A Tax Lien Warning Story

[Don Konipol]

This is a story from my past that provides a perfect example as to why investing in tax liens at auction is so dangerous for any but the most experienced and knowledgable investors

20 years ago I purchased a SFR as a long term rental investment that sat on a double lot. The second lot had the remnants of a tennis court the original owner had built, but was now in disrepair. The seller has the two lots legally separated, but due to deed restriction imposed by the subdivision development, found that building a house on the "tennis court" lot was not allowable.

Do to an anomaly pertaining to the appraisal district, the total value of the two lots was divided equally between the lots instead of allocated by market value.  Hence the lot on which the house resided was taxed at a 45% discount based on actual value, while the tennis lot was taxed at about 4 times what it should have been by value. 

I purchased both as a package and for the next six years enjoyed great cash flow as I paid the tax on the house lot annually at about half of what it should have been and neglected to pay anything on the tennis court lot.  The law firm handling tax foreclosures for the county put the tennis court lot up for auction. Of course it probably wasn’t even worth the amount owed in taxes as nothing could be built on the lot. 

To add to the confusion, the party that had divided the lots had instead of distinguishing the lots by A and B, used A1 and A2.  The result was that a few maps had the lots reversed - in actuality A1 was the tennis court lot and A2 was the house, although intuitively one would expect the opposite.  Since both lots had the same mailing address, this was the address used by the foreclosure attorney when posting the sale.  Of course a visit to the county records office and -correct reading of the legal description would reveal that the tennis court lot was the one being sold.  A less then full investigation may result in one thinking that the house and or the house and tennis court lots were what was being sold.

As I later found out, a newbie tax lien investor thought they were getting a great bargain by outbidding other misinformed investors and paying the back taxes, legal fees, and an additional $34,000 (overage) which the county forwarded to me.  The buyer of course believing he had purchased the house paid a visit to the tenant, who of course called me.   when I informed the tax lien purchaser that he did not purchase the house, only the tennis court lot, he did not believe me.  He contacted an attorney, who finally got clarification from my attorney as well as the county recorder.  The investor “gave up” after numerous attempts to sell the lot or get a “refund” from the county proved unsuccessful.  The buyer had paid over $70,000.  The appraisal district shortly thereafter corrected the tax allotment “anomaly” between the two lots, but the investor never made a tax payment and eventually lost the lot to a tax foreclosure.