A group of Illinois County Board members will be investigating a former county treasurer for taking campaign donations from real estate investors who stood to profit – and did profit – from his tax lien auctions[1]. The treasurer, Fred Bathon, received about $140,000 from investors who were involved in buying delinquent property tax debts at his tax lien auction sales. These investors then purchased the debts at the maximum penalty rate, 18 percent, and were able to bring in about $200,000 each in penalties for a number of years.

While buying tax lien properties at the maximum penalty rate is perfectly legal, in Illinois the bidding process on tax liens can involve “bidding down” the interest rate on the liens. If these liens were not exposed to the entire buying population, then the entire process could be a problem. At some of Bathon’s auctions, it was reported that literally whoever shouted the loudest, lowest percentage bid got the property, so if everyone shouted 18 percent someone – whoever was perceived to have shouted first – would get the property at that amount and bidding would be cut off. This method has historically been used to prevent bidding down and to keep buyers from undercutting each other, a process that benefits the debtor rather than the purchaser of the debt.

The present treasurer allows bidders to submit trailing bids, allowing for undercutting. He says that he “welcomes public scrutiny” of current and past tax auction practices.

Do you think that Bathon and/or the investors involved should be punished for their participation in what appears to be a very sketchy method of selling tax liens? Is Bathon wholly responsible or do the donating investors deserve some of the blame?

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At a tax lien sale in Lenawee County, Michigan last week, only four properties of the 32 available were even bid on, indicating a continuation of massive buyer disinterest in the area first indicated at the initial auction in July where only 20 of 52 parcels were sold[1]. At a time when many small municipalities are hoping to fund entire budgets or make up budget shortfalls by auctioning off property tax liens to help avoid raising taxes on the rest of the town, Lenawee’s treasurer was disappointed by the lack of sales.

Particularly given other Midwestern counties’ successes with tax lien sales – last week we reported on a sale that set records for attendance and participation – this second-chance sale was viewed by the city with great optimism. However, for this county, the results were not all that was hoped. The county hopes to establish a “land-bank program” that will purchase properties that appear to have potential from the city in order to make improvements that will attract buyers.

The four properties that sold at this auction faced no competition during bidding. Does this sound like a missed chance to you or do you prefer higher-intensity auctions for your property tax lien investing?

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In most tax lien auction situations, there are a few “plum” properties that get a lot of investor attention while a number of unsalable properties sit on the sidelines and eventually go back to the city to stagnate indefinitely. However, these days in some counties, the tax lien auctions are selling out.

At a tax auction last week in southern Michigan, buyers came from as far away as California and Alabama to bid on the 102 properties up for grabs. All of the properties sold[1]. Bidding started at $50 but skyrocketed into the thousands in many cases. Interestingly enough, while there were some out-of-towners, most of the participants were local, according to the county registration records. The county treasurer attributes this large local participation to the fact that a lot of young couples in the area who cannot buy homes in a traditional fashion right now are investing in fixer-uppers.

How do you think this new influx of participation will impact your tax lien investing?

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In Pennsylvania, at least one county will be giving property owners a little more time to file their property tax payments before establishing liens and starting the process that ultimately leads to a tax sale in an effort to keep more people in their homes[1]. Like many areas around the country, Allegheny county is experiencing a potential budget problem, due in part to the fact that the number of people neglecting their property taxes is spiking dramatically. The tax controller believes that delayed filings have improved that number before and hopes that it will do so again. People who are unable to pay in full will also be able to opt into a payment plan.

As a tax lien investor, do you think that these delays – which are becoming more and more common – are reasonable or are similar last-ditch efforts interfering with your investing process?

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The mailing of nearly 115,000 personal property tax bills in Arlington County in Virginia has been delayed by at least ten days, thanks to defects on the forms themselves[1]. Since tax bills cannot be assessed late penalties or other regulatory processes unless the bills have gone out no later than 30 days before the deadline, the deadline will be extended for the entire area. No penalties of any sort will be assessed to bills received by October 15. Usually the deadline is October 5.

