What is an “Upset Sale” and Why Do They Only Care About it in Pennsylvania?

Written by Mitchell Drimmer

March 11, 2024

Most states have a very similar convention when it comes to recovering unpaid real estate taxes. In most states, when taxes are due and not being paid, the taxing authority will exercise its right to hold a tax lien auction, which will eventually lead to a tax deed sale or a redemption from the owner. A tax deed sale is a public auction where a local government or taxing authority sells a property to recover unpaid property taxes. Not so in Pennsylvania.

In Pennsylvania, the government uses a method known as “an Upset Sale.”

What is an Upset Sale?

An Upset Sale is a legal process in Pennsylvania to collect delinquent property taxes. When a property owner fails to pay their property taxes, the local tax authority may take steps to recover the outstanding taxes. The Upset Sale is one of the stages in this process. During an Upset Sale, properties with unpaid taxes are auctioned off to the highest bidder by the tax authority. In other states, a tax lien is auctioned off to investors looking for a return on their principal.  In Pennsylvania, the winning bidder acquires the property, subject to any liens or mortgages, and the proceeds from the sale are used to satisfy the delinquent taxes. This is equitable because debts to community associations, mechanics, and other creditors are not immediately wiped out. 

That means that if you purchase a property at an Upset Sale, you are responsible for any other unpaid liens or judgments on the property. Most people assume that when they buy a property at a tax sale, they don’t have to worry about other liens, such as a mortgage. This is not true at the Upset Sale. Sometimes, people find out how much they owe after the sale, and perhaps that is the etymology of the phrase “Upset Sale.” This can be particularly upsetting (not a pun) in Pennsylvania, where an HOA is not required to perfect a lien. A buyer at an Upset Sale might not know how much they may have to pay to have an unencumbered title on the property they just purchased. A manager or a board member may know, which might lead to shenanigans, but that is another story for another day.

If an HOA is unable to collect dues from a homeowner, it may place a lien on the property. Not so in Pennsylvania,where perfecting a lien is not a condition precedent, and the amount owed to the association could be enigmatic. See London Towne Homeowners Ass’n v. Karr for all the details. 

Competition for Limited Funds

At an Upset Sale, the property is sold to the highest bidder. If multiple parties, including the local tax authority, mortgage lenders, and the HOA, have claims on the property, they may end up competing for the limited sale proceeds. In such cases, the HOA may only receive a fraction of the outstanding dues. From the buyer’s perspective, “caveat emptor.”

If there are no buyers at the Upset Sale, the next step is for the tax authority to have a Judge remove all the encumbrances (suc as liens, judgments, and mortgages). whereat this point, either a tax deed investor will buy the property, it will be sold to a third party, or it will not be sold at all. This process is known as a “judicial sale” in Pennsylvania. 

For those of you who are curious about a property not selling in a judicial sale in Pennsylvania, there is a third step: a “repository sale,” where the county can sell the property at a “bargain basement” price point. Too many of these can hurt the property values of the association the property is within.

In Pennsylvania, an Upset Sale can have a profound impact on a homeowners’ association, especially when homeowners cannot pay their dues and property taxes concurrently. To mitigate these risks, HOAs should create a Uniform Collection Policy, and when a property goes delinquent, send it off to a collection agency as expeditiously as possible. Boards and managers must address the issue before a unit winds up in a Tax Deed dilemma and the debt to the HOA is wiped out.

Understanding the Upset Sale process is crucial for HOAs in Pennsylvania to navigate financial challenges and continue serving their communities effectively. If your association in Pennsylvania has homeowners who are delinquent on their property taxes and HOA dues, contact us for a free assessment and information on how Axela Technologies can help.

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