Since 2007, there has been a growing movement by Massachusetts cities and towns to sell delinquent property taxes to investors rather than try and collect them in-house.
A change to Chapter 295 of the Acts of 2004 has enabled communities including Worcester, Methuen, Lawrence, Haverhill, Norwell, Framingham, and others to sell entire portfolios of back taxes and collect millions of dollars in the process. Originally met with skepticism and a good deal of cultural resistance, the practice is now quickly growing in popularity.
“We don’t have the staff to chase people to the ends of the earth,” said one local assistant treasurer. “This way, the city gets all the taxes and interest, and I get these problem accounts off my desk.”
Although largely unknown to many, overdue property taxes are an enormous problem – and represent an enormous opportunity – in Massachusetts. According to the Department of Revenue, Massachusetts cities and towns had slightly more than $900 million in property tax delinquencies, including water and sewer, in FY 2010. To put it in perspective, uncollected real estate taxes amount to roughly 3 percent of the commonwealth’s annual budget of approximately $29 billion.
Given fiscal pressures at both the state and municipal level, this amount of “missing money” can no longer be ignored.
As opposed to federal or state liens used to collect income taxes, property tax liens are placed against real estate by cities and towns to collect delinquent property taxes. In Massachusetts, these tax liens are alternately known as tax titles. Under Massachusetts law, property tax liens yield 16 percent, and are in super-priority position on title – ahead of all mortgages and encumbrances. Because of their safety and guaranteed high yield, they are eagerly snapped up by investors.
Open Secret
Selling tax liens is common practice elsewhere in the United States. Florida has done it for well over a century, and in New Jersey it is actually mandatory – all 473 cities and towns in New Jersey must sell their delinquent taxes every year and balance their books.
In Massachusetts, cities and towns can auction liens one at a time, or have contractors bid on entire portfolios. One city’s CFO said he likes the auction method, which puts the small investor on an equal footing with the biggest banks. Another said he wants keep control by finding a single investor to contract with for the whole portfolio.
“We’re looking for someone professional to partner with, someone who will be accountable to the city,” this official told me.
Sometimes filing a foreclosure action is the only way to bring a tax scofflaw to the table. In addition to staff cutbacks and the eternal need for cash, the cost of collection and foreclosure prohibits many cities and towns from going to court. In the past ten years, filing and recording costs alone for foreclosure have jumped from $110 to $590 per case. This means a town with 100 foreclosures to file needs $59,000 – aside from attorney’s fees – just to start. As a result, the Land Court, which has exclusive jurisdiction over tax lien cases, once saw 4,000 to 5,000 lien foreclosure actions filed annually, but has seen the rate go below 600 statewide in recent years.
Will the practice of selling tax lien portfolios lead to problems and abuses as we have seen in the mortgage crisis? While anything can be abused, there are three critical differences between taxes and mortgages that mitigate against abuses.
First, unlike mortgages, taxes are not optional. All properties are taxed – residential, commercial, industrial, raw land, wetlands, environmental. According to the U.S. Census Bureau, approximately 30 percent of all homes have no mortgages, but 100 percent are assessed taxes. Everyone is treated equally in taxation. There are no “subprime” taxes.
Second, unlike a mortgage foreclosure, tax lien foreclosures are judicial proceedings in Massachusetts. Unlike the mortgage foreclosure process, every taxpayer gets a hearing for due process to be valid. Payment plans are available and the Land Court is eager to keep taxpayers on the rolls. The vast majority of owners pay off, and even when started, more than 95 percent of foreclosure actions are settled before judgment.
Finally, the collection and foreclosure process as a whole is far slower for taxes than for mortgages, giving taxpayers more time to pay. Tax liens cannot be sold until they are at least one year old, and most tax delinquents are usually 3 or 4 years late by the time they are in danger of foreclosure. Some tax liens go back 8 or 10 years or more.
“It’s hard to believe,” says one former treasurer, “that it’s such a secret.”
Michael Cercone is manager of Scollay Square Investment LLC in Marblehead. He can be reached at mike@scollaysquare.net
