REAL ESTATE
Home Equity Stripping
As discussed in Chapter 7 of our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), and several previous blogs, the purchase of a home may be one of the biggest decisions, and investments, to make in one’s lifetime. Over the last few years, it has never been more difficult for young buyers, with rising inflation, property prices, and property taxes/insurance, and the situation appears to be only getting worse, with an increasing number of defaults and loans coming due.
Today’s focus is on Property Taxes, which have become very questionable, as well as a major source of delinquency and fraud. First, let’s briefly discuss the source of property taxes. The geographical location’s government/tax authority is the city/town assessor and/or collector of property taxes. The value of a property is then determined by various procedures, including the two most popular for residential homes…
Market-based Approach – This approach takes into account recent sales, usually 6 months, from similar homes, within a comparable market and/or distance, to create a “probable value” should the home be sold on the open market.
Cost-based Approach – This approach takes into consideration the cost of “replacement,” which includes current land “value” (market price), depreciation, construction/repair, and building code standards.
While the Cost-based is more technical and specific, the Market-based is more volatile and questionable. Essentially this practice estimates what a property is worth, based on others that have recently sold, then assigns a current “value,” based on the current tax rate. These re-assessments generally occur every couple of years, and it is very rare for a property to have lost value on the open market, especially in seller’s markets where over-bidding has occurred. The problem is that the homes that have not been sold are actually incurring an “unrealized gains tax,” which is not legal, which in turn leads to “over-assessment fraud.”
Failure to pay property taxes by the specified due dates may result in penalties and interest charges, which are added to the outstanding tax amount and can accumulate until the taxes are paid. Should a homeowner fall behind by as little as 90 days, a tax lien can be placed on the property by the governing authority, which blocks any sale of the home without full payment of the balance. This situation can then lead to a foreclosure/tax sale of the property, which creates another financial nightmare for the owner. Due to the constant rise in these “estimated” values, there is now, unfortunately, a 2.7% (over 3.7 million) default rate in the United States, which continues higher as property taxes rise. Even more astonishing is the fact that a high percentage of those actually own their homes “Free and Clear” (without any mortgage balance), which was discussed in last month’s Real Estate – Is it Free & Clear? Blog, dated 6-15-26.
As discussed in that blog, “Free and Clear” technically means that the property is “free” of any loans, and “clear” of any liens or other financial claims. The Title is a document that confirms ownership, including any financial obligations, that is recorded with the tax clerk. However, that does not pertain to the obligation of property taxes.
The Uniform Standards of Professional Appraisal Practice (USPAP), was a standard formed in 1987, to essentially ensure the ethical performance of the appraisal industry. The goal was to promote and maintain public trust in appraisal services by setting requirements for integrity, impartiality, objectivity, and competent performance. Unfortunately, those standards have fallen by the wayside in many instances, as transparency and honesty violations are rampant in many locations, including shady practices, software fraud, and school bond corruption (when money is allocated to other projects).
When a homeowner does fall into a “default” situation, the home can be sold at auction by the governing body, which then often involves investors. After the sale, there are varying practices and procedures, one such issue involving “due compensation” for the homeowner, which has been called into question by lawsuits. The main issue here is what amount of compensation, if any, is due the defaulting property owner following the closing of the sale.
In the case of a tax sale/foreclosure, should the homeowner receive the “overage” from the auction, minus the taxes/penalties/fees? Or, like in some cases when an investor purchases the property for a discounted “auction” price, then immediately re-sells for “market” price (without investing any further capital), should the owner receive the overage from that amount, since the property tax was based on that amount. This is a very interesting concept, and has been tabbed “Home Equity Stripping.” when the homeowner receives no, or less than deserved, compensation.
Law of Fair Market Value/Property Tax Law…
In the United States, fair market value (FMV) is the legally recognized price at which a willing buyer and a willing seller, both with reasonable knowledge of the facts, would agree to a transaction in an open market, without compulsion to buy or sell.
Under this concept, one could argue that “fair market value” no longer matters as the homeowner most likely would not be in agreement that a heavily discounted “auction” sale price, especially when they are being taxed on a “market-based value” would fall under the “willing seller” category. This then brings up the question of one’s legal rights being deprived, as defined below..
Deprivation of Rights under color of law…
Deprivation of rights under color of law occurs when a person acting with legal authority willfully violates another's constitutional or legal rights, punishable under 18 U.S.C. § 242.
Under 18 U.S.C. § 242, it is a federal crime for any person acting under color of law—meaning while exercising authority granted by federal, state, or local law—to willfully deprive someone of rights, privileges, or immunities protected by the Constitution or U.S. laws. This includes acts performed within or beyond the bounds of lawful authority, as long as the person is purporting to act in an official capacity.
Homeowners have attempted to fight back with legal challenges which have recently reached the U.S. Supreme Court level. In a very surprising ruling, however, just last month, the justices decided that neither the 5th nor 8th U.S. Constitution Amendments “require the government to compensate former homeowners,” indicating that the government would lose money if compensation was awarded. This appears to be very contradictory and controversial, as the government is still allowed to tax on “market value.” This also suggests that homeowner’s may no longer possess the “rights” they always had.
For a much more detailed account of these matters, including how to potentially partake in a formal complaint, tune into the Real Estate Mindset U-Tube video, dated 7-7-26, titled “The Supreme Court Just Changed Home Ownership FOREVER.”
Though there are always the possibility of unforeseen circumstances, when considering the purchase of a home, it may be very wise to extend the normally excepted amount of savings (6 months) with the ever-rising costs of a home, to prevent (as much as possible) the situation of being unable to afford the property taxes. As always, we recommend consulting with a financial advisor, and possibly a real estate professional, when making such an important decision.
Please visit the website www.augustassociatesllc.com for home values, listings, and professional assistance.
***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of current economic conditions.
