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Money September 2012

Dollar Sense

Beware the Danger of Getting Behind on Property Tax

By Teresa Ambord

Homeowners, often seniors or persons with very low income, miss a property tax payment or other municipal obligation. All states have laws permitting local governments to file liens in order to collect unpaid amounts. These tax liens take priority over all other liens, including mortgages.

You may think being a little behind on property tax couldn’t do you any real harm, other than a penalty. But some former homeowners would be quick to warn, do not let that happen. If that’s your situation, clear it up as soon as possible. The same may be true if you fall seriously behind on city-owned utility bills like water and sewer. If the amount remains unpaid, a lien could be filed against you. Even if that lien is only for a few hundred dollars, you could end up losing your home.

Here’s how this happens: A recent report from the National Consumer Law Center (NCLC) described the gory details. Homeowners, often seniors or persons with very low income, miss a property tax payment or other municipal obligation. All states have laws permitting local governments to file liens in order to collect unpaid amounts. These tax liens take priority over all other liens, including mortgages.

You, as the homeowner may receive notice of the lien, but in many areas, the seriousness of the situation is not made clear. In fact, the NCLC report says the deck is often stacked against homeowners. Most state and local governments just don’t have the resources to educate and assist the homeowner. Few have any process at all for protecting homeowner interests. According to the report, there have also been cases where corrupt officials worked with investors to make the possibility of foreclosure more likely.

Many people have come to believe there is no real danger till they’ve gotten several notices of increasing urgency. You may remember an episode of “Roseanne” where the Connors fail to pay their utility bills for months, and finally the power is shut off. Roseanne cries “unfair,” because they only got three final notices none of which were pink. We’ve grown used to multiple warnings before anything serious happens. We may even wait till the sheriff shows up. If you are behind in your property tax or city-owned utility bills, trouble may be brewing that you aren’t aware of. That’s why you need to take action immediately to clear up the problem.

If the amounts owed are not paid, a lien may be filed against your property. Once the lien is filed if you don’t take care of it, local authorities may sell the lien at auction to the highest bidder. To add insult to injury, the new owner of the lien may have paid only a few hundred dollars to buy your house, then turn around and sell it for an enormous profit. Not only is your home gone, but so is the equity you built up over many years.

What is the motivation for investors to buy property tax liens? Simple. The bank pays interest on most savings of less than one percent. But in some locations, state law allows the purchasers of tax liens to earn as much as 20 to 50 percent interest, according to the NCLC report. If you’ve never heard of such an outrageous practice, that’s probably because you are not in the market for shady deals.

Property tax lien sales are promoted mostly on the Internet, or in late night get-rich-quick infomercials. They emphasize the “get rich” aspect of course, and fail to mention the former homeowners evicted from their homes.

It’s not unusual, said the report for the owner of a home worth, say $200,000, to fall behind on property taxes, through misunderstanding or neglect or inability to pay -- the reason doesn’t matter. For the default of property tax that may amount to only $1,200 or so, a lien may be issued, then the lien sold at auction. The bidding process is often biased against the homeowner, said the report. The result, the lien is sold to an investor.

Attorney John Rao of the NCLC said in the agency report: “The tax sale procedures in most states are exceedingly complicated and are generally understood only by investors and purchasers. Inadequate notice and a lack of judicial oversight over the process leave many homeowners in the dark about steps they can take to avoid a home loss. Homeowners most at risk are those who have fallen into default because they are incapable of handling their financial affairs, such as individuals suffering from Alzheimers, dementia or other cognitive disorders.”

Two specific cases cited in the NCLC report include a homeowner in Baltimore who was behind in her water bill to the tune of $362. Legal fees, interest, and penalties were added to bill which quickly rose to $3,600. When she could not pay it she was evicted. In another instance, an 81-year-old Rhode Island woman was evicted from her home two weeks before Christmas. After 40 years in the home, she could not pay a $474 sewer bill. A lien was filed, the home sold for $836 and later resold for $85,000.


Is There a Remedy?

If you are behind in property tax or city-owned utilities, contact the proper authorities and ask about payment arrangements in order to avoid a lien. Once a lien is filed, before your home can be foreclosed upon, you have the right to redeem your property, according to the report. You do this by paying the purchaser of the tax lien the purchase price, plus interest, penalties, and costs incurred, within a specific time period. If you do not redeem the property on a timely basis, foreclosure may result. Unfortunately some unscrupulous investors and others have been known to tack on expensive legal fees that appear to jack up the price. They do not tell you, however, that it is not necessary to pay all of these fees in order to buy back the lien.

If you believe you are in danger of a lien, or are already subject to one, don’t wait till further action is taken against you. Contact your local property tax office to find out about installment payment plans. You may need to seek legal advice or the help of another trusted advisor, but do it quickly. If you have a mortgage you might be able to set up an escrow account for the payment of property tax and avoid future delinquencies.


Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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