More than 2,600 Jefferson County property owners have waited too long to pay overdue property taxes and now face much more expensive bills.
Some of them may be hardship cases similar to the Center Point woman who didn't pay last year because she had breast cancer and two children.
"She was in a hard time," said Jefferson County Tax Collector J. T. Smallwood.
Tough luck or not, the law tells Smallwood what to do with delinquent properties - offer them for sale. For many homeowners, this will mean a penalty payment added to their property tax bill, a penalty which currently may be equivalent to a 70 percent to 90 percent interest rate on the overdue taxes.
Smallwood said he doesn't like that, and said that feeling is shared by other members of the Alabama Association of Tax Administrators.
"We think it's more of a punitive thing," Smallwood said. "Sort of like usury."
But for outside investors who flocked to the recent tax lien sale, Alabama offers the chance to invest millions of dollars at an interest rate of 12 percent, far above the 10-year Treasury bond yield of about 4 percent.
Here's how the sale works:
When institutional investors bid to buy tax liens, they pay an amount far greater than the tax owed. Any amount above the amount of taxes is held in trust by the county and begins to earn 12 percent simple interest.
This money held in trust is called "the excess." When a homeowner goes to the courthouse to redeem a home, Alabama law requires him to pay not only the original overdue tax (and 12 percent interest on that tax charged since Jan. 1), but also the 12 percent interest being earned by the investor's excess payment.
The law caps the portion of the excess that can earn the 12 percent interest, saying that it cannot be greater than 15 percent of the value of the home. But interest on the excess quickly grows expensive for homeowners.
Consider three tax liens sold this year:
In north Gardendale, $594 was owed for unpaid taxes on a 1,825-square-foot home that was built in 1970. The home is worth $115,600. A Philadelphia financial firm bought the tax lien, paying the taxes and an excess of $29,000.
To redeem the home today, the homeowner would owe about $870 - a total that includes the taxes and 12 percent interest since Jan. 1, as well as 12 percent interest charged on $17,340 of the excess since the May 24-26 tax lien sale. The effective annual interest rate on the original tax bill, if paid today, would be 91 percent.
In the Vestridge area of Vestavia Hills, $2,279 was owed for unpaid taxes on a 3,239-square-foot home built in 1973. The home is worth $270,800. A New Jersey bidder bought the tax lien, paying the taxes and an excess of $81,000.
To redeem the home today, the homeowner would now owe about $2,980 - a total that includes the taxes and 12 percent interest since Jan. 1, as well as 12 percent interest charged on $40,620 of the excess since the date of the tax lien sale. The effective annual interest rate on the original tax bill is 60 percent.
In the Liberty Highlands area of Birmingham, $365 was owed for unpaid taxes and collection costs on a 1,392-square-foot home built in 1977. The home is worth $54,100. A Fort Lauderdale investor bought the tax lien, paying the taxes and an excess of $13,000.
To redeem the home today, the homeowner would now owe about $500 - a total that includes the taxes and 12 percent interest since Jan. 1, as well as 12 percent interest charged on $8,115 of the excess since the date of the tax lien sale. The effective annual interest rate on the original tax bill is 72 percent. Things get worse:
Things get worse if homeowners drag their feet further, because the interest owed on the excess payment is growing. If the homeowners waited until three months from now to redeem their tax liens, they would each owe more than double their original tax bills. The effective annual interest rates on the original tax bills would then be 115 percent for the Vestavia Hills homeowner, 140 percent for the Birmingham homeowner, and 180 percent for the Gardendale homeowner.
When homeowners redeem their tax liens, the investors are repaid the excess that was held in trust by the county and they also get the 12 percent interest that it earned.
This year's tax lien sale came nearly five months after the tax bill became delinquent. At the public outcry auction in a fifth-floor courtroom of the courthouse, the county offered tax liens on 4,639 delinquent properties.
Investors bought 2,670 of them, mostly family-owned homes that they believe are sure to be redeemed. They paid a record total in excess of $43.5 million.
Tax liens on 1,969 other properties, ones that may be neglected or of low value, were given to the state.
"It's a feeding frenzy," said Smallwood, who acted as the auctioneer.
Competition a factor:
Competition drives investors to pay amounts above the 15 percent cap, which reduces the overall interest rate they earn. The average excess bid this year was 20 percent of the value of a property.
In Hoover, Hueytown, Mountain Brook, Pinson, Pleasant Grove and Vestavia Hills, the average overbid was equal to 24 percent or more of the value of the properties.
A homeowner has three years to redeem the tax lien. If that is not done, an investor can receive a tax deed for the property.
Smallwood said the fervent competition for tax liens has been going on for six or seven years, because of plummeting interest rates.
A similar investor frenzy is seen in Baldwin, Mobile, Montgomery and Shelby counties, as well as other states, said Gary Boyd, director of land divestment for the Jefferson County tax collector. Investors tell him they go to similar tax lien sales in Indiana, Mississippi and South Carolina.
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