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Tax sales support get-rich-quick cottage industry

Posted on by taxlieninvesting


Although procedures differ from state to state, the modern tax sale system across the U.S. was molded by the very investors who would later profit from it — and it still works to their advantage today.

Liens on homes delinquent in their tax bills went up for auction at the Marion County tax sale in the City-County Building in Downtown Indianapolis on Oct. 8, 2015.

In the 1930s, as delinquent tax rolls swelled because of the Great Depression, the Interstate Bond Co. in Atlanta approached delinquent homeowners with a solution: We’ll pay your taxes, you pay us back with interest.

When the Interstate Bond Co. saw how lucrative its business was becoming, tax sale scholar Andrew Kahrl said, it lobbied state lawmakers around the country to change long-standing tax sale laws to its liking.

The burgeoning tax lien industry was well established in Indiana by 1938, when the Lake County treasurer boasted in a newspaper clip that the county tax sale had collected $11 million in unpaid taxes a year earlier. The top buyer? The Interstate Bond Co. from Atlanta.

At the time, the company’s business was unusual; most buyers operated in just one state, said Kahrl, an assistant professor at the University of Virginia’s Corcoran Department of History. By the ’60s and ’70s, that began to change, and tax buyers began to exploit the system as a means of acquiring property for far less than it was worth.

Today, tax sale investors range from multimillion-dollar companies that purchase hundreds of properties at a time, to small nonprofits and developers — not to mention single investors who sit in on seminars promising easy money, and often get in over their heads.

‘Wealth Explosion Starter Kit’

On a warm evening in mid-August, a crowd of 50 or so investors gather at the Arch at Chatham event hall in Downtown Indianapolis to talk shop.

One woman stands up and wows the crowd with her tale of snagging a condo for $10,000 at a tax sale; now she’s renting it for $650 a month with low overhead. Another speaker directs his colleagues to BloxTrade — a secondary online market where tax liens are traded among investors after auction, similar to the way banks buy and sell mortgages.

Later, Edwin Kelly, the CEO of Specialized IRA Services, takes the mic for the feature presentation. He calls it his “Wealth Explosion Starter Kit” — “How to create a fortune and rescue your retirement using one secret tip.”

The tip is a self-directed IRA, a tax-deferred retirement account that allows real estate investors to put off paying income taxes on their investment properties.

At the two-hour meeting of the Indiana Real Estate Investors Association, there’s no discussion of how much money someone would need to invest in a tax sale property to make it habitable; little discussion of the challenges of renting; none of what negligent real estate investing can do to a neighborhood.

Instead, they swap tips on minimizing taxes, avoiding liability.

Don’t want to deal with code enforcement? Register your real estate business to a third party, such as an attorney. Or, if your IRA owns the property, list the account number as the owner; Kelly says that even if asked by the city or a judge, he can’t divulge his clients’ names.

It’s stuff like this that frustrates city officials and neighborhood groups alike, and has left lawmakers searching for answers to the abandoned housing problem. Often, they say, investors neglect properties, leaving them vacant and unattended, and when developers want to step in, the system presents obstacles.

Michael Osborne, right, president of the Near North Development Corp., and James A. Whitfield, of the Highland Vicinity Neighborhood Association, discussed an overgrown property on Indianapolis' Near Northside in 2013.

“You can’t even find who owns the property,” said Michael Osborne, president of the Near North Development Corp. “You know, it’s still in the name of ‘X’ — some LLC, which happened to be legally dissolved at the state level.

“… They’re long gone, they’re not connected to this property. So, it’s like yeah, we know legally who’s on the title, but you can’t get a hold of them.”

The Star found instances of investors simply walking away from their properties, leaving taxpayers to pick up the costs of their neglect.

Often, the only recourse for groups that want to rehab a neighborhood eyesore is to wait for it to go back to tax sale — a process that takes years, with no assurance of success.

Call Star reporter Brian Eason at (317) 444-6129. Follow him on Twitter: @brianeason.



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