Patricia Miller talks about how her father's west Phoenix home was lost because $808 in property taxes had gone unpaid. It was the home where Devoe Poleeson, the proud family cook and grill master, taught his daughter how to fry eggs. It was the home where he set the oven timer to awaken the kids for school before he left for work. And it was the family gathering place — for holiday parties, wedding receptions and even wakes — during the four decades he lived in the modest west Phoenix home.
The mortgage had long since been paid off. But in 2010, a decade after Poleeson's death, an investor from Utah legally seized the home because a mere $808 in property taxes had gone unpaid.
"It was tragic for us, for our family, because ... we grew up in that house and all of our memories are there," said Patricia Miller, Poleeson's daughter. "It was a loss that we just couldn't really do anything about. There just wasn't enough money from the insurance he had left to cover everything."
The avalanche of foreclosures that devastated Arizona's real estate market after the 2008 crash arose when thousands of homeowners were unable to pay their mortgages. But since then, other homeowners have faced their own foreclosure crisis, quietly losing their homes at a rate that didn't peak until 2015.
Tens of thousands of people were at risk of foreclosure in recent years after they fell behind on their property taxes. And, like Miller, hundreds of those people lost their homes, and all their equity — not to the bank or local government, but to private investors.
Homeowners who fall behind on tax bills by as little as Poleeson's $808 — indeed, sometimes by $50 or less — can have their debt bought by other investors or banks. With what's known as a "tax lien" on the property, those investors then have the right to collect not just the debt, but compounding interest, too.
If homeowners can't pay the tax plus interest, they lose their homes and all the equity they've gained.
A review of more than six years of data on tax-lien foreclosures across Arizona shows most of the hundreds of thousands of property-tax liens in the state were paid off, sidestepping foreclosure. And a closer look at Maricopa County shows many tax-lien seizures involved vacant lots.
But of the cases that do lead to foreclosure — 1,734 in Maricopa County since 2010 — more than a third are primary residences. That means that 642 homeowners lost their homes and all their equity.
The data shows just how much can be lost:
One investment LLC bought a tiny tax lien — $48.65 — on a faded fixer-upper in south Phoenix, then foreclosed and sold the house for $43,600.
Another purchased a $1,390 tax lien on a house in north Glendale, then took the house in foreclosure and sold it for $210,500.
In Maricopa County, high-poverty neighborhoods such as the Maryvale area, where Poleeson lived, have been disproportionately affected. Hardest hit are areas with large populations of Latinos and African-Americans, such as west Phoenix, south Phoenix and south Glendale.
"If you successfully foreclose, you normally find them ... in socioeconomically depressed neighborhoods," said Barry Becker, a prominent local attorney who has his own tax-lien investment company. "No one loses their house in Paradise Valley. Very few people lose their house in Scottsdale."
Many cities and counties across the country sell tax liens, andthe system has an immediate public benefit. Investors pay the back taxes immediately, meaning property-tax revenue is restored to counties that have been counting on it in their ever-tightening budgets.
But because the system lets investors pocket the interest or take the home, some say it distorts the government's duty to help, rather than hurt, taxpayers who may be struggling the most.
"It's very vicious and draconian way of enforcing taxpayer compliance, and we should never lose sight of the threat underlying the tax lien is you'll lose your property and all of its equity," said Andrew Kahrl, a professor at the University of Virginia who has studied the history of the tax-lien industry across the country. "The part that should give lawmakers pause are the cases when people lose their homes over a small unpaid tax bill. While rare, it happens more often than people want to recognize."
How tax liens work
When a property owner falls behind on paying taxes, county treasurers place liens on properties with delinquent property taxes. If the taxes remain unpaid after two years, the treasurers auction off those liens to investors, who then pay the delinquent tax, recouping money the counties need.
Investors who bid on those liens buy the right to collect those taxes — with interest — and take the property if the owner will not or cannot pay within three years.
The back taxes aren't a huge chunk of the county budget, but the amounts are still significant. In 2016, Maricopa County recovered nearly $17 million in unpaid taxes through its lien auction, although that is less than 1 percent of the county's $2.2 billion budget that fiscal year.
In interviews, several county treasurers noted that tax-lien auctions benefit both taxpayers and homeowners. The county gets the money it is owed. Delinquent taxpayers actually may benefit, too: For as long as the county holds the lien, the back taxes accrue interest at 16 percent a year. Buyers, though, can bid down the interest rate — in essence, those willing to charge less interest to the property owner win the bid.
A lien buyer may get far less than 16 percent interest, but tax liens are almost guaranteed to turn a profit. The property owner either repays the taxes with interest or the investor gets to foreclose and sell the property.
In addition, tax liens take priority over most other types of debt, including banks' stake in properties when owners default on their mortgages.
When investors foreclose on a home, they often can quickly sell it for an enormous profit, as was the case with Poleeson's house.
After he died in 1999, his four children found it difficult to sell the home because he left no will. Property taxes were paid intermittently. In 2007, their $808 tax lien from 2004 was sold at auction. The family then was obligated to pay the overdue tax to the investor, plus 16 percent annual interest.
That investor foreclosed on the house in the 3500 block of West Earll Drive in Phoenix in 2010 and sold it for $16,000 when the real estate market was near rock bottom. Eight months later, the house was sold again — for $54,900.
The tax-lien foreclosure peak in Maricopa County came in 2015, when investors foreclosed on about 400 properties, ranging from vacant lots to mobile homes in Glendale to apartments in Phoenix to houses in Buckeye.
