Some of you may recall that last week we talked about HOAs taking advantage of Mortgage servicers and how we need to make sure we include HOA fees as part of our due diligence process. Well, that really got me thinking and hence wondering how utility liens affect our process of note investing. So, naturally, I started my research and what I learned was actually shocking.
I learned that every state is different which is very true in all aspects of note investing. People are losing homes for unpaid water bills at an alarming rate. Someone could actually lose their home for failure to pay a $200 or $300 water or sewer bill. Even a partially paid water bill could land your home on the foreclosure list. Laws in all 50 states allow for local governments to sell properties through the tax foreclosure process. There is an actual statute that provides for this: RCW 57.08.081. This statute indicates that a utility lien is given greater priority than even a mortgage. This type of lien is second only to general property taxes.
Once the properties are sold, companies often tack on substantial interest rates from 18 to 50% in addition to additional fees that the homeowner would have to pay in order to redeem the lien and avoid foreclosure.
As recently as May, 2017, the city of Flint, Michigan warned over 8,000 residents that they could receive a tax lien for unpaid water accounts, even if the water is undrinkable as some residents have claimed. The residents did later receive a 1-year moratorium on unpaid bills, but that doesn’t make their problems go away. These residents are still responsible for paying their utility bill. Although its not shocking for a city to foreclose over unpaid utility bills, it is shocking to think it can happen in a city that has had famously toxic water since 2014. A lot of Flint residents felt they should not have to pay for water they couldn’t drink.
The practice of selling homes for unpaid water bills has generated so much interest that recently Maryland passed a moratorium on selling houses for unpaid water bills as well. The bill called for a year long moratorium on the practice of selling homes for unpaid utility bills statewide. This could really impact Baltimore where over 300 owner-occupied properties went to tax sale over unpaid bills last year. The bill is waiting to be enacted by the General Assembly.
Especially embarrassing to Maryland is the fact that the Ravens and Orioles stadiums were sold at the recent tax sale held in May for unpaid water bills. Now, the sale was quickly voided due to the fact that the City realized the two properties were exempt from the tax-sale process, but none the less, these 2 properties did get sold at the tax sale to an investor who hoped to claim the properties.
So, what does this mean to the note investor? I can think of several items to note:
- Check all utilities in the due diligence process. If you see a property with an unpaid utility bill, call the county to determine how much is owed, how long the bill has been unpaid so that you can determine if it will be foreclosed on before buying the note.
- If you purchase a note that has delinquent utility bills, I would advise paying them as soon as you take over the asset so that you don’t lose your position in the property since utility liens take precedence even over a mortgage.
- If you ultimately foreclose on an asset, make sure the utilities and taxes are paid to avoid the asset being sold at a tax sale.
So, next time you look at assets for purchase, make sure you add checking for unpaid utility bills to your list of due diligence.
If you are interested in learning more about due diligence in note investing, we have put together several videos about our due diligence process available on our YouTube channel.