Most counties, cities and other local governments rely on ad valorem taxes on real property as a primary source of revenue. Delinquencies on these taxes run as high as 20 percent in some parts of the country. Nationally, billions of dollars of real estate property taxes go unpaid each year, affecting government cash flow and increasing the taxes paid by non-delinquent taxpayers. These receivables can go uncollected for years until they are finally written off, representing billions of dollars in lost revenue.
The tax delinquent properties are also frequently distressed, depressing the property values of surrounding properties and further eroding the local government tax base.
Historically, governments have attempted to collect the delinquent taxes, with the final option being foreclosure. The record of this approach has been inconsistent at best and the backlog of uncollected taxes indicates government collection methods are not only cumbersome, but ultimately ineffective. Frustration with these inefficiencies has led many jurisdictions to the innovative alternative of privatizing the collection process by selling tax liens.
Under this process, when a property owner fails to pay taxes or in some cases other government assessments (for instance, sewage and garbage disposal and water service) a lien is placed on the property by the government. In 28 states, state law permits transfer and assignment of these liens to private investors.
The benefits of such sales are clear:
First, the city or county receives its money immediately. Past due taxes, penalties and interest that may have accumulated on the tax rolls for years are paid by the person or institution purchasing the lien.
Second, the property becomes a tax source again, improving the city’s or county’s cash flow. In order to maintain the viability of the investment, the lien purchaser has great incentive to pay the future taxes as they come due. So, property that has stopped generating taxes starts to contribute to the city or county treasury again.
Third, the non-delinquent taxpayer has less worry about increased taxes. With up to 20 percent more property generating taxes, a great deal of budge pressure is relieved.