As Poleeson's case underscores, many foreclosures involve homeowners who have died.
Kahrl,the professor who has studied tax liens, said it's common in such cases for property taxes to slip through the cracks.
"If you have a husband who takes care of their family finances ... the year after that person's death, along with all the other things you're dealing with, you miss your property taxes," he said.
Tax-lien sales have long been a niche industry, but in recent years, the pool of investors involved has shrunk in Maricopa County. Traditional buyers have been crowded out by large financial institutions that now make bulk purchases of liens at auction. The winning interest rates have nosedived, making each lien less profitable for investors and forcing out smaller companies who can't afford to buy in bulk.
"Smaller investors are happy to just get liens with great interest," said Eric Kessler, one of the most prominent attorneys who represents lien investors. "Historically you could expect to get 8 to 10 percent return on investment if you bought enough liens."
But five or six years ago, Kessler said, big banks and other major investment firms poured into the market, bidding down the interest rates on the liens.
"This left smaller investors in the lurch," he said.
One of these smaller investors was Stan Harrison, who ran a small Oklahoma-based firm investing his and his family's money. He had been buying liens in Maricopa County for years, with nearly 200 in 2010 alone, but soon left the entire industry for good.
"When I first got involved in tax liens, the big banks were not involved," he said. "Because of low interest rates in our economy, they were forced to go where the rates were best, so they got heavily involved in tax liens and they could flood the bidding. Basically they crowded guys like me out. ... Big banks rule the roost now."
Those large institutions have included subsidiaries of major banks, including Bank of America and JPMorgan Chase.
In 2010, there were more than 535 bidders in Maricopa County's tax lien auction. By 2016, there were less than half of that — 208.
Kessler said the entrance of big banks has shifted focus in the lien business, because the lower interest rates mean the only way to turn a big profit is by taking a property.
"Most of the investors are large funds," he said. "Many investors are pumping millions of dollars into lien investments knowing that they are going to hold onto these for three years. Essentially they are willing to purchase non-performing assets — liens below 2 percent — on a grand scale, just to hold them until they can foreclose."
Seventy-four percent of the winning bids for liens in Maricopa County, where bidders can easily access online auctions, were from out-of-state investors, according to an analysis of auction results from 2010 to 2016. Some investors bid from Canada and, in 2012, an investor from Singapore bought five tax liens at auction.
Even though investors from around the country and world buy tax liens in Maricopa County, the top buyers are a select community of major investors. And so are their local attorneys.
The same four attorneys — Becker, Kessler, Heather Hendrix and Mark Manoil — represented investors in 83 percent of foreclosure proceedings in Maricopa County.
The two companies Hendrix represented, a Nevada-based LLC called National Tax Lien Redemption Services and its Arizona subsidiary, together foreclosed on more properties than any other investor. And 139 of those foreclosures, or 59 percent, were primary residences.
Becker's company, Kolonia, successfully foreclosed on the second-most properties in court, but only 23 percent of them were primary residences. Many of his wins were vacant land.
"Our attitude is that we go for the interest and, if we get property, we just lucked out," he said.
Limited ways to help
Scattered government efforts to protect homeowners on the edge have had limited success.
In 2015, former Maricopa County Treasurer Charles "Hos" Hoskins worked with legislators to pass a law permitting homeowners in every county to make periodic payments of back taxes to lien holders rather than paying one lump sum.
But Maricopa is the only county to institute the program. Other counties feared it would deter investors from buying liens and replenishing county coffers.
Royce Flora, the Maricopa County treasurer, conceded that some investors weren't too happy about any program that makes it easier for homeowners to redeem their liens.
But, he said, "My job isn't to make investors rich. It's to keep people in their homes."
Maricopa has also been the only county to have an Elderly Assistance Fund since the state authorized it in 2007. That cut property taxes for many low-income, elderly homeowners. But it was funded by higher interest rates on delinquent property owners trying to redeem their liens. Essentially, it helped one group of on-the-edge taxpayers at the expense of another.
The fund is nearly out of money, and Hoskins said he fears that means many more homeowners will be unable to pay their taxes — boosting tax lien sales and foreclosures yet again.
"What we have is nearly 14,000 low-income homeowners out there who are going to lose their credit and their taxes are going to go up," he said. "They probably are making the choice between food and meds."
Since the foreclosure, Miller hasn't returned to her father's house. She said she wishes these types of resources were available when her family was facing the loss of his home, although she still doesn’t blame anyone but herself.
"There could be a flaw in the system, but the way I see it, it is each homeowner's responsibility to pay those taxes," she said. "I'm the oldest in the family, so I feel it should've been my responsibility to watch out and take care of the property. ... I kind of feel like I let down the family. I let down my Dad."
How we did the story
Tax-lien foreclosures are part of a vast but nearly invisible industry in Arizona.
To determine the scope of tax-lien sales, reporters collected data from 14 of the 15 county treasurers, along with court filings, assessment records, deeds and tax lien auction results. (Only rural Cochise County in southeastern Arizona did not provide the number of tax liens it sold.)
They found that more than a quarter of a million property tax liens were sold between 2010 and 2016. Many of those 250,000 involve properties with multiple liens. And in most cases, the owners sidestep foreclosure by paying off the private investors.
But with help from the Maricopa County Treasurer’s Office, reporters used foreclosure data to measure the impact of the practice on homeowners. (The county has 61 percent of Arizona’s population.) In the same timeframe, hundreds of people lost their primary residences to tax-lien foreclosures.
Read original story at AZCENTRAL.COM.