Those late night infomercials might make buying tax sale properties sound like the ultimate get-rich-quick plan: pay a few hundred bucks and end up owning a home that is worth $80,000.
The trouble is, it is rarely the case when purchasing properties that have been sold by cities or counties for delinquent taxes. It is, however, a great way to sell a $49.95 “Get Rich Quick” kit.
“It is not common to get property of significant value at tax sales,” said Eddie R. Myers, director of administration and city clerk for the City of Hattiesburg and president of the Mississippi Municipal Clerks and Collectors Association. “We have property that matures each year, but generally that property is not extremely valuable.”
The way tax sales work in most areas of the state is that property taxes are due the first of January. If taxes aren`t paid by the last Monday in August, most jurisdictions in the state then hold a tax sale.
“People have two years from that date to redeem that sale by paying their taxes and applicable fees,” Myers said. “Purchasers buying property for unpaid taxes are subject to a two-year period of redemption. If it is redeemed, purchasers get 1.5% per month return for their money. If after 24 months taxes are not paid, then tax sale purchasers can actually take ‘a tax title’ to the property.”
Myers said it has been his experience that bidders at tax sales are familiar with the area and tend to purchase properties that are of higher value. That makes sense since the purchasers are more likely to get a return on their money. “Lesser value property often is not bought at the tax sales,” Myers said. “If no one bids on the property, then it is struck off to the municipality, or in the case of a county tax sale, it`s struck off to the state.”
Situations where more valuable property is lost to taxes may include a case where the property owners have passed away, and heirs are unable to be found. However, even in these cases, a tax purchaser is seldom able to obtain clear title to such property due to lack of statutory notice. Only very rarely do occupant owners of valuable real estate allow it to be sold for taxes. If nothing else, they are likely to do a quick sale even at below market rates in order to recoup something from their investment rather than letting it go for taxes.
Because tax sale purchasers can earn up to 18% per year – a far higher rate of return than can be found in most other investments – it is a competitive market. Nevertheless, at most tax sales what usually happens when more than one purchaser is interested in a tax sale certificate going up for bid, which is often the case, is that there is a competitive bid. The person who bids the highest premium dollar amount wins the tax sale, and the extra revenue, over the amount for the taxes, goes into the city or county coffers.
In some isolated cases, some cities and counties use a “round robin” bidding process instead of a competitive bidding process. In a round robin, each purchaser takes a turn as the tax certificate comes up for bid. Nonetheless, Myers notes that it`s illegal for a tax collector to require a round robin. Even so, in such sales it is not uncommon for purchasers to agree among themselves not to bid against each other, but instead to take turns buying property as it comes up for sale.
“That is, as far as I’m concerned, entirely up to the group of purchasers,” Myers said. “I’m calling out property to sell. If purchasers decide to take turns, I can`t do anything about that. But tax collectors should not dictate how purchasers bid on property.”
The reason for a round robin can be the time it takes to do individual bids on hundreds to thousands of pieces of property. While tax sales are time consuming, they can be a significant source of extra revenues for the city or county. The City of Hattiesburg generates over $40,000 in additional income every year from competitive overbidding.
“Bidding does bring in extra money,” Myers said. “The law allows for excess bidding in any jurisdiction in the State of Mississippi.”
There are some counties that actively discourage and others that outright refuse to accept overbids, says Mitch Kalom, a 25-year veteran in the tax sale business and owner of MSTaxDeeds.com, a business specializing in buying and selling tax deeds across the state.
“They do a round robin, which is highly illegal,” Kalom said. “I’m serious. I can`t tell you how many sales I have been to where people think that is great thing to do.”
Kalom said one problem with the round robin approach is if that is done one year, next year potential purchasers may bring along a whole gaggle of relatives and friends to get as many properties as possible. It can get ridiculous. Taken to its most absurd, you can have people being bussed in to take turns in the round robin.
Furthermore, it is important to note that in Florida, the state and the federal government recently labeled these types of practices by bidders as criminal in nature and illegal. It joined hundreds of bidders in a large suit and many had to pay large fines as well as the cost of having to defend themselves in suits alleging potentially criminal conduct.
Cities and counties and local taxpayers win in overbid environment. So it makes no sense to Kalom when cities and counties don`t allow overbids. For example, Madison County won`t allow overbids in auction. But Kalom said most cities and counties have done a good job with the tax sale auctions.
One snag over tax sales, noted Meyers, is the issue of whether or not taxes have been purchased from both the city and the county. If one purchaser buys the tax deed for the city, and another for the county, there is no clear ownership. Thus, in an effort to reduce conflict over city and county sales and in an attempt to streamline collection efforts, the City of Hattiesburg has recently joined a statewide trend to turn over tax collection to the county. Myers said having the city and county collect taxes separately is a duplication of services.
