Debunking the Top Ten Tax Deed Myths

Perhaps no other area of municipal law contains more popular misconceptions than tax deeded real estate. Considering the complex legal requirements surrounding the tax deeding process, recent changes to tax deed
law, and the plethora of ways to sell tax deeded property, it is no wonder there is so much confusion surrounding this important topic.

In this article, we debunk the ten most frequent myths we’ve encountered about tax deeded properties over the decades we’ve represented New Hampshire municipalities as attorneys and auctioneers.

Myth 1: Municipalities must always take a property by tax deed two years after the execution of the first real estate tax lien.

According to RSA 80:76, a municipality’s tax collector “shall” take a property by tax deed two years from the execution of the first real estate tax lien (if the property was not redeemed).

This requirement is subject to several exceptions, however— a governing body can refuse to take a property by tax deed if doing so (1) would subject the municipality to environmental liability, (2) would burden the municipality with real estate or tenant obligations, or (3) for “any other reason” that “would be contrary to the public interest.”

Given the number and breadth of these exceptions, municipalities have substantial flexibility to choose which properties it takes by tax deed. Nonetheless, municipalities should take qualifying properties by tax deed in most instances. A property with years of existing tax liens will, in all likelihood, continue to accumulate unpaid taxes and fees, making it more and more difficult for the municipality to recover those funds if it later decides to take the property by tax deed and sell it.

Myth 2: A municipality must obtain authorization each year before selling tax deeded properties.

To sell tax deeded properties, the governing body must be authorized by a warrant article or ordinance. Such authorization is good for one year by default. Pursuant to RSA 80:80, however, the authorization can be made perpetual if the words “indefinitely, until rescinded” or similar language is included in the warrant article or ordinance.

Even with perpetual authorization, it is a good practice for municipalities to verify that the authorization has not been rescinded before conducting a tax deeded property sale— particularly if the municipality has not sold tax deeded real estate for several years.

Myth 3: Municipalities must retain tax deeded properties for at least three years before selling them.

This is a common misconception, the effect of which municipalities end up holding onto tax deeded properties for much longer than necessary.

Under New Hampshire law, a former owner has three years after the municipality takes the property by tax deed to redeem the property by paying past-due taxes and other fees. During this period, the municipality may sell the property so long as it sends a redemption notice to the former owner(s) and mortgage holder(s) at least 90 days before the sale date. Note, however, that if a municipality holds onto the property for three years or more, this redemption notice is not required pursuant to RSA 80:89, VII.

Myth 4: Municipalities may keep the entire amount from a tax deeded property sale if the municipality has held onto the property for at least three years.

Before 2020, municipalities that held onto a tax deeded property for three years or more could, pursuant to RSA 80:89, VII, keep all funds generated from the sale of the property. This included the “excess proceeds”—that is, the amount generated at the sale which exceeds what the former owner owed the municipality in back taxes, interest, costs, and penalties.

That changed on April 24, 2020, when the New Hampshire Supreme Court decided Polonsky v. Town of Bedford, 173 N.H. 226 (2020). In Polonsky, the Court invalidated the portion of RSA 80:89, VII that allowed a municipality to keep excess proceeds resulting from the sale of a tax deeded property that had been held by the municipality for at least three years. The Court determined that this law violated the takings clause
of the New Hampshire Constitution because, when former owners are not provided with the excess proceeds resulting from the sale of their property, they are not receiving “just compensation.”

On May 25, 2023, the United States Supreme Court reached a similar conclusion in Tyler v. Hennepin County, Minnesota, __ U.S. __ (2023). In a unanimous decision, the Court held that an unconstitutional taking occurs when the government seizes a property for non-payment of taxes and retains the excess value. According to the Court, the government cannot “use the toehold of the tax debt to confiscate more property than was due.”

In sum, a municipality now must always attempt to pay the excess proceeds to the former owner (or, in some instances, the lienholders) after selling a tax deeded property.

Myth 5: Tax deeded property sales are unpopular with the public.

Historically, municipalities taking properties for non-payment of taxes and selling them to private individuals has rankled members of the community opposed to government takings. In our experience, however, explaining the varied benefits of tax deed sales has substantially reduced this resistance.

Under the current tax deed sale framework, selling tax deeded properties helps many—including municipalities, taxpayers, and the former owners and lienholders.

