Monday, February 1, 2010

Harrisburg tax increases, tax sales, title defects

I wrote last week of a recommendation by consultants hired by Harrisburg to double the property tax for city properties (plus large increases for trash, sewer and water). I have written of potential consequences from these increases, including increased litigation over property assessment, downward pressure upon prices and values and financial distress for owners.

Another consequence of the proposal would involve local taxes. Investors whose cash flow does not cover a property's expenses will often simply allow the property to be auctioned at tax sale. This is particularly true where the investor cannot sell the property because the property value has declined below the balance on the investor's loan(s). Doubling the property tax will increase the likelihood of properties being sold at tax sale, as more properties will suffer from negative cash flow as a result of the newly imposed tax costs (and related municipal charges).

Contrary to popular belief, an increase in properties being sold for unpaid taxes does not mean that more properties will be available for investors to purchase. It means, instead, that more properties will suffer from title defects. These title defects inhibit sales, financing and repairs, thus contributing to the general decline in the real estate market.

Check this post for future updates on the consequences of tax sales and resulting title defects.
Update - click here for more detail on title defects resulting from tax sales.

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