This time of year, it is easy to be inundated with traditional signs of the season at every turn. One customary signal that December has arrived is the staging of Charles Dickens' A Christmas Carol. In a story known to most, Ebenezer Scrooge is shown the error of his cold-hearted ways and makes amends for his self-centered choices. In cities all across the country, Scrooge hasn't yet repented, and homeowners and communities are paying a steep price.
Following the Great Recession, many communities experienced a glut of homes that were returned to lenders through foreclosure due to an owner's inability to pay the mortgage. Individuals who owned their homes outright were also caught up in the downturn, with some having difficulty paying property taxes. In other cases, the need to pay real estate property taxes fell through the cracks and homeowners ended up as unsuspecting scofflaws.
In many jurisdictions, when a homeowner is delinquent in paying property taxes, a lien can be sold on their home. The purchaser of the lien holds it for a fixed period of time, or redemption period. If the homeowner wants to have the lien removed during the redemption period, they need to pay the lien holder the back taxes and a fee, which can be a double digit percentage of the taxes. Generally, the practice of buying home liens was left to small local investors. However, the economic downturn has seen the industrialization of the process by outside commercial interests, which has injected a new level of aggressiveness into the process.
The situation takes a Dickens-like turn, however, in some jurisdictions when, following the redemption period, unscrupulous lienholders begin tacking on a multitude of service fees the homeowner must pay to remove. As a recent Washington Post story describes, local real estate tax practices in Washington, D.C. have made homeowners vulnerable to an extent not previously seen and at an unprecedented scale. A $500 tax bill can become a $5,000 headache for a homeowner. If unable to pay, the lienholder can foreclose on the property, evict the former owner and then sell the house for an immediate profit. If the homes are not in strong real estate markets, lienholders can be stymied to readily sell them. Since the business model is one based on fee generation rather than property management, the empty homes languish and become nuisance properties, thereby affecting the entire community.
It is unlikely that malevolent lienholders will "awaken" one day as Scrooge did, therefore, communities need to be vigilant in their housing and tax policy to ensure the appropriate balance is maintained between tax collection and home ownership. Three things communities can do to evaluate and respond to this practice in their jurisdictions include:
- Track tax sale purchasers. Know who is buying what properties in the community.
- Understand how many abandoned houses in the community are owned by mortgage companies versus holders of tax liens.
- Require tax lien purchasers to be registered in the city where they are buying liens, and limit the number of liens any entity can buy at one sale.