. But that’s not all: They can also add other costs, penalties and fees (including legal fees) that can jack the amount homeowners must pay up to many times the amount of the original debt. If homeowners do not pay the total amount due within a certain period of time, which varies by state, the tax-lien holders can begin foreclosure proceedings.
Recent investigative articles published in the AARP Bulletin and the Washington Post included the stories of a number of individuals and couples — most of them elderly — who were caught up in a property-tax lien web and lost their homes due to non-payment of relatively small property tax amounts. A 76-year-old man with dementia lost his $197,000 home due to an unpaid $134 property tax bill, before interest, fees and penalties were assessed. Even worse, a 95-year-old woman with Alzheimer’s lost her $300,000 home over an unpaid tax bill that was only $45 before interest, fees and penalties increased it exponentially.
The total size of the property-tax delinquency market in the U.S. is estimated to be between $5 billion and $15 billion. This has gotten the attention of some big banks and hedge funds that are now buying up bundles of property-tax liens by the thousands. Hedge funds now control an estimated 40 percent of the property-tax lien market, up from just five percent five years ago, and enjoy investment returns that can reach 10 percent or higher.
Predatory Lending — or Legit?
So are property-tax lien investors “predators” like many critics claim? Or is property-tax lien investing legit? The answer probably depends on whom you ask. Some property-tax lien investors respond to criticisms by noting that while there are a few bad apples in this industry, just like there are in any industry, most tax-lien investors are not out to foreclose on people’s homes. They claim that they often need to have the leverage of a foreclosure in order to collect unpaid property taxes.
In addition, the amount of interest and penalties that can be charged against unpaid property taxes is set by governments, not by the investors themselves. And in states where property-tax lien sales are not allowed by law, governments can simply auction the deed to the home, giving the homeowner no recourse whatsoever. Selling property-tax liens to investors gives homeowners more time to pay — between 6 months and 3 years, depending on the state.
But it is hard to read stories about people who have lost their homes because they did not pay relatively small tax amounts and not feel like some property-tax lien investors are taking advantage of elderly and financially unsophisticated couples and individuals. In the most egregious situations, people were not even aware that they owed the back taxes until they were approached by lien holders and told they owed the taxes, plus interest, fees and penalties. Sometimes, the back taxes even resulted from mistakes made by taxing authorities, like applying tax payments to the wrong property or sending tax bills to the wrong address.
Protecting Yourself
The best way to guard against foreclosure at the hands of a buyer of your property-tax lien is to pay your property taxes on time without fail. In a blog post, one property-tax lien investor responding to the AARP Bulletin article put it this way: “I will tell you that the one thing that I’ve learned from this business is that you’ve got to pay your property taxes before anything else, even your mortgage.”
If you pay your property taxes along with your mortgage each month and they are held in escrow and paid annually by your mortgage company, you really shouldn’t have any concerns. Still, it wouldn’t hurt to check with your mortgage company the month that property taxes are due to make sure that they are paid on time. Meanwhile, if you pay your property taxes directly yourself, make sure you make the payment in plenty of time so that it’s received on (or preferably before) the due date.
If for some reason you get caught up in a property-tax lien web and are faced with having to pay back property taxes plus interest, fees and penalties to avoid foreclosure, you should first try to negotiate a settlement with the lien holder. You could hire a lawyer to help you, or possibly reach out to advocacy groups like the AARP Legal Counsel for the Elderly, which provides free legal services to the elderly, for help in negotiating a settlement.
Depending on where you live, there might be legal protections in place to guard you against foreclosure or excessive interest and fees. In New York City, for example, tax liens cannot be sold on homes owned by low-income seniors, veterans or the disabled. In Maryland, legal fees in property-tax lien cases are capped at $1,500. And in Rhode Island, taxing authorities are required to notify the Rhode Island Housing and Mortgage Finance Corp. of delinquent liens well in advance of tax sales, which then helps homeowners make their tax payments.
Regardless of where you live, if you’re faced with having to pay back property taxes plus interest, fees and penalties in order to avoid foreclosure, you are eventually going to have to pay. The only question is how much. The best way to avoid this situation is to make sure that your property taxes are paid in full, on time, every year — no exceptions.