Tax Lien Sales: The 'Other' Foreclosure Problem Plagues Elderly Homeowners

PHOTO: Beatrice McNeill, 77, encountered two property tax lien sales on her home in Washington, D.C.Janet McNeill
Beatrice McNeill, 77, encountered two property tax lien sales on her home in Washington, D.C.

Homeowners with an outstanding water bill or property taxes are increasingly discovering the tax man is more than eager to sell their home to property-hungry investors.

Called the "other" foreclosure crisis, property tax lien sales are enabled by state and local laws that allow the sale of a property through a tax lien foreclosure process if the owner falls behind in property taxes or other bills, like a water bill or even a dental bill.

If homeowners are behind for just a few hundred dollars, their homes can be sold to investors at a tax lien sale for simply the back taxes owed on the property. If the owner of a $200,000 house fails to buy back the property, for example, it could be sold for as little as $1,200, and then resold for a windfall by the investor.

Beatrice McNeill and her husband were the subject of two tax lien sales over an error in their property classification.

One week after McNeill, 77, and her husband moved into their two-story home in Washington, D.C., they received a letter stating they owed $10,000 more in property taxes, an incorrect figure that twice led to the near-sale of their new home. Outdated local laws are often to blame, ensnaring vulnerable U.S. homeowners, such as the elderly stuck with a fixed income.

In November 2006, McNeill and her husband paid $2,370 for their residential property tax bill to the District of Columbia Office of Tax and Revenue.

"They said we didn't have to pay anything else," McNeill said.

But in March 2007, the office sent an outstanding bill of over $11,000 because it incorrectly reclassified the property as vacant.

McNeill had to appeal to the Department of Consumer and Regulatory Affairs for the property classification to be changed back to "residential."

"It just went on and on," McNeill said. "We kept going down to the tax building. They said they didn't know anyone was living in the house. They said it was unoccupied."

As a member of AARP, McNeill and her husband were then assisted by Laura Newland, staff attorney with the AARP's Legal Counsel for the Elderly.

"I had advised her to keep paying taxes throughout the process," Newland said. "There were times the Office of Tax and Revenue said, 'You're right.' But it all started with this 2006 classification, because it was so much more than what they had originally paid."

Because McNeill's "delinquent" balance was higher than a particular threshold, which was $500 in 2011, her home was subjected to two public tax lien sales to investors, first in 2008 then in 2009.

More than once, McNeill had some uninvited potential buyers inspect the home.

"There were some people standing right outside my house taking pictures," McNeill said.

Her home was actually sold to investors and Newland was "devastated" that she was going to be evicted.

"I had a lot of problems," McNeill said. "My husband was sick and then he passed away in 2009. I felt real awful. I'm a senior."

Finally, the Department of Consumer and Regulatory Affairs returned the classification of McNeill's home to "residential." But it took the tax office a year and a half to agree to change the classification in the system and cancel the tax sale certificates that had been sold.

Annual tax lien sales total about $15 billion in the U.S. and are on the rise because of the weak job market, depressed home values, and an increase in mortgage foreclosures, according to a report released this week by the National Consumer Law Center.

John Rao, staff attorney with the law center and author of the report, "The Other Foreclosure Crisis: Property Tax Lien Sales," said the elderly are the most vulnerable to these types of sales.

"They have owned the home for long time and there's no mortgage company there that will make sure it won't be sold in a tax sale," Rao said.

Rao's main advice about people who are behind in their bills, like property taxes, is to understand the tax lien processes in your state and to seek legal advice, whether paid or pro bono.

"There's a point where you really can lose your house," Rao said. "If you can afford [legal help], you should do it."

To insure yourself against a tax lien sale, you can ask your mortgager to set up an escrow account for taxes and insurance, so that you will have a monthly payment over time instead of a large tax bill.

Many of the subprime loans leading up to the financial crisis didn't have terms that were favorable to consumers, including not having escrow accounts, Rao said.

"A lot of homeowners get hit with large bill and just can't pay it," he said.