Big Banks Use Back Taxes to Seize Homes

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We’ve explained investing in property tax liens in both video and print, most recently in this story: How to Buy Property for Back Taxes. But is this something that big banks should be allowed to do?

You’re about to see a video produced by the Huffington Post that would suggest they shouldn’t. But before we explore that question, here’s a very brief explanation of how the property tax lien system works and why it exists.

Local government agencies collect property taxes nearly everywhere in the United States from nearly every real estate owner, residential and commercial. In many places, this is the primary funding source for a variety of local government services: for example, schools are often funded this way.

Local government agencies that depend on property taxes need a way to collect them to meet their budgeted expenses – they can’t afford a shortfall if people don’t pay their tax bills. So what they do when individuals or businesses don’t pay their taxes is essentially collect the money owed from unrelated investors who then have the right to collect that money from the home or business property owner.

A simple example:

  • You don’t pay the $1,000 property tax bill on your home – your county is now $1,000 short of the money it expected to get to pay for local schools.
  • By buying a tax lien certificate at a local auction, I essentially pay the $1,000 you owe: the county now has it’s money.
  • You now owe me the $1,000 you used to owe the county. You also owe me interest – the amount differs by state.
  • You typically have a long time to pay me back, but if you don’t, the county will ultimately take your house and sell it to repay me. You also might be responsible for legal bills if I have to hire a lawyer to get you to pay.

Investing in tax liens is no more sinister than buying homes at a foreclosure auction or repossessed cars at a car auction. Is it profiting from other people’s problems? Potentially, but remember that tax lien certificates, like foreclosed homes, don’t come with a story attached – you have no way of knowing why somebody didn’t pay their taxes, just as you have no way of knowing why somebody didn’t pay their mortgage or make their car payments.

Unlike buying properties at a foreclosure auction, tax liens are almost always redeemed, for an obvious reason: if you’re about to lose your house, you’re probably going to find the $1,000 you owe for back taxes. If there’s a mortgage on your house, your lender will redeem the tax lien – otherwise they’d lose their collateral.

So here’s the question: should big banks and hedge funds be allowed to invest in property tax liens? That’s the question asked and answered in the following video. It’s a well-told story: check it out, then meet me on the other side for more.

The producers of this video did a super job of story-telling. But is their unspoken-but-strongly-suggested conclusion – that banks and hedge funds shouldn’t be allowed to take advantage of homeowners – fair? In my opinion, not really.

The tax lien process isn’t new – I bought my first certificate more than 20 years ago – and it isn’t secret. Tax liens serve a public purpose and you don’t have to be a fat cat or super-sophisticated to invest in them. In addition, the people who aren’t paying their taxes are well aware of it – or, at least they should be. They should also be aware of the potential ramifications if their obligations aren’t met. As you saw in the video above, the results of the tax lien process can be devastating. But no investor knows the individual stories behind a tax sale. Would you feel like a vulture by buying a car at an auction if you found the cars being sold were repossessed? The previous owners of the cars could have been crack dealers, or struggling single mothers – you have no way of knowing. The same logic applies to foreclosure buying and to tax lien sales.

It’s unfair to exclude any potential investor – including banks and hedge funds – from a widespread, publicly available and perfectly legal investment venue. That being said, the video above does leave me with two questions:

  1. If banks and hedge funds have nothing to hide, why are they hiding? They should have talked to the producers of this video and mounted the same defense that I’ve presented here. If you’re not ashamed of what you’re doing, don’t hide. If you are, don’t do it.
  2. Did the banks and hedge funds consider what this story might look like to the millions of Americans who already would like to see their heads on a platter? For those in the public spotlight, this is one investment that might be better off unmade.

By the way, lest you think I’m a supporter of the big banks, be sure and see The Foreclosure Freeze – What It Means and Why It Matters.

So, what do you think? Should banks and hedge funds be investing in past-due taxes? Leave your two cents worth below.

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Comments & discussion

We welcome your opinions, but let’s keep it civil. Like many businesses, we reserve the right to refuse service to anyone. In our case, that means those who communicate by name-calling, racism, using words designed to hurt others or generally acting like an uninformed bully. Also, comments that include links to email addresses or commercial websites typically aren't posted. This isn't a place to advertise your business.

