City auctions liens on homes

investors can collect

Baltimore's often-criticized tax sale likely set a record on Monday

  • Vicki Valentine (right) lost her West Baltimore home in early February. Real estate investors snatched her property over what began with an unpaid city water bill of $362.
Vicki Valentine (right) lost her West Baltimore home in early… (Photo by Lagan Sebert )
May 17, 2010|By Fred Schulte, Ben Protess and Lagan Sebert | Huffington Post Investigative Fund

Baltimore City officials on Monday auctioned liens on 12,689 homes and properties whose owners failed to pay local taxes and municipal bills — a probable record and twice as many as in 2006 in the midst of Baltimore's housing bubble.

City officials said the number of liens was the highest in recent memory and reflected the severe economic downturn. Investors placed bids on liens connected to a range of properties in the online auction, from boarded-up shells and vacant lots to a few downtown office buildings. Property owners affected by Monday's tax sale owed more than $203 million in debts.

"This jump reflects the pain being felt by Baltimore and other cities across the county. It's definitely indicative of the overall recession," Baltimore City Council President Bernard C. "Jack" Young said.

Critics have warned that tax sales can add unfairly to the economic woes of homeowners even though some of the debts are small, as low as a few hundred dollars. That's because investors who buy the municipal liens can tack on fees and steep interest rates — which can amount to 18 percent annually — or sue to take the property.

The city's record tax sale comes as the Justice Department continues a criminal investigation into bid-rigging by some investors. Federal prosecutors allege that the activity compromised as many as two dozen of the tax sales in Baltimore and several Maryland counties.

Prosecutors say investors agreed in advance which properties to bid on, improperly reducing the money earned by municipalities. Three investors have pleaded guilty in the case.

Such auctions allow local governments to sell liens and ease budget woes without having the added expenses of debt collection, foreclosing, and being a landlord. For their part, investors can bid for the right to collect delinquent taxes and other municipal debts on property owners, sometimes by paying only a few hundred dollars.

It can be a good deal for everyone but the property owner.

An investigation by The Baltimore Sun in 2007 showed that at least 400 homes had been lost in the previous three years by Baltimore homeowners for debts other than property taxes. Half were for unpaid municipal charges of $500 or less. Many of the debts included Baltimore City water bills.

Vicki Valentine lost her West Baltimore home that way one raw day in early February. Real estate investors snatched her property over what began with an unpaid city water bill of $362.

As snow threatened to fall, Valentine scrambled to pack up clothing and mementos. The home had been her family's for nearly three decades, and her father had paid off the mortgage in 1984. "It's hard to say goodbye to this house," she said. "It's like someone forcing you out of something that belongs to you. I don't get it."

Valentine lost the two-story brick row home after the city sold her debt to investors through the contentious and byzantine legal process that can result from a tax sale. In her case, legal fees and other charges climbed past $3,600 — nearly ten times her original bill.

When owners can't pay, investors can pick up real estate at bargain prices.

Investors purchased an estimated $30 billion of real estate tax debt held by governments across the country in 2009, twice as much as a year earlier, according to the Florida-based National Tax Lien Association. Nearly 30 states and the District of Columbia can sell tax lien debt to investors.

Investing in liens can be risky, with profit on a particular property anything but certain. Investors generally compensate for such uncertainty by buying in large volumes, sometimes at a clip of thousands of liens each year.

City records show that one in five of the liens on properties is for unpaid taxes or other municipal bills amounting to $1,000 or less. And if Baltimore's 2009 tax sale is any indication, hundreds will stem from delinquent water bills; there were 666 such liens last year.

The brisk trade in tax liens has drawn scrutiny from legislators, law enforcement authorities and some community activists.

'Unintended consequences'

Some lawmakers have questioned the fairness of the tax sale foreclosure process, which often sticks homeowners with thousands of dollars in legal fees and other costs to keep from being evicted. Cities and counties in Maryland earlier this year fended off an effort to keep water bills out of the tax sale, arguing that without the threat of losing homes many people would fail to pay their bills.

Baltimore revenue collectors defend their tax sales as a necessary means for feeding the public treasury. In aging cities such as Baltimore, there's also hope that new owners will rehab decaying or abandoned properties, restoring them to the tax rolls.

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