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Tax Lien Errors - How You Could Lose Your Home Even If It's Paid For

By Donna S. Robinson | July 4, 2012

Rita James, a 76-year old from Atlanta, GA, had no idea 18 years ago that the Fulton county tax commissioners office had made a mistake on her property tax bill. As reported in the Atlanta Journal - Constitution, Ms. James spent years trying to save the home she had owned since 1963. A home which she apparently owned free and clear, except for those yearly property tax payments.

But when the Fulton county, GA tax commissioner auctioned a tax lien on Ms. James home to a real estate investment company, for non-payment of taxes, it was up to Ms. James to prove that the county had made a mistake.

In many states, tax liens are created by the county government when a property owner does not pay their property taxes on time. These liens can then be sold to the highest bidder. Bidders are often well funded investment companies who specialize in this little known form of real estate investing. Generally the idea is to buy the lien at an auction held by the taxing authority. The seller may have the right to "redeem" their property by paying the taxes due, plus interest. Investment companies buy these liens hoping to earn interest when the owner pays the back taxes. But if the owner does not pay, after a specific period of time, the lien holder has the right to claim ownership of the property.

This is essentially what happened to Ms. James. She actually did pay her tax bill that year, but the county made a mistake and sent her two property tax bills. One in her name and one with someone else's first name. Since Ms. James did not recognize the name on the other tax bill, she paid the one in her name, and threw the erroneous one away. This small oversight almost cost Ms. James a home she had owned for nearly 50 years.

The investment company that bought the lien issued to the other name thought they had purchased a legitimate lien on the property. When it went unpaid, they went to court to make their claim to the property. It took Ms. James almost 18 years and a lot of stress and worry that never should have happened, but fortunately, a Georgia court finally recognized that the error had been made and denied the investment company's claim to the property.

There are a couple of important lessons here, one for the property owner, who never should have been subjected to such treatment, and one for the investment company, who arrogantly assumed that they had a valid claim to a tax lien that was issued in error.

To clarify a fine point of property taxes and liens - In some states, unpaid taxes are collected by auctioning off "tax deeds" instead of "tax liens".

A tax deed can actually convey ownership of a property to the buyer of the deed. These deeds are sold for the back taxes due. A tax lien does not convey a clear title, but gives the buyer the right to make a claim to the property, which is pursued through a legal process known as "quiet title". (see the link above on tax deeds). Some states such as Georgia use tax liens. Other states use tax deeds.

Property owners must always be vigilant where property taxes are concerned. Fortunately incidents like this are not too common but if a mistake is made on your property tax bill, it's important not to ignore the error. Act promptly to correct the error and make sure that the local tax commissioner knows that you have paid your property taxes.

Tax lien and tax deed sales can cause you to lose your property even if you own the property free and clear and have paid your mortgage in full. Remember that there are lots of buyers out there looking to use this method to obtain real estate investments at substantial discounts. It's perfectly legal, and you can't blame the investors. They are only doing what the government allows them to do. This is the government's way of collecting those back taxes that the owners have refused to pay.

When it comes to real estate investing, there is often more expense to the tax lien and tax deed process than meets the eye. In Georgia, where Ms. James lives, the owner of the lien was required to file for "quiet title". This is a lengthy legal process in which the lien buyer asserts a claim for ownership of the property. It can be quite lengthy and expensive to pursue a quiet title claim.

I used to buy houses from a company that bought up thousands of tax liens in Georgia and Florida. In one case, they spent more than the value of the house in legal fees and court costs, trying to obtain legal title to a property that we had under contract with them. We held the contract for two years waiting for them to get clear title so that we could close on it. During the course of those two years someone broke into the house and almost burned it to the ground. The company spent more than $20,000 getting title to the property, then sold it to me for $6000. After that they contacted me to tell me that they were pulling out of the Georgia market as it was too expensive to pursue the quiet title process.

Sometimes real estate investment opportunities such as this work out great, and sometimes they result in big losses. An old late night infomercial used to sing the praises of buying tax deeds until the FTC shut them down for misrepresentation. For investors it pays to understand what you are getting into. Tax liens and deeds can be a great investment vehicle, but real estate investing of this type is not for "sissies".

Sometimes even "little old ladies" like Ms. James have a legitimate claim to their property and there's just no point in wasting tens of thousands of dollars trying to convince a court otherwise.
Donna S. Robinson is a real estate industry veteran who has authored several books and courses on real estate investing. Follow her on twitter at donnaconsults. Her website is Realty Biz Consulting.


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Donna S. Robinson has been involved in the real estate industry since 1996. A licensed agent and real estate investor, she is a recognized expert on residential real estate investing. Her course, "Fundamentals & Strategies For Real Estate Investing" is approved for CE credit by the GA Real Estate Commission. She has authored several books on real estate investing, and consults with residential investment companies. She also offers coaching services to real estate investors.

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