Private investors can make out like bandits when purchasing property tax liens and reaping interest rates of 18 percent or more.
But that leaves homeowners who were unable to pay their property taxes with an even more expensive option for recovering their homes – and its all legal.
A new report by the National Consumer Law Center has dubbed this little-publicized practice as the “other foreclosure crisis,” particularly with a backdrop of a sluggish economic recovery and weak jobs market.
“The interest and penalties homeowners must pay to redeem their property after a tax sale are set by laws that were enacted decades ago in most states and do not reflect the current cost of funds,” the report reads.
Tax lien purchasers are entitled to a return on investment, the NCLC explains, but these laws produce profits in many states at a much higher rate than ordinary investments.
Banks currently provide interest on savings accounts at less than 1 percent, but many states permit tax lien purchasers to recover interest at rates of 18 percent or more, even as high as 20–50 percent.
The structure of tax lien sales also makes it far more likely a homeowner will suffer a “devastating loss of home equity” as compared with other auction sales, the report said.
In many states, the property is sold only for the amount of back taxes owed. A tax lien sale may be started over nonpayment of a tax bill of only a few hundred or thousand dollars.
For example, a $200,000 home may be sold at a tax lien sale for $1,200.
“These bidding procedures mean that homeowners may lose not only a homestead, but also thousands or even hundreds of thousands of dollars in equity,” the report said.
As a result, tax lien sales may destabilize communities, but very few states have enacted procedures to protect owners’ equity.
Here are the report’s recommendations at the state level:
- Make redemption costs affordable by keeping investor profits reasonable. State laws should be reformed to limit the maximum interest or penalty rate on redemption amounts to reflect current economic conditions. The interest rate should seek to discourage speculation and promote redemption.
- Place reasonable limitations on additional fees and costs. States should not permit investors to pad their profits by charging homeowners unreasonable fees to redeem after the foreclosure process has been initiated. State law should establish a maximum fee schedule based on reasonable, market rates for title searches, attorneys’ fees, and other fees.
- Establish a tax sale procedure, with court supervision. States should limit the initial tax sale to the sale of a tax lien certificate, rather than granting an entire interest in the property to a purchaser. If a homeowner fails to redeem the property, state law should require the purchaser to seek a court order authorizing final sale of the property. The court should confirm the final sale results and ensure that the sale price is fair and that any surplus funds are promptly paid to the homeowner.