In a tax deeded property sale, the municipality benefits by recovering all or a portion of its back taxes, interest, costs, and penalties owed to it by the former owner, as well as by returning unproductive properties to the tax rolls. Taxpayers similarly benefit because, when their municipality has additional funding, property taxes go down and municipal services go up. Former owners and lienholders also benefit because, if the property sells above a certain amount, they may receive substantial compensation (sometimes tens of thousands of dollars) via excess proceeds distributions.

Myth 6: Selling tax deeded properties by advertised sealed bids is easier and more cost-effective than hiring a third-party auction company.

Many New Hampshire municipalities sell tax deeded properties by sealed bids because they believe it is easier and more cost-effective than hiring a third party to sell these properties on the municipality’s behalf. Unless the municipality is selling only one or two properties of modest value, however, engaging a third-party auction company is usually preferable.

When a municipality sells properties by advertised sealed bids, municipalities must handle all stages of the sales process, such as advertising the properties, reviewing the bids, conducting closings, preparing and recording deeds, and filing paperwork with the State. Not only can these tasks carry out-of-pocket costs for the municipality, but they also drain municipal resources—particularly if many properties are being sold.

By contrast, engaging a third-party auction company to sell tax deeded properties—especially if that company includes legal support—allows the municipality to delegate most of these tasks, freeing up the municipality’s time and resources for other projects. Most auction companies do not charge municipalities for their services and instead receive their compensation via a buyer’s premium paid by the successful
bidder. Also, tax deeded properties sold by auction typically generate substantially more revenue than sealed bids, improving the likelihood that the municipality will recover the back taxes, interest, costs, and penalties owed to it by the former owner.

Myth 7: Selling tax deeded properties by reserve auction is less risky than selling them by absolute auction.

The two most common types of auctions for tax deeded real estate are “absolute auctions” (also known as “auctions without reserve”) and “reserve auctions.” In absolute auctions, properties may sell for any amount. In reserve auctions, the seller sets a minimum bid, and if the property does not meet or exceed that threshold at auction, the property goes unsold. A reserve auction may also be “subject to seller confirmation,” whereby the municipality may elect to accept a lower amount if the high bid does not meet the reserve.

To maximize return from selling tax deeded properties, municipalities must balance three considerations: (1) recovering the back taxes, interest, costs, and penalties owed by the former owner; (2) returning properties
to the tax rolls quickly so they may resume generating tax revenue; and (3) minimizing costs associated with retaining tax deeded properties (such as insurance, required maintenance, and security from vandalism).

When taking into account all of the above, absolute auctions are typically the best approach for tax deeded property sales. Absolute auctions tend to attract the most interest because bidders know that the properties will sell. And even if a property does not obtain a high value at auction, when the property is sold and returns to private ownership, it begins generating tax revenue for the municipality again and frees the municipality from paying upkeep costs.
Reserve auctions, by contrast, carry several risks:

• First, if a property does not sell at auction because it fails to meet the reserve or the municipality rejects the high bid, the property will continue to generate no tax revenue and may require the municipality to continue to pay for insurance and upkeep. The municipality must also spend time and resources attempting to sell the property again.

• Second, if a property does not sell at auction, the auctioneer may charge a fee for its costs and labor associated with marketing the unsold property.

• Third, in the context of a reserve auction subject to seller confirmation, if the municipality rejects some bids but not others, it can give the impression that the municipality is discriminating against certain bidders.

• Finally, it can be difficult for a municipality to set the appropriate reserve or, in the context of a seller confirmation auction, to know when a bid should be rejected for being “too low.” In a single auction, some tax deeded properties may sell for hundreds of thousands of dollars, while others may sell for only hundreds of dollars. Oftentimes, a property that appears desirable to municipal leadership may be unappealing
to bidders due to title issues, zoning regulations, environmental concerns, or uncertainty about whether the lot is buildable. For such properties, it is usually better for the municipality to return them to the tax rolls instead of holding onto them in the hopes of possibly obtaining a higher sale price down the road.

Even considering the above risks, however, a reserve auction or reserve auction subject to seller confirmation may be appropriate in certain circumstances, such as when the municipality is on the fence about keeping a property, or when the municipality is selling a property that carries exceptional emotional or political significance in the community.

Myth 8: A municipality has no obligation to compensate the former owners and lienholders of a tax deeded property if the municipality keeps the property.

