Delinquent Utilities: Invest Wisely In Others' Defaults

Investing in delinquent utilities is a niche area that can be profitable but also carries substantial risk. One way to do this is to purchase property tax liens, which are legal claims against the assets of individuals or businesses that fail to pay taxes owed to the government. These liens are sold at auctions, and the new lien owner can collect payments with interest from the property owner or, in some cases, foreclose and attain the title to the property. However, there are risks involved, such as unforeseen expenses and the presence of other liens against the property. Another way to invest in delinquent utilities is to buy distressed properties from motivated sellers who are facing tax-delinquent properties. This can provide negotiation power and profitable opportunities, but it is important to be aware of potential issues such as other past-due bills and the seller's ability to find alternative accommodation.

Understand the risks of investing in delinquent utilities

Investing in delinquent utilities comes with a unique set of risks that potential investors should be aware of. Here are some key risks to consider:

• Loss of assets: Lenders/servicers risk losing assets due to delinquent utility bills. Even small amounts of delinquency can lead to the property being sold at a tax sale. It's important for lenders to record mortgage transfers and encourage borrowers to keep open communication to avoid losing assets.
• Lack of notification: In some cases, lenders/servicers may not be notified of delinquent utility bills because deeds are not recorded. This makes it difficult for them to take action and protect their interests.
• Regulatory and legal issues: Investing in delinquent utilities can involve complex regulatory and legal issues. It's important to understand the rules and regulations specific to the state or locality where the property is located.
• Financial risk: Investing in delinquent utilities can be financially risky. The expected profits may not materialise due to competition from institutional investors or changes in interest rates. Additionally, there is a chance that the investment may result in a loss if the property owner is unable to repay the taxes and the investor has to initiate foreclosure proceedings.
• Time and effort: Investing in delinquent utilities requires thorough research and due diligence. Investors need to familiarise themselves with the local area, check property records, and stay updated on any changes up until the auction date. This process can be time-consuming and may not be suitable for those who are not able to dedicate the necessary time and effort.
• Conflict of interest: If you are investing on behalf of friends or family, there is a risk of conflict of interest. You may feel pressured to make investment decisions that prioritise your personal relationships over the best interests of your clients. It's important to set clear boundaries and communicate expectations to avoid straining relationships.
• Hidden costs: Delinquent properties may have other past-due bills, such as mortgage payments, insurance, or repairs. These additional costs can eat up equity and reduce the potential profits from the investment.
• Seller's situation: When dealing with distressed sellers, it's important to consider their circumstances. They may not have the financial means to pay the taxes or find another place to live, which can complicate the investment process.

Learn about the collection practices for delinquent utility accounts

Collection practices for delinquent utility accounts vary depending on the location and type of utility service. However, here is an overview of some common practices and considerations for addressing delinquent utility accounts:

Collection Agencies

Utilities may assign delinquent customer debts to licensed collection agencies. Before doing so, they must notify the customer of the debt and the possible consequences of non-payment. Utilities can also add a reasonable collection fee to the outstanding debt. Working with collection agencies can help utilities recover debts and minimize financial losses.

Court Actions

The relationship between a utility company and its customers is contractual, and customers who fail to pay their bills on time are considered to have breached that contract. Utility companies can take delinquent customers to court to seek payment. Small claims court is typically used for debts up to a certain amount, while larger debts may require district court involvement.

Payment Plans

Utilities may offer payment plans to customers with delinquent accounts. To avoid violating laws or regulations, utilities must charge a reasonable rate of interest on these payment plans. This option can help customers manage their debt and avoid service interruptions.

Utility Liens and Termination