Suppose an elderly owner passes away, with no heirs or relatives. The property just sits there, accruing back taxes, until the government puts it up for a tax sale.
NO LEGAL OWNER
Here, the elderly owner who passes away may have some relatives out there, but maybe they died suddenly, and never having specified a new owner to take over the legal ownership. It’s really up to the owner to make sure that the local governments are up to speed on who really owns the property, so if they fail at maintaining the piece of information, the property can fall into a tax sale situation.
Sometimes a property owner might contract a serious physical or mental illness, and when the property taxes are not taken care of by someone else, they may have to be collected by the government through a tax sale.
This is one of the least pleasant situations, but also one of the most common, particularly in the case of elderly couples. Say Mr. Jones has been in charge of all the bill paying, and he dies, leaving Mrs. Jones to fend for herself. She may not realize that there are taxes due on their property, or just plain forget to pay the bills. Or maybe she simply moves to a retirement home, forgetting to keep up to date on the taxes (this happens most often when the house is owned free and clear). No payment on property taxes means a tax sale event. This isn’t something one hopes for, but it happens a lot more than it should.
More often than not, opportunities for real estate tax sale investors that happen because of bankruptcies involve corporate ownership of some sort. A company might own a parcel of land, but dissolve without closing out all their assets, leaving the property in question without fully-paid taxes. Not many successful businesses will forget about truly valuable properties, but as you probably know, there are often business deals done under the table or without all the partners knowledge, and those can be a terrific opportunity for the investor.
JUST PLAIN FORGOTTEN
This category would probably be the one that most tax sale investors like yourself hope to find. It’s the situation where the purchaser has moved, or has changed his lifestyle, or divorced, or something to where he just plain forgot about the property. There’s nothing like a mid-life crisis to distract people from paying their bills. Or maybe the property has been handed down so many generations that its value, and even very existence, is forgotten-out of sight, out of mind.
FORCED TO FORGET
So you bought a piece of property for a hunting club for your buddies. The perfect hideout for just the boys. Maybe before you can figure out how to tell your wife, your marriage gets a little strained and you realize the hunting club idea is going to be the last straw. You just wish everything, including the property, would disappear. Or, they might have purchased a piece of land as a surprise for their spouse to build a dream vacation home, but suddenly find themselves getting divorced and now have to let the property disappear or lose it in the nasty negotiations. Well, if you don’t pay the taxes due, it will likely be sold by the government or a savvy tax sale investor.
This is when the landowner is trying to do the right thing by paying their taxes, but somehow sends payment to the wrong tax authority. Maybe the owner sends payment to the IRS instead of the right local agency, but is credited by the IRS against their personal taxes due to confusion. Imagine if this happens for 20 years (and the landowner doesn’t even wonder why his personal taxes are so low all the time). The owner thought they were paying one kind of tax, the government another, and the landowner finds himself in a tax sale situation. Or suppose the owner thought his accountant was covering his taxes, but the accountant was thrown in jail years before and hasn’t paid a dime. Again, it would be unusual for a mistaken payment to result in a lost property, but there have been cases where exactly that has happened.
MISTAKES BY THE TAX AUTHORITIES
Yes, local governments have been known to make paperwork errors-not too hard to believe! They might accidentally misfile payments or related information to a property, resulting in a tax sale event. It’s somewhat unusual for this to go all the way to the point where the property is lost by the original owner, but in combination with a forgotten property or one less important to the owner, it can and does happen on occasion.
As a landowner, this is good motivation for making sure the post office knows your current mailing address. It might be as simple as forgetting to pay the property taxes because you forgot to have the bills forwarded to your new home in Eastern Peru. After awhile, your property goes up for sale and you don’t even know about the proceedings. Yes, the government is legally bound to work hard to find you before they foreclose on your property, but nonetheless this can and does happen.
As we all know, there are those who protest the government’s right to tax them to begin with. Maybe they inherited a huge house in a beautiful part of town, but don’t think they should pay any kind of taxes and are eventually arrested for income tax delinquency. Chances are good the property taxes are delinquent too, so that nice house is now up for grabs.
A WORD OF CAUTION
Don’t forget – things that are too good to be true sometimes are. The question of why someone didn’t pay their property taxes does make a difference, and will stand up in court. The simple situation of misaddressed payments is not going to force someone out of their home if they can prove in court that they had good faith in trying to make payments.
Yes, all of the causes described above can result in a tax sale event, but the right combinations need to come together or you as the real estate investor won’t see the profits you expected.