“There is a major trend throughout Mississippi for cities to contract with counties to let the counties collect taxes for them,” Myers said. “In theory, it should save you money. And it is a real convenience to taxpayers because they only have to go to one place to pay taxes for both. It is also a good situation for tax sales because if the cities have not turned tax collection over to the county, the tax sales are taking place at the same time. One can pay for the city taxes and another for the county. If it matures two years down the road, you have a title problem with two different purchasers.”
“A lot of people get in that trap,” Kalom said. “The front end is the lure of an 18% return on investment. With interest rates at the bank less than 2%, that sounds great. But on our best day we don`t get 18%. A ton of people has entered this marketplace. What that has done is driven down the rate of return. Eighteen percent is an unreal rate of return. In reality, it is nowhere close to that because in a competitive environment people have to pay a premium to really get that deal, which means a lower yield.”
If a purchaser bids a 6% premium on a tax sale, and then the property is quickly redeemed, the purchaser may end up losing money. The purchaser is betting on the property being redeemed later rather than earlier.
To be successful in the long term in this business of purchasing delinquent property tax obligations, a lot of research is necessary.
“If you are going to do this, you have to be the kind of person who is willing to do their homework,” Kalom said. “For example, if you buy in Hinds County, you could have 90 of your purchases turn into tax deeds. However, a lion`s share of those properties you wouldn`t want to have. There may be so many cleanup assessments and other liens on the property that you will never be able to get your money out of it.”
He said for people who are prudent and do their homework, less than 2% of a large portfolio will end up being redeemed. And even when you do end up getting a valuable piece of property, the sto
, or nightmare, may have just begun.
“If you get a valuable piece of property, someone has made a mistake somewhere,” Kalom said. “There is the potential for ending up with property, but it is very small, and out of that small percentage, the potential for ending up with a truly valuable property upon which one could obtain clear title is even smaller. Less than 2% of a well-researched tax certificate portfolio will end with property upon which tax deeds can be issued.”
It can be a good way to get property – assuming the property has a value. However, what many people find is that when they do obtain a tax deed on a property, the property they get is either valueless or has a significant liability.
“For instance, say you end up with the tax deed and someone falls on the property and sues you,” Kalom said. “Moreover, you have to keep in mind that a lot of people are trying to use tax sales as vehicles to extract themselves from significant liability. For example, their house burns down, and they take the insurance money and leave.”
Additionally, pre-existing IRS liens may pose significant problems or wipe out all equity in the property. Also, more counties and cities have environmental courts that require owners of derelict properties to clean up the properties or face civil penalties. For example, the City of Biloxi can now impose significant fines and potential jail time for failure of a property owner to clean up a property.
Even if the tax buyer did not cause the problem, she may very well inherit that liability, which in many instances may well exceed the current value of the property. Kalom knows a tax purchaser who paid almost $100,000 to defend against an asbestos abatement suit over a matured tax certificate, and others who ended up in similar quandaries.
“To boot, let`s assume you get a tax deed to that gem of a property,” Kalom said. “Well, what almost always happens there is that at some point the prior owner will file an action claiming lack of notification. In such a case, the general rule is that judges and the law ‘abhor’ forfeiture, and upon hearing the case the judge, either in law or equity, will find same way to void the tax sale and in most cases, at best, the tax purchaser will get their original investment back less, of course, the expense of having to defend the suit, thus resulting in a net negative return. Finally, at the end of the two-year period the taxing authority sometimes even saves the court this trouble by summarily voiding a tax sale and refunding the tax purchaser`s original investment, with no interest. There are other potential problems, as well.”
None of those potential drawbacks are advertised in the “infomercials” that come on the television at 2 a.m. in the morning.
“It could be a good investment,” Kalom said. “But when you see these books advertised about how to make a million in tax sales, you have to ask, ‘If this is such a home-run hit, why isn`t the author doing it himself?’ You can make a decent living. Treat it like a business, do your homework, and you will make a little bit of money. But the only way to get rich quick in the business world is if you are willing to lose it quickly. And the reality is, you can get poor really quick. Stick with the theory that if it sounds too good to be true, it is.”
There is more money in the business by writing a book telling people they can make a million quickly. “Get Rich Slow” isn`t a title that sells books, Kalom said.
“If you want to gamble, go to our casinos in Biloxi,” said Kalom, who since 1980 has purchase tens of thousands of tax certificates throughout the United States worth hundreds of millions of dollars. “You would have more luck and more fun than buying tax liens if you are not going to do your homework.”
Contact MBJ contributing writer Becky Gillette at email@example.com.