Real estate development, sovereign style

[Lambkin]

Good times are back, in Montana
http://helenair.com/news/state-and-regi ... 407b8.html

By the time Pat Kelly realized he was in trouble, members of the anti-government sovereign citizen movement had already claimed 371 of the developer’s investment homes.

And it all appeared to be legal, done with a favorite tool of anti-government groups: liens.

“They came in and put tax assignments on (approximately) 400 units," Kelly told the Billings Gazette recently. “And if I didn’t come up with the money in 60 days, they’d get it.”

Kelly didn’t come up with the money. Consequently, 371 of his properties went to DTM Enterprises, a group represented by two sovereign citizens from Washington state, for a price of $187,086.43, according to Valley County tax records. The average home price: $504.

Sovereign Terry Lee Brauner told The Gazette he isn't interested in creating a compound. Rather, he sees development potential in St. Marie. He'd like to sell the buildings DTM acquired and eventually manufacture carbon fiber air tanks on a large scale, a plan Brauner said will take about $50 million.

[noblepa]

I realize that sovereigns will do this, but how can a non-governmental entity place a tax lien on a property? And then, how can they foreclose on it?

Now, it may cost the developer a lot in legal fees to regain title to his property, but I can't believe that this is somehow legal. I believe that the sov's may have convinced a county recorder to transfer title, but (and IANAL) I believe that the lien and subsequent foreclosure would be considered fraudulent and that a court would probably reverse them.

Why doesn't the developer simply file tax liens for $1,000,000 on each property and wait for the sov to default? If the sov defaults, he gets his properties back. If the sov pays, he gets $371,000,000.

[Jeffrey]

I think this counts as a "win" frankly.

[KickahaOta]

This is an unusual situation. The sovereign citizens have their own loony motives, but for once it sounds like they're doing things perfectly and utterly legally. And they succeeded on such a large scale because the developer is apparently a dumbass.

This is apparently a very depressed community, given that so many of the homes are vacant. That means that lots of people, apparently including this developer, fall behind on their taxes. And this community apparently has the same system that a number of other communities do: If you become sufficiently delinquent on your property taxes, anyone else can step in and pay them. And then if you get proper notice, and you don't repay that person (plus interest) within a set period of time, that person can get title to the property.

In this case, you have a developer who's probably highly financially distressed, and who pretty much ignored any notices from the tax authorities, because what were they going to do, sue him for the money he didn't have? He presumably didn't actually read the notices and understand the danger he was in until the deadline had already passed.

[KickahaOta]

I think this counts as a "win" frankly.

But it counts as a win in a very asterisky sense in this case. The sovereign citizens didn't win by employing sovcit methodologies. They won by apparently understanding the Actual Laws better than the property owners, and by actually using those Actual Laws. In other words, they won by behaving completely unlike a sovereign citizen.

[Prof]

Also, there is usually a redemption period -- pay the taxes, penalties, interest, fees, get the property back. I took a glance and it would appear Montana has a 2 year redemption period.

[Judge Roy Bean]

Also, there is usually a redemption period -- pay the taxes, penalties, interest, fees, get the property back. I took a glance and it would appear Montana has a 2 year redemption period.

Ah, therein lies the rub.

They're just copying the hundreds of property-tax mills that do the same thing on a routine basis all over the country. They have access to the owner's financial status information and target those they know can't pay.

[Gregg]

I think, and this is just an educated guess, that it works something like this.

Tax goes unpaid

County files some kind of notice that tax is due and creates a security that can be bought by someone else for the amount of tax due, said security entitles buyer to collect tax within X amount of time, or foreclose on the property

If the redemption period is two years, could it be possible that the Sov buys it 18 months after it is generated, there is only 6 months left to redeem it? So, the owner got a notice when the tax lien was generated and assumed based upon past experience that even though it could be foreclosed on in 24 months, they rarely are?

The first part is at least my understanding of how some communities collect their delinquent taxes, they sell the right to collect it with interest.

Anyhow, I think that this is something like what happened, I get the impression that some, perhaps most of the property involved is long vacant.

[Judge Roy Bean]

I think, and this is just an educated guess, that it works something like this.

Tax goes unpaid

County files some kind of notice that tax is due and creates a security that can be bought by someone else for the amount of tax due, said security entitles buyer to collect tax within X amount of time, or foreclose on the property

If the redemption period is two years, could it be possible that the Sov buys it 18 months after it is generated, there is only 6 months left to redeem it? So, the owner got a notice when the tax lien was generated and assumed based upon past experience that even though it could be foreclosed on in 24 months, they rarely are?

The first part is at least my understanding of how some communities collect their delinquent taxes, they sell the right to collect it with interest.

Anyhow, I think that this is something like what happened, I get the impression that some, perhaps most of the property involved is long vacant.

Actually, depending on the state/county you're in it can go something like this:

The taxing authority (in the case of Texas there can be a blend of three or more, including school districts, counties, cities and "special taxing districts") engages a collections law firm they have a contract with. When and if they determine the tax isn't going to be paid, the law firm begins dunning the property owner and at some point, when the taxes, collections fees, attorney fees, etc., etc., aren't paid the suit is filed and more fees are added to the debt, i.e. process-serving (constables), court costs, exorbitant title search costs, etc., etc.

In the vast majority of cases where there is a mortgage, the suit alerts the loan servicer, who may elect to step in and pay the taxes. Whether they do or not is purely a matter of their risk/reward status on the property. If the borrower is in trouble, they'll evaluate the equity situation and determine whether it would be better for them to pay the taxes and add that to an escrow account and collect from the borrower or use that leverage to create a foreclosure situation if the borrower can't pay. If there is no equity position (i.e., if the loan is way upside down), they may be content to let the property go into foreclosure and dump the loss.