RSA 80:80, V and RSA 80:91 do not require a municipality to distribute excess proceeds when it keeps a tax deeded property. Pursuant to Polonsky v. Town of Bedford, 173 N.H. 226 (2020) and Tyler v. Hennepin County, Minnesota, __ U.S. __ (2023), however, a municipality may have a constitutional obligation—despite what RSA 80:80, V and RSA 80:91 provide—to pay the former owners and lienholders the difference between what the municipality is owed and what the tax deeded property is worth.

In the Polonsky decision, the New Hampshire Supreme Court held that it was unconstitutional for municipalities to keep excess proceeds resulting from the sale of a tax deeded property. The Court repeatedly emphasized that its holding was limited to this narrow issue. Yet, in support of its central ruling, the Court broadly stated that “when the municipality acquires property by tax deed that is worth more than the amount owed, the municipality is required to provide compensation to the former owner.” Based on this language, it is reasonable to conclude that, regardless of whether a municipality keeps or sells a tax deeded property, it is required to distribute any excess proceeds to the former owners and lienholders.

The recent Tyler decision also sows uncertainty about whether the government has a constitutional obligation to return excess proceeds to the former owner when it keeps a tax acquired property. Like the New Hampshire Supreme Court in Polonsky, the United States Supreme Court in Tyler did not expressly state that the government must compensate the former owner when it keeps a tax acquired property. Nonetheless, the Court noted that in one of its prior decisions, it held that when the government kept a tax acquired property, the former owner was “still entitled to the surplus . . . just as if the [g]overnment had sold the property.”

In light of Polonsky and Tyler, municipalities should consider consulting with legal counsel to determine whether to compensate former owners and
lienholders when tax deeded properties are kept rather than sold.

Myth 9: Municipalities always recover their incurred legal fees and other costs upon selling a tax deeded property.

Under RSA 80:88 and 80:90, the legal fees and other costs incurred by the municipality in connection with a tax deeded property are recoverable from the property’s sale proceeds. However, the municipality will recover these fees and costs only if the property sells at or above the amount owed.

Simply put, because legal fees and other costs are “recoverable” does not necessarily mean that they will be “recovered.” In practice, the total amount owed to the municipality in back taxes, penalties, fees, and costs often meets or exceeds the value of the real estate—particularly for less desirable properties, properties that the municipality has held for many years, and properties that require the purchaser to invest significant funds to render them usable. For these properties, there may be no excess proceeds available to cover the legal fees and other costs associated with the sale and with the post-sale real estate closings. This means that, unless the municipality engages a third-party company that  covers these legal expenses, the municipality must pay out-of-pocket, reducing the overall recovery for the municipality and its taxpayers.

Myth 10: When the municipality agrees to sell a tax deeded property, the municipality’s work is nearly complete.

Before 2020, selling tax deeded properties was comparatively straightforward. Property values were lower, tax deeded property buyers tended to purchase with cash, and, if municipalities held onto properties for three years or more, they could retain all proceeds from the sale.

Nowadays, accepting a bid on a tax deeded property typically marks the halfway point in the sale process. New Hampshire real estate prices have skyrocketed in recent years, which has driven more buyers to hire title companies to investigate title issues for tax deeded properties before closing so they may obtain financing. Even with ample pre-sale disclaimers, buyers are increasingly demanding assurances from municipalities as a requirement for closing. These post-sale, pre-closing negotiations can drain the time and resources of the municipality’s leadership, staff, and legal counsel. And if a buyer refuses to close, the municipality may need to file a petition for specific performance in court to compel the buyer to purchase the property.

After closing, the municipality must also attempt to distribute excess proceeds for those properties that sold for more than what was owed. This requires the municipality to track down the former owners and lienholders and, if these parties cannot be easily located (as is often the case), the municipality must file an interpleader action in New Hampshire Superior Court—a process that can take many months to resolve.

Now, more than ever, municipalities benefit by retaining counsel experienced in tax deeded properties and by engaging real estate auction companies that include legal support in their services. Otherwise, municipal leadership and staff may be saddled with post-sale legal headaches for months or years following the sale of the municipality’s tax deeded properties.

Weston R. Sager and Richard D. Sager are partners at Sager & Smith, PLLC and co-owners of NH Tax Deed & Property Auctions. Both are dual-licensed attorneys and auctioneers with experience in municipal law, real estate law, and auction law. Weston may be reached at weston@sagersmith.com or weston@ nhtaxdeedauctions.com, and Rick may be reached at rick@sagersmith.com or rick@nhtaxdeedauctions.com.

The information contained in this article is not intended as legal advice or as a legal opinion.