Understanding tax sales and assessed home values

Q: My former stepdad purchased a property in 2018 at a tax sale. Since my mother had already passed, I assumed he bought it in his own name. I’ve recently been informed that he purchased the property in my name.

Its fair market value is around $600, but somehow the tax assessor’s office believes it’s worth $50,000. It has been uninhabited for nearly 30 years and I’ve never even seen it. Now that I found this out, I attempted to remedy the situation, but the tax office is refusing to take the correct value and is insisting that it’s worth $50,000.

I don’t want to get my former stepdad in trouble, but the truth is I had no idea about this at all. Should I just fight the valuation and prove that it’s only worth $600, or should I request they talk to my former stepdad? I did see the deed, and it clearly shows my name on it and a price of $600. I’d hate for him to go to jail, but this is hurting my family.

A: First, tax sales are entirely different than when you buy a house in the open market from a willing seller. Local governments use tax sales to recover unpaid tax bills. When a property owner fails to pay their taxes, at some point in time, the local government puts the property up for sale for the price of the unpaid real estate taxes. In this case, the tax bill was $600.

The local government sets up auctions every year to sell off those properties whose owners have failed to pay their real estate tax bills. At these auctions, prospective buyers bid for the properties and the winning bid is usually at or above what the property owner owed the taxing body.

So, while you may see a purchase price of $600, that is likely not what the property is actually worth. These are usually two separate issues, as you only pay a fraction of what a property is worth for real estate property taxes each year.

Let’s say you live in a property that’s worth $100,000. And, you decide to stop paying your real estate taxes. Or, perhaps you don’t have the money to pay them. A couple of years go by and you still haven’t paid those taxes. At some point, if you never pay what you owe, enough time will have passed that the taxing body has the statutory right to sell the property out from under you.

Let’s assume the tax debt is $5,000, and the property is worth $100,000. The tax auction takes place and some bidder gets to own the $100,000 property because they paid $5,000 in back taxes owed at the auction.

Having said that, we do have to clarify that the taxing body can’t sell the property right away. There is a lengthy process to get through before the tax sale. They notify the homeowner repeatedly of the unpaid taxes. They publish the tax sales dates along with other information. And, even after the sale, the homeowner has a period of time (usually 18 to 24 months) to repay the taxes owed, plus interest, to the investor and keep the property.

So, you see, your former stepdad may have only paid a small amount for the property, but you wound up getting a great deal. We don’t know if the property is worth $50,000, but if it is, you can sell it and move on. Or, you can keep it, rent it and benefit financially from the gift he gave you.

If you don’t want the property, you can simply say you didn’t know it was given to you. You never accepted the gift. If you don’t pay the property taxes going forward and don’t want to sell the property, the local taxing authority will sell it again to someone else. On the other hand, if you find that you want the property or have already taken steps that would lead a reasonable person to believe that you accepted the gift of the property, you can work to contest the value.

Keep in mind that when you contest the value of the property, there are rules in place that the taxing authorities follow for determining the value of the property. Read up so you understand how they determine the value of property. You’ll need to find comparable properties that pay less in taxes than your property’s bill. Use those comparables to build a case that your property is worth less than the $50,000 they claim it’s worth.

You should also know that in some parts of the country, there is an industry of people out there that will assist you in contesting the value of your property for tax purposes, and you pay them a percentage of the savings you may realize.

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(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, a financial wellness technology company. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)