Whether or not the property is vacant is really irrelevant; in steps the ultimate friend of the participants in the system - a cash bidder at the foreclosure auction who has connections with the servicer and a stable of buyers and who knows the bottom-line value they can bid at and obtain the property to flip to a waiting buyer. In some of these cases, the ultimate potential buyer has fronted the money as a guarantee to the auction bidder. Some of these buyers are sophisticated enough to have made contact with the present homeowner/borrower as potential rescue buyers and they have toured the home to get an idea of its condition. They then seem to disappear and seem to ignore the borrower or tell them there just isn't a deal they can put together.

At the auction the problem is solved; foreclosed property is sold, taxes paid, and the lender/servicer gets the kickback from the bidder/buyer to cover its alleged losses and so it goes.

Lather, rinse, repeat.

You can find these vultures every month at every county courthouse in Texas.

[The Observer]

You can find these vultures every month at every county courthouse in Texas.

And like real vultures getting rid of dead animals that sit around and just rot, they provide a useful service in making sure that properties that wouldn't get sold under normal circumstances do get sold. These "vultures" are not the problem, the problem originates with the owner and the lender both thinking that the owner could afford the house.

[Prof]

And the Texas right of redemption can be a "hollow" right:
See, e.g.:

Sec. 34.21. RIGHT OF REDEMPTION. (a) The owner of real property sold at a tax sale to a purchaser other than a taxing unit that was used as the residence homestead of the owner or that was land designated for agricultural use when the suit or the application for the warrant was filed, or the owner of a mineral interest sold at a tax sale to a purchaser other than a taxing unit, may redeem the property on or before the second anniversary of the date on which the purchaser's deed is filed for record by paying the purchaser the amount the purchaser bid for the property, the amount of the deed recording fee, and the amount paid by the purchaser as taxes, penalties, interest, and costs on the property, plus a redemption premium of 25 percent of the aggregate total if the property is redeemed during the first year of the redemption period or 50 percent of the aggregate total if the property is redeemed during the second year of the redemption period.

[Red Cedar PM]

Very interesting, and a reason why property tax foreclosure laws and policies around the country need to be reformed. The current system in most states where any schlub can buy property for just the back taxes (or through an often-disorderly public auction process) is very antiquated. The problem with allowing anyone to purchase property that goes into tax foreclosure is that it encourages speculation. It's been a huge problem in Detroit and many decaying urban areas in the midwest where you have responsible property owners living next to vacant homes which are owned by a speculator who has very little skin in the game and little incentive to maintain the property. It can rot a community from the inside-out.

Michigan is actually at the forefront of solving this problem by utilizing land banks - government agencies that act as a repository for tax foreclosed properties and work with the local community to get the properties back into productive use. These entities have broad power to clear title and sell properties to owners who (in the case of single-family residences) will promise to occupy the residence or to actual developers (not pretend ones) who need to live by a negotiated development agreement or forfeit the property. If this community in Montana had a land bank it would have had a much better way of dealing with properties that "nobody wants" (to quote the local government official from the article) rather than running the risk of losing them to irresponsible assholes.

[KickahaOta]

Here's another example of how odd things can get. There's a court case that's been ping-ponging back and forth between a district court in Illinois and the 7th Circuit appeals court for years now, and it goes like this:

In Chicago, once a year, there's a tax sale -- really a tax auction. All the sufficiently-delinquent parcels in the city go up for bids. As has already been discussed, the winner of the auction for a property pays the current tax bill on the property and gets a redemption certificate. If the owner of the property doesn't repay this property tax to the redemption certificate holder, along with statutory interest and fees, plus an additional penalty, the redemption certificate holder gets the property. What's the "additional penalty"? Well, that's what the auction decides. Bidders declare what additional penalty they're willing to accept -- 1%, 5%, whatever -- and the winner of the auction is whoever bids the lowest penalty.

All of this is written into state law, and you can see the point -- it protects property owners (to a degree at least), by ensuring that market forces will keep the penalty low, while the state still gets its money.

Now for the problem. In Chicago, at least in the mid-2000s (around the time the suit was filed), the investors in these sorts of things had long since figured out that it wasn't necessary to charge any sort of penalty at all for the vast majority of properties; there was more than enough money to be made by taking properties from people who failed to redeem. So imagine an "auction" where the auctioneer calls out a property number and opens the auction, and twenty people shout "zero".

The city wasn't allowed to not hold an auction, and it wasn't allowed to let the penalty rate go negative (which would clear the market, but which would also give some people an incentive to delay). So it started doling out the properties as evenly as possible to the bidders: if there were 40 properties, and 20 people bidding zero on everything, everyone would get 2.

Naturally, this created another problem: a powerful incentive to being a bunch of shills to the auction with you. If you brought four friends who'd let you manage the certificates they 'bought', you'd get five times as many certificates as someone who came alone. The city 'solved' this problem by requiring everyone to swear that they were not affiliated with anyone else.

Eventually, one bidder sued another bidder for mail fraud, on the grounds that the other bidder was bringing shills and falsely swearing that everyone was independent (the mails were involved elsewhere in the process). The case was repeatedly dismissed by the district court and reinstated by the appeals court because of a disagreement on a fundamental question: in a situation like this, does A have the right to sue B over B's false statement to C? And is it mail fraud when the city gets essentially what it wants (someone who'll pay the taxes), and the property holders get the best they can get (a redemption holder who'll charge the legal minimum), and the only damage is to someone who's effectively cut out of the arrangement? (The appeals court decided that the answer to both questions was "yes", and I believe that the jilted bidder finally won a decent chunk of change.)

[Burnaby49]

A new article about these guys;

https://www.splcenter.org/fighting-hate ... ng-montana