Investors began buying millions of dollars worth of delinquent property tax bills in Kentucky about a decade ago, strengthening Kentucky’s system of collecting property taxes and pumping fresh money into the state’s cash-strapped schools.
Sheriffs have long had the authority to sell delinquent tax certificates to third-party collectors, but there was traditionally little interest. That changed in the early 2000s for several reasons, including the chance for investors to earn a relatively high interest rate on delinquent bills, and a court ruling and legislation allowing buyers to collect fees and costs in addition to interest.
Johnson County Clerk Sallee Holbrook, who has worked in the office since the mid-1980s, said 2006 was the first year she saw a big jump in investors, including large out-of-state companies, buying bills.
“They were like a feeding frenzy for a while,” Holbrook said.
Third-party sales, which are not unique to Kentucky, have played a significant role in improving property tax collections, according to state and local officials.
One reason, of course, is that the buyers pay off delinquent bills. Since 2009, tax sales have generated more than $72 million for state and local agencies, nearly $40 million of which went to schools, according to state data.
Another reason is that the threat of having to pay added fees to redeem a tax bill from an investor prods some delinquent property owners into paying up earlier, local officials said.
“It’s been a good thing because a lot of people are paying their taxes that never did,” Jackson County Clerk Donald “Duck” Moore said.
Harlan County Clerk Donna Hoskins estimated that her office takes in delinquent payments from 300 to 400 property owners who probably wouldn’t pay without the threat of having their bills sold.
“We get a run on it as soon as that first letter goes out” notifying delinquent taxpayers of the upcoming sale, Hoskins said. “This has helped as much as anything.”
‘These guys are exploiting’
The tax sales help pay for schools and other agencies, but it comes at a stiff price for delinquent taxpayers.
The law allows third-party buyers to collect 12 percent annual interest, a $115 administrative fee and pre-foreclosure attorney fees of as much as $700. If the investor has to foreclose, the law allows “reasonable” attorney fees – as much as $2,000 according to the Department of Revenue.
Even without foreclosure, the interest and fees necessary to satisfy a delinquent bill in the hands of a third-party buyer can total two or three times the amount of the original bill, according to county clerks.
“The third-party sales are good for the counties and the taxing districts. They’re bad for the taxpayers,” said former Meade County Clerk Katrina Fitzgerald, past president of the clerks association. “There’s win and lose here.”
The sales have caused controversy at times.
At one point, state law didn’t define how much third-party buyers could charge in fees. The Fayette County Attorney’s Office complained in a 2006 lawsuit that a Louisville company had demanded $5,127 in attorney fees to collect a $367 tax bill.
There also were complaints from taxpayers that some third-party buyers didn’t properly notify them about buying their tax bills, so the interest piled up.
State Rep. Arnold Simpson, D-Covington, said the legislature added protections for taxpayers, including required notices from third-party buyers to the people whose bills they hold; limits on the buyers’ fees; and a mandate that buyers allow taxpayers to set up an installment payment plan.
“It’s not trying to punish anybody,” Simpson said of the system. “At some point, you have to pay your bill.”
Simpson, who has sponsored legislation on third-party sales, said the system is doing what it was designed to do: bring in money for local and state services.
Still, the sales cause hard feelings.
Many county clerks have a story about someone coming to the office angry after getting a notice that an investor had bought his bill.
Third-party buyers are “hated by the individuals” whose bills they buy, said Bell County Attorney Neil Ward.
Casey County Clerk Casey Davis said he recognizes that people should pay what they owe, but he tells taxpayers that the third-party buyers are out to rip them off.
“These guys are exploiting, to me,” Davis said.
Several third-party buyers told the Herald-Leader they work within the rules and help bring in money for state and local services. They also said that they buy bills only after people fail to pay taxes despite repeated notices.
“Kentucky leaves a pretty large window for them to pay their taxes,” said attorney Adam O. Stanley, who works with third-party buyers.
‘Very little impact’
The amount of tax money pulled in by the sales has dwindled in recent years.
In 2009, third-party purchasers bought 26,394 tax bills in Kentucky, generating $18.9 million in taxes for state and local government agencies, including $10.4 million for schools, according to the Department of Revenue.
In 2013, the last year with available information, those totals were down to 12,560 bills purchased, generating $11.59 million in tax payments, $6.1 million of that for schools.
Several clerks said they have seen a decline in the number of third-party buyers.
In Leslie County, for instance, there was only one third-party buyer last year, who bought 14 tax bills, County Clerk James Lewis said.
“Very little impact … on our collections” the past two years, Lewis said.
Hoskins, the Harlan County clerk, said only 120 delinquent bills sold there last year, of 1,700 available. In Wolfe County, Clerk Steve Oliver said no buyers came to the third-party sale in 2014.
“It ain’t no big deal anymore,” Oliver said.
State and local officials and third-party buyers pointed to a number of factors fueling the decline, including buyers becoming more selective.
Some local officials said more taxpayers are taking advantage of rules allowing them to set up installment payment plans, so their bills are prevented from being sold to third parties.
In addition, county clerks said banks are stepping in to pay delinquent tax bills on property they have under mortgage, then rolling the cost into the mortgage payment to protect their interest in the property.
Some third-party buyers told the Herald-Leader that letting investors buy delinquent bills for something less than full amount could boost interest and bring in money that otherwise probably wouldn’t be collected.
Many bills are not worth taking a risk on at face value, but they might be at something less, investors said.
“I would be very interested in something like that,” said David Prater, general partner in Mid South Capital Partners LP, one of the largest third-party buyers in Kentucky. “Capital’s going to go where capital’s got a shot at making a return.”
Tom Crawford, a Revenue Department official, said there was no reason to discount tax bills when the current rules were put in place because there was strong interest among buyers.
“Maybe we’re getting to the point where we need to open those discussions again,” Crawford said.
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