Tax Auctions Can Offer Bargains--or Bidder’s Headaches

Hundreds of properties will be auctioned Feb. 6 in Pasadena by the Los Angeles County treasurer and tax collector because the owners failed to pay their property taxes.

These properties--including many in the San Fernando and Antelope valleys--represent just a fraction of the more than 200,000 property tax delinquencies in Los Angeles County each year, but they provide some valuable lessons about bargain hunting at auctions and the consequences of not paying your taxes.

As of Jan. 3, nearly 2,400 properties were slated to be auctioned, but the number will likely decrease substantially as some owners pay their overdue taxes or contest the power of the tax collector to auction their properties.

Owners are considered delinquent when they don’t pay their property taxes on time. If the delinquency lasts for more than a year, they fall into default status, and Los Angeles County imposes various financial penalties, including 18% annual interest. Owners can remain in default for about five years, during which time they can work out a deal with the tax collector to pay their taxes over several years. If the taxes still aren’t paid, the tax collector may sell the defaulted property at auction. The rules for handling tax sales are outlined in California statutes, so each county follows a similar procedure.

Once a property is auctioned by the tax collector, all other liens are erased--except for federal tax liens. That means that lenders who hold a mortgage on property whose taxes haven’t been paid will find themselves with no collateral unless the lender steps in and pays the overdue taxes.

Before you rush off to the auction, note that delinquent property owners have until Feb. 3 to pay off their taxes in full and avoid having their home auctioned off. And if a home is sold at auction by the tax collector, the property is sold as is, and could come with a rash of problems.

The tax collector doesn’t file a notice of sale the same way a mortgage lender does. Various notices, however, are sent to property owners and a so-called “power-to-sell document” is sent to state agencies.

Who shows up to all these auctions? All sorts of people--often up to 1,000 of them--said David J. Collins, assistant treasurer and tax collector at the Los Angeles County Department of Treasurer and Tax Collector.

Some bidders are real estate professionals, others are bargain hunters or owners of a parcel adjacent to one being auctioned. Bidders are required to preregister with the treasurer and tax collector, and many also order the $10 book of listed properties.

Regrettably, the book only lists properties by their legal description. Bidders who want more information need to do their homework to find out more about where each property is located--such as researching the street address, if there is one.

The minimum bid at the county auction is the amount of outstanding taxes on the property. Successful bidders have to deposit $5,000 or 10% of the purchase price, whichever is greater. The buyers then have an additional 15 days to come up with the balance of their bid. The former owners get any sale proceeds that exceed the overdue taxes, penalties and costs. It takes a year or more for those former owners to get that money, though. More information about the upcoming auction in Pasadena is available by calling (213) 974-2045.

“People should never go to the auction unless they’re 100% sure of what they’re doing,” Collins advised. “When we sell property . . . we sell it as is.” Many properties that get auctioned off have serious surveying errors, some are located in the middle of a street, in the path of the Los Angeles River, on a steep hillside. They may be landlocked or unreachable. “We recommend . . . to all people that they should never buy a property until they’ve fully investigated it. They might find that it’s underwater,” Collins said.

“There can be really good deals at tax auctions, but it’s an area fraught with problems,” said Jim Peters, senior vice president and chief advisory title officer at Stewart Title Co. in Glendale.

Peters explained that many title companies--including Stewart--will not issue a title insurance policy for properties bought at a tax auction. Stewart doesn’t fully trust that all parties with an interest in the property have been given proper notice of the upcoming auction and the title company doesn’t want to sustain any losses because another person claims an interest in property the company insures.

It is also advisable, Peters said, to go through the so-called process of “officially quieting title,” which means, going through a legal proceeding to establish title to land after purchasing a property at a tax auction. After title is quieted, there is no problem in getting title insurance. All this can add about $2,000 to $5,000 in litigation costs to the cost of the property, Peters said.

Veteran auctioneer Mario Piatelli of the Piatelli Co. in Beverly Hills sees another problem with tax auctions. “When you get closer to the auction many of the tax delinquencies get cured and the list of properties dwindles. Owners wait until the last minute to go out and borrow money or do whatever to get some money and pay off the taxes,” Piatelli said. “People will walk away from a property if it isn’t worth anything.”

Despite his warnings about tax auctions, Piatelli said there are sometimes very good deals--but only for buyers who know what they are doing. Auctions that don’t offer the bidders a sizable discount, Piatelli said, should be avoided.

Ventura County reports that it has the power to sell about 130 parcels because of tax defaults, but an auction isn’t yet planned for this year, said Cynthia Sim mons, manager of the public service division of the Ventura County Tax Collector. Many of the parcels that do end up being auctioned off aren’t really all that valuable, Simmons conceded.

Early this century some who bought encyclopedias by mail, for example, used to get tiny parcels of land in remote parts of Ventura County that aren’t valuable or feasible for construction. The owners rightly figure that paying property taxes on these small parcels just isn’t worth it, Simmons said.