While this will not likely have a major impact on tax lien investing in this area since properties do not immediately enter auction in Virginia, it does give taxpayers a little additional time to get their payments together. The defect has been attributed to an error on the part of the printer, Graphic Communications.

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Tax lien investors could stand to take a lesson from a near-miss in Schenectady, New York. The city, which recently had to add another $4 million to a $21 million project to rebuild public works buildings on abandoned, tax lien property taken over by the city council, found that not only was the project running way over budget thanks to unexpected and unavoidable soil cleanup efforts, but that the city might not even have the deed to the land in the first place because the original owners never signed it over when they abandoned the property, leaving their property taxes unpaid[1].

This is an important step in the tax lien investing process that you must not overlook. In some cases, the foreclosure process will resolve the matter. However, you must make sure – particularly if you accept a deed-in-lieu – that your name is actually on the deed to the property when you take possession. Schenectady has resolved the issue without conflict, but this was lucky for the city council. Not everyone who neglects to get a deed quitclaimed will have such a smooth time locating the previous owner and removing the cloud on the title of the property.

What is the worst error you ever made as a tax lien investor?

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If you are perusing tax lien sale lists for retail properties as well as residential, then Pennsylvania could be a good place to start. Delinquent tax payer lists in this state include entities that have failed to pay cigarette taxes, with some parties owing as much as $46,000 including penalties and interest. Even more serious, however, are the liens accumulated by individuals who buy online, since once the product is shipped the recipient becomes responsible for the payment of the tax on the cigarettes[1]. Liens on businesses can impact that retail entity’s building, but it is unclear how individual taxes might be collected should they fall delinquent.

These tax payment are dedicated to the Children’s Health Insurance Program (CHIP) and the Agricultural Conservation Easement Purchase Fund to help preserve Pennsylvania farmland. Would you consider buying this type of lien in a tax sale? Should they even be included with tax liens at all?

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Although the county is still left with about $5.4 million tax liens to auction off, the number is dramatically lower today than it was on Friday when a “tremendous number of residents” hurried in to pay their 2009 property taxes and avoid Pascagoula, Mississippi’s annual property tax auction[1]. Last year, the county made about $253,000 in “overbids,” when investors pay more than the lien is worth in order to get the rights to the debt and the right to potentially foreclose on the property. This year they expect about the same, although tax officials fear that this year investors may have less overage to work with.

In 2007, there were only a little over half the number of liens for sale that the country is showing this year. Tax officials credit skyrocketing insurance costs with the increase and predict more liens next year. Tax lien investing is certainly a burgeoning real estate investing arena at this time. Do expect the opportunities available to keep expanding in scope?

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Although legislation that enables thousands of “low-income seniors and disabled residents” in California did survive this year’s budget cuts, it did so in a form that will not enable eligible people not already enrolled to avoid paying their December property taxes this year[1]. The program, which allowed the state of California to pay these tax bills and be reimbursed upon sale of the property after the death of the participant, was under the gun because the homes were not selling for amounts that allowed for this type of reimbursement, or the reimbursement came at the cost of other lien-holders who protested the program

The new bill will allow individual counties to determine if and how they want to structure the program, allowing them to offer the property tax loans as an investment at 7 percent interest. Currently, only one county in the state has elected to participate in the program.

Do you think that this is a good resolution to the problem? Do you think people should be able to postpone their tax liens indefinitely?

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Tax lien investors know that the holder of a mortgage on a tax-lien compromised property can be a friend or a foe. If you are hoping to have your lien redeemed, then a mortgage holder is a friend. After all, they would probably rather pay off your tax lien – with interest and penalties of course – to avoid losing their larger investment in the property. On the other hand, if you are hoping to foreclose on the property, a lender holding a large mortgage can be bad news since they will likely prefer to take a loss on the tax lien and foreclose themselves.

If you want to know ahead of time what the debt situation is on a property, you can easily check out the situation at the county courthouse. Liens on properties are matters of public record, meaning that you can simply contact your county recorder or city clerk to find out where a property stands. Generally, the more mortgages on a property, the less likely that all those lenders will opt not to pay off the lien. Use this information to help determine what properties will work best for your personal tax lien investing strategy.

How do you identify prime targets for your tax lien investing?

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