Gerald Rutz retired from teaching in the Phoenix area and moved to the Rim Country to live the good life. He decided to invest in tax liens — a good business — until it wasn’t.
Rutz purchased tax liens on property that plunged in value from over $700,000 to a smidge over $11,000.
“The properties surrounding the ones on which I purchased liens are of considerable value, but apparently fail the similarity test,” wrote Rutz to the Gila County Assessor’s Office attempting to understand the extreme drop in value, “...in the field, the cow paddies are in the same vicinity as the cow, but much less valuable ... All three (lots) are vacant land and in the same condition as when they were purchased, nevertheless, they are now in the same category as the crap next to the cow.”
His story illustrates the dangers of tax lien investing — and the complexities of the overlapping decisions that establish the value of any given piece of property.
Tax lien investing is a niche real estate investment area.
Counties sell past-due property tax bills to investors in the hopes of recouping taxes lost because owners failed to pay. Investors then hold onto the deeds of the property hoping that either the property owner will pay the back taxes (with interest), or that the owner of the tax lien will end up owning the property.
Before the real estate bust, people who ended up owning the properties often made windfall profits. In a scenario reminiscent of a gold rush, developers came to Arizona, the fastest-growing real estate market in the country, to strike it rich.
In Gila County, the board of supervisors saw gold too — tax gold. Valuable property equals impressive property taxes. The supervisors in the past rushed to approve “wildcat” subdivisions, said Tommie Martin, District 1 Supervisor. Such land gets the zoning designation necessary to build a subdivision, even though the land may lie far from the nearest public services like water, power, sewers and streets. Developers frequently get residential zoning, then sell the lots to speculators.
“The supervisors, in the early 2000s (before Martin’s term), approved a lot of wildcat subdivisions,” said Martin.
She explained these isolated subdivisions are now scattered throughout the Tonto National Forest. Since many of these developments lie off of established roads, the supervisors require developers to build roads that can handle traffic from heavy construction equipment to passenger cars as well as weather issues. Even with roads, the subdivisions often lack public services or may sit in the midst of thick forests, which can make them almost impossible to defend against wildfires.
Roads and wildcat subdivisions sit at the heart of Rutz’s problems.
His saga began Feb. 20, 2010 when he purchased tax liens on three pieces of property in the Strawberry area in a development called Strawberry Ridge Estates. The three pieces of property he purchased were valued at $718,865. He ended up paying $40,456 in back taxes, thinking he got a steal of a deal.
But forces behind the scenes worked against Rutz.
“These were steep view lots,” said Larry Huffer from the Gila County Assessor’s Office.
The steep lots offered amazing views, said Huffer, but created road-building challenges. And the lack of a road brought everything to a screeching halt.
On July 5, 2011, Robert Gould of Gila County Community Development, the department that grants building permits, filed a notice against the developers of Strawberry Ridge Estates. In it he wrote, “Subdivider is in violation of Gila County Subdivision Regulations in that the street (Tomahawk Trail) has not been completed in accordance with Gila County Street Standards ...”
The result of the violation? Gould and his department would issue no building permits to anyone in the Strawberry Ridge Estates wildcat subdivision.
Immediately, the values of the property plummeted by 700 percent. Rutz was out more than $30,000. He was not happy.
He wrote to the county assessor’s office asking for an explanation of the dramatic drop in value. He wanted his money returned or applied to a new lien.
Dale Hom, the assessor, turned Rutz’s letter over to Daisy Flores, the Gila County attorney and asked for an opinion.
In her letter, Flores wrote, “The issue for consideration in this opinion is whether you as the Gila County Assessor have any authority to implement any of Mr. Rutz’s options. Because you are the Gila County Assessor and you have no jurisdiction over the sale of tax liens, (the treasurer does), you cannot either refund the money he paid for the tax liens or allow him to undo his transaction to allow him to use the money to purchase other tax liens.
“The sale of tax liens is governed by A.R.S. 42-18101 et. seq. County treasurers are tasked with handling counties’ responsibilities regarding the sale of the tax liens. Nowhere in the statute is there any authority for county treasurers to buy back tax liens because the underlying property has lost most of its value. Likewise there is no authority for allowing a certificate holder (owner of tax liens) to have his money back so that he can purchase other tax liens.”
Steve Sanders, the Public Works Division director, oversees all road projects. “We develop standards to protect people,” he said. “There was some question about testing (on Tomahawk Trail) ... where the fill was and additional information on the engineering analysis.”
His department declared the road unsafe until tests confirmed its usability. Until then, no one could build, and that doomed the values. “Market drives the cost of property,” said Huffer from the assessor’s office, “but we try to be fair.”
He said his office based the original values on sales of surrounding pieces of property and those were selling like hotcakes.
And then the market bottomed out and the county put a moratorium on building permits in the area due to the questions about the road.
“There was a sale of one of those properties up there that a bank owned because of foreclosure. It sold for $3,600,” said Huffer.
Things might look up for Rutz, however. On the last day of June this year, the county lifted the moratorium on building permits. Sanders said after testing the road, his department deemed it safe enough for construction traffic.
Martin believes the next challenge for builders will be the steepness of the lots. “I hope they can figure out the septic,” she said.