Friday, June 10, 2016

Illinois Real Estate Tax Sales

A real estate tax sale can be aside aside in bankruptcy court if it was for less than "reasonably equivalent value." In re Smith, 2016 U.S. App. LEXIS 934 (7th Cir. 2016). The Smith case dealt with several technical bankruptcy and fraudulent transfer issues, which will not be explained here, but I wanted to pass along this section of the opinion that explains the Illinois real estate tax sale process. I do not have any prior experience with tax sales and I did not know that potential buyers actually bid downwards on the redemption interest rate they'd be willing to accept. This case says that 85% of winning bids are at zero percent. If no one redeems the tax bill, plus the prevailing interest rate, the winning bidder gets an unencumbered deed to the property. Here is how the 7th Circuit explained the two most common methods for selling delinquent real estate taxes, including the system used in Illinois:
States generally choose one of three methods for collecting delinquent property taxes: the overbid method, the interest rate method, and the percentage ownership method. Georgette C. Poindexter, Lizabethann Rogovoy & Susan Wachter, Selling Municipal Property Tax Receivables: Economics, Privatization, and Public Policy in an Era of Urban Distress30 Conn. L. Rev. 157, 174 (1997). This case requires us to compare the overbid and interest rate methods, so we focus on them. 
The overbid method is probably the auction system more familiar to most readers: the bidding price begins at the total amount of taxes and interest due, and potential buyers then offer higher bids up to the total price they are willing to pay in return for (eventual) fee simple title. See, e.g., Colo. Rev. Stat. Ann. § 39-11-115 (West 2015). The fair market value of the property is at least in theory the ceiling for amounts that might be bid. The winner of this competitive bidding receives rights to the property. See In re Grandote Country Club Co., 252 F.3d 1146, 1152 (10th Cir. 2001) (explaining the competitive nature of the Colorado overbid system). A redemption period typically follows, during which the delinquent taxpayer or a mortgage lender may pay off the tax debt and reclaim the property. If the property is not redeemed, the winning bidder may bring an action for quiet title to the property. See, e.g., Colo. Rev. Stat. Ann. § 39-11-120 (West 2015). 
The interest rate method used by Illinois is quite different. At the county tax auction, bidders vie to purchase the tax lien, not the property itself. They do so by bidding down. See BCS Services, Inc. v. Heartwood 88, LLC, 637 F.3d 750, 752-53 (7th Cir. 2011). Bids are expressed not as a total price for the property but rather as decreasing interest percentages. Id. These percentages are the penalty interest rates that the buyer may demand from the delinquent taxpayer (or mortgage lender) to redeem the property. Id. In Illinois, the bids therefore work down from a statutory ceiling of eighteen percent. Zero percent is the floor. 35 Ill. Comp. Stat. 200/21-215 (2015). 
Under this system, the lowest bidder wins and is granted the lien and a certificate of purchase. In re LaMont, 740 F.3d 397, 400-01 (7th Cir. 2014). And if the delinquent taxpayer and any mortgage lenders fail to redeem in the subsequent two years, the buyer takes the property free and clear. Id., citing 35 Ill. Comp. Stat. 200/21-350 (2015). 
In the vast majority of tax sales in Illinois, the penalty percentage paid by the winning bidder is zero percent. BCS, 637 F.3d at 752 (almost 85 percent of the winning bids). The purchase price of the property, taking into account the risk of redemption, is therefore usually nothing more than the sum of the delinquent taxes.

3 comments:

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