What if you’re late paying your property tax? In Alabama, give it a few months and a lien will probably be placed on your property. But one man’s delinquent property tax is another man’s opportunity. Every year, these debts are put up for auction and investors from around the country buy them to make money.
Standing at her kitchen sink, Sandra (who asked us not to use her last name) makes a pot of coffee and pulls a few mugs down from the shelf. “See, these are the truth mugs,” she says. “If things get better with age, then I’m magnificent. I’m learning to live with that one.” Sandra is over 70 years old and lives alone. Her home is cozy, decorated with tropical accents on the wall and a large sun porch where she spends most of her time. When she bought her house more than 15 years ago, Sandra arranged for her property taxes to be escrowed through her mortgage, so they were always paid on time. But when Sandra refinanced her house in 2015, the new mortgage didn’t offer this as an option. For the first time, Sandra forgot to pay her property taxes. “When you called and I realized that I had forgotten, I was ready to go run right down and do it,” Sandra recalls. “But then there were all these other things that I had to do first and deal with all the penalties and fees and so forth for being late.”
More Than a Late Fee
When Sandra went to the Jefferson County Courthouse to settle her debt, things got complicated. Because she had not paid on time, Jefferson County put a hold on her property, called a lien. Sandra’s lien equaled the value of her unpaid property tax, which was $892. The big surprise was that back in May, an investor bought her lien of $892 and paid an additional $10,000 for it. Now, that investor has the hold on Sandra’s property and could own Sandra’s house if she does not pay back the debt in a few years. For Sandra to clear this up and redeem her property, she has to pay the investor the original $892 debt plus 12% annual interest on the total amount the investor paid for it. This adds up to $892 plus interest on $10,892.
In Alabama and dozens of other states, this is how counties process late property taxes; local governments host annual tax sales and investors can pay off tax liens. This process transfers the debt so that the property owner owes the investor, rather than the local government. Investors are also allowed to “overbid” and pay more than the cost of the lien, increasing the value of the investment. When an owner redeems his/her property, the investor gets that overbid back, in addition to the cost of the lien. Any profit is made by the interest that accrues on the combined total.
Elusive Investors
For property owners, the process can be confusing. After sifting through the details, Sandra realized she could not just visit the tax collector’s office and pay back her late property tax. She has to track down and contact the investor, which is not easy. “I mean, I had to really hustle to find phone numbers and get fax numbers and stuff,” Sandra recalls. “Because a lot of that information wasn’t even available without a lot of further digging from the people at the courthouse.” In fact, I had a difficult time figuring out who bought Sandra’s lien. It turns out the investor has a few other entities working for it, like a legal agent and a custodian, who essentially operate as gatekeepers. The actual investor goes by ATCF II Alabama LLC, whom we will refer to as ATCF.
Groups like ATCF are known as institutional or corporate investors. Gary Boyd knows a lot about them. He consults tax lien investors, occasionally invests himself and worked for the Jefferson County Tax Collector’s office for 25 years. Boyd says companies like ATCF are often set up as intricate networks scattered throughout the country. “So it can be you know a somewhat complicated structure,” Boyd explains, “so that when you see the guy show up with his laptop at the Jefferson County Tax Sale, he shows up and he’s bidding a lot of money. He’s just kind of the tip of the iceberg of this whole system you see behind him.” That iceberg typically involves large investment firms backed with “Wall Street Money” as Boyd describes it. And Boyd says, while the structure is complicated, it is pretty clear why these groups buy tax liens. “So you know an investment that’s secured by real estate and administered by government, that’s about as secure as you can get,” says Boyd.
Wins and Losses for Local Government
At this point, Sandra’s late property tax is part of an investment and every day, she owes a little more in interest to this mysterious investor, ATCF. The system is designed in a way that makes property owners really work to resolve their debts. And Boyd says it is advantageous for Jefferson County as well. “And that’s what investors are doing is stepping into the shoes of local government when they buy tax liens,” says Boyd. “And the great benefit for the government is, instead of taking a chance on that property owner may be paying their taxes over the course of the next three years, they’re getting their cash upfront.”
Frank Alexander is co-founder and senior advisor to the Center for Community Progress. He studies property tax delinquency across the country. Alexander agrees that for local governments, the point of selling tax liens is to collect unpaid taxes immediately. But he says in doing this, the county is leaving money on the table. “What happens about 80% of the time,” Boyd says, “the property owner who never paid in the first place, will pay some day. They end up paying the private investor the 12% plus penalties. And my question – why are they not collecting that themselves? Why are they transferring to the private market the 12% rate of return.” When asked why Jefferson County sells tax liens, Tax Collector J.T. Smallwood says it is just the way it is. “We have no choice. It is a State of Alabama law,” he says. “It’s a rule. The sale occurs in every county in Alabama.” As long as it remains law, tax lien investing is not likely to decline anytime soon. In today’s market, a 12% annual rate of return is really good.
For property owners, the system increases the potential penalty for late property taxes. In Sandra’s case, she just wanted to pay off the debt as soon as possible, but she found herself delayed by a complex system of bureaucracy. “And it just sort of felt like a hole that you fall into on the way to trying to recover,” She says, “and why are there so many holes on this road?”
Sandra eventually paid off her lien and owed about $400 in interest to ATCF. She learned a lot in the process, but she says she never wants to go through it again.