Big Banks Use Back Taxes to Seize Homes

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.