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What Is a Tax Lien Sale and Why Is It a Bad Way of Dealing with Vacant Properties?

October 9, 2023


Property tax delinquency is an early warning sign of a property’s decline, years of unpaid property taxes suggest that an owner has walked away from the basic responsibilities of property ownership. When vacant properties are allowed to languish for years, unmaintained and falling apart, they harm the economy, safety, and health of individuals and communities. These tax delinquent properties also drain the very tax base they’re not contributing to.

Tax lien sales are one way that cities and counties try to recoup some of the public dollars they’ve spent maintaining these properties abandoned by private owners. But, as we’ll explain in this article, tax lien sales rarely fix the problem, nor lead to a vacant property being returned to productive use

What happens when a property owner doesn’t pay property taxes?

Once property taxes are considered delinquent, local governments typically focus on providing notice of delinquency and attempting to collect the unpaid amounts from the owner. After providing notice to the property owner of delinquency, many local governments have the power, granted in state law, to foreclose on unpaid property taxes.

However, this process typically takes years. If an owner has walked away and is unwilling to pay taxes or maintain the property, the city must spend tax dollars to maintain the property. These costs—boarding up the building, mowing overgrown grass and weeds, responding to fire and police calls on the property, and more—add up.

This is why there is a critical distinction between owners “unable” to pay and those who are “unwilling” to pay. Owners who have fallen on hard times absolutely need every effort to keep them out of delinquency and in their homes. But generally, if the property is vacant and deteriorated, we must assume the owner has chosen to abandon their interest in the property and that they are “unwilling” to pay (though circumstances earlier in the process may have forced their hand).

That is why reforming property tax systems starts with equitable property tax assessments and keeping property owners out of tax delinquency in the first place, and ends with making sure a vacant, tax-delinquent property can be swiftly transitioned to a new, responsible owner.

When collection efforts have failed and the delinquent tax remains outstanding, the local government will pursue enforcement in a manner largely determined by state law: either sell the property or sell the tax lien.

What is a tax lien?

A tax lien is a form of legal claim imposed on a property to secure the payment of taxes in the amount of taxes owed, which may include interest, penalties, and other costs or fees. In most states, this tax lien (aka “tax debt”) is given first-priority status, meaning it needs to be paid back before almost any other debts, such as a mortgage.

Take, for example, a single-family home where the owner has long since walked away. For years the local government has had to step in and remove garbage dumped in the yard, board up the doors and windows, and respond to calls about illicit activity on the property. All these services cost the local government taxpayer dollars. The local government places a lien on the property for the cost of these services, but it goes unpaid, along with the property taxes. In many states, those costs can be collected in the same manner as the unpaid taxes, but not in all. (Something that Community Progress strongly advocates in favor of.)

Eventually, the total debt becomes greater than what the property could sell for.

Graphic showing the difficulty of selling a property when tax and municipal debt exceeds market value.

What is a tax lien sale?

In a tax lien sale (or tax certificate sale) the local government typically holds a public auction where the winning bidder agrees to pay the most money for the right to enforce the tax lien, starting with a minimum bid of at least the taxes owned, plus applicable interest, fees, and costs. In some states, they also get the right to purchase future delinquent tax years and earn similar benefits on their investment.

When a government sells the tax lien they are generally selling to a private buyer the local government’s authority to collect the debt in exchange for upfront payment of the taxes owed. The buyer’s purchase usually includes the ability to earn future interest, as well as recoup related fees and costs incurred by the buyer, if the property owner pays the tax debt.

It may also include the ability to foreclose on the owner’s right to pay back the tax debt—called the right of redemption—and to either force a sale or take control of the property. This is, in essence, privatization of a core government function: tax collection.

Why are tax lien sales bad for vacant properties?

Tax lien sales are particularly bad when it comes to vacant, abandoned, and deteriorated properties because they prolong the period before a property can be moved into the hands of a new, more responsible owner. Private tax lien buyers hold the debt, but they do not own the title—the legal right to ownership of the property—and in many cases, they have no interest in getting it. They are hoping the owner redeems and they can earn a return on their investment and the longer the owner takes to redeem, the greater that return might be.

Considering budget cuts, local governments in many states have reduced in-house property tax collection and enforcement efforts and looked to tax lien sales as a quick infusion of revenue. Many counties choose or are mandated by the state to sell tax liens because it outsources collection and often brings in very needed cash earlier in the collection process. However, this short-term win comes at a steep long-term cost, particularly in disinvested communities.

By transferring the local government’s interest in and enforcement of the tax lien to a private buyer, local governments lose much of their flexibility: flexibility to acquire vacant properties that the private market doesn’t want, or to help the owner avoid losing their property. With vacant properties, there is a much higher chance that the private buyer isn’t interested in the property itself. So, if the owner doesn’t repay the private buyer’s investment, the property could cycle through the tax sale process again and again.

Tax lien sales can cause harm in historically disinvested areas. In a depressed housing market, fewer owners are able to redeem the amount of the debt sold to a tax lien buyer. These areas are ripe for a different type of tax lien investor—speculative owners seeking to acquire properties on the cheap by foreclosing on the property tax lien, milking what little equity is left by renting a substandard property to vulnerable tenants, and then abandoning the property when they’ve earned back their investment.

And if a tax lien isn’t sold at first auction, in many places it cycles through the system for another two, three, six, or even ten years, accruing more debt while becoming further dilapidated. Not all state laws give local governments the power to intervene in this cycle. Either way, the property remains vacant and in limbo, all the while imposing significant costs on its neighbors and taxpayers.

Graphic depicting what happens when a tax lien is put up for sale, versus the government retaining the tax lien.

What is a better alternative to tax lien sales?

It’s understandable that many local governments turn to tax lien sales because they help fund essential public services. But alternative strategies are generally just as effective in eventually collecting those unpaid taxes.

If the local government instead sells the property (aka the “tax deed”), rather than the tax debt, then they are in control of what happens to the property and the enforcement process if the owner continues to not pay the property tax owed. The government will provide the owner a reasonable time to pay back the tax debt, after which the government will foreclose its interest in the tax lien and the owner’s right of redemption. It will then seek to transfer the property to a new owner in exchange for at least the amount of the taxes owed, plus applicable interest, penalties, fees, and costs. The property could also potentially be acquired by the local government or transferred to a trusted public entity like a land bank, which can extinguish debts and sell the property to a new, responsible owner.

In recent years, several local governments have ended the process of selling tax liens, including Poughkeepsie and Rochester, New York.

If you’re struggling with vacant, abandoned, and deteriorated properties in your community, check out our free online resourceswebinars, and publications. We also provide customized, expert guidance to state and local governments to assess the state of vacancy in your community, analyze your tax enforcement policies and practices, and recommend solutions for equitable neighborhood revitalization. Contact us at [email protected] for help.

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