Using a loophole in Georgia’s foreclosure laws, savvy investors are snatching houses away from taxpayers who get behind on bills, short-circuiting legal safeguards designed to help them keep their homes.
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How a small debt can lead to a major loss
When a property owner doesn’t pay tax bills, a county, a city or a private lien-holder can auction the property on the courthouse steps to settle the account. Since homeowners often face extenuating circumstances that can cause them to fall behind — sickness, catastrophic injury, deaths in the family, to name a few — the law has built-in protections.
After the property is sold for back taxes, the owner has one year to pay that debt, plus interest, the late penalty, fees and the tax sale penalty, which is 20 percent of the sale price.
Or, if the property owner can’t pay and wants to walk away, he or she can instead apply for the excess funds, which is the difference between the auction price and the taxes, fees and penalties. The owner loses the property but at least can recover some of the equity.
Unraveling the protections
If there is a second lien on the property owner, that lien holder can quickly redeem the property and claim the excess funds. It’s a mind-numbing process, but here’s a simplified version of how that can work against the home owner.
Say someone owes $10,000 in taxes on a $175,000 home and has a judgment for a $500 debt to a roofer. The property would be auctioned to pay off the taxes. The winning bidder pays $100,000. Then, whoever holds the judgment lien redeems the property by paying the winning bidder $120,000.
The winning bidder has made $20,000. But the judgment holder has something potentially more valuable: a super lien and the right to claim the excess funds, $90,000.
At this point, even with the excess funds in hand the super lien holder is still out the amount of the taxes, penalty and that roofing debt. Now, the homeowner must reimburse for all of that, with some added costs for attorney fees. Or the super lien holder forecloses, and the house is sold at auction to the highest bidder, compensating the super lien holder.
It can get worse. Here’s how the process can be exploited:
Company A buys the property at tax auction, driving up the sale price to $140,000 and with it the 20 percent penalty. It does so because it is working with Company B which has that $500 judgment on the property and knows it will be reimbursed.
Company B moves in and redeems the property. It claims the excess funds — $130,000 — and has the right to obtain foreclosure. Company B now has about $38,500 in the deal (the penalty, the taxes and the judgment debt). The homeowner’s tab is about $168,500, not including various fees.
Taking the house
Next, Company B convinces a Superior Court judge to let it, rather than the sheriff’s office, hold a foreclosure auction. It can be done between a wide range of hours and quietly to avoid other bidders. It buys that $175,000 home for $45,000.
It then sells that house for four times that price, and Company A and Company B split the profits.
The homeowner has lost the home and any equity over what started as $10,500 in debt.
It’s all legal - unless Company B doesn’t actually pay Company A when it purchased the house. In that case, attorneys say, the companies could be accused of fraud and the liens could be reversed. That would have to be proven through litigation.