  • http://pulse.yahoo.com/_AIRBJRUA5UN4VXEGSEMZKFTLNU La Sonrisa

    I used to buy up property through these same tax liens. BUT that ws 20 years ago when the economy was booming. There should have been no reason why homeowners didn’t pay their property taxes. By the way, every one of the properties I purchased paid their leins & I made a few bucks on the small investments of paying their back taxes.
    I wouldn’t dream of doing this now! There are so many families that are unemployed that they can’t pay their mortgages, utilities, let alone property taxes. It really is inhumane.
    Thank you for this article as I haven’t thought about my back-tax buy-out days in forever. And to think these big banks are using this as a vehicle to bully unfair amounts of money from already cash strapped families is deplorable! Makes me wish I was some kind of charitable lawyer to represent these families! Problem is;
    1- have the finances to back up the idea (maybe charity based?) and,
    2- find a law the big banks are actually breaking…

  • Anonymous

    I have been buying tax certificates in Florida for the last three years. I am into vacant land and non homesteaded houses. If owner occupied homes go to action, the county sets the opening bid at 50% of the accessed value. Many buyers do not want to touch these because most of them are in poor areas. The county sets the rules, I do not understand what you are complaining about? Do you want the county to go broke? Do you think that the people who are paying should pay more? Should the county stop welfare and school to non payers.?

  • Anonymous

    In Florida the county sets the rules. Opening bids on owner occupied homes start at 50% of accessed value. Few people bid because these are usually in poor African neighborhoods. The county uses taxes to pay for schools, roads, welfare, jails, government and much more. Do you want these services stopped? Do you think everyone should stop paying taxes? Do you think tax payers have to pay for non tax payers? If you think investors are getting rich, put up your own money and get rich too.

    • http://pulse.yahoo.com/_WZWIMLV4TPHQIHZ2DKOHKSXR3U noni

      You didn’t read the whole article. If you did, you misunderstood it. I am not a big blood sucking bank crying for bail-outs while hiding in emply offices under fake business names, taking leins on properties for back taxes, then slapping outrageous fees on top of that and demanding it be paid in ONE lump sum! That makes it impossible for the homeowner to pay for sure! It is called “Backwards Bank Robbery”! Nowhere in this article did it say that everyone should stop paying their taxes, and all the services stopped. That is subject matter for another article!

  • Anonymous

    norm66 –

    I imagine that you’re an individual investor, a citizen not a bank or investment firm. That means you can’t tack on exorbitant interest, fees, legal costs, etc. like the big banks, who have the resources to do so. The playing field isn’t level in several ways.

    That is the key here — not that people should get away with not paying taxes, nor just the questionable privatization of tax payments. The disgust for this tax lien rip-off comes from the unfortunate, immoral and malevolent ability of private banks and big investors to pile on unaffordable costs to force homes into foreclosure for what often was a small amount in default. Limits, legislation, and regulation are needed to plug the holes where the local governments have failed to protect their citizens from swindles that should be illegal.

    And why is Wall Street being allowed to bundle these liens into investor-backed securities that are sold over and over — the latest twist in Ponzi schemes? Isn’t one crash per decade enough?

  • Anonymous

    I am unable to pay my taxes for the first time in 30 years. I came to Florida to take care of my mom and built my home with all of the savings from the north, and then some. 3 years ago both my husband and I lost our jobs. We are doing everything we can to pay our bills. I knew my savings would be depleted very quickly when we lost our jobs and I started to investigate a loan modification program for my mortgage which my bank said I could finally get into after calling them for 8 months previous to that. I am at this time still without a job due to the care that my mother is in need of now since she has severe dementia and I am unable to put her in a home at this time. My husband collected for a short period of time and has been doing everything he can to find odd jobs and has a lawn business, which everyone has these days. If the bank was able to take my home for the mere money of taxes, then where will I go. What am I to do. We have worked hard for everything that we have and yet at this time in our lives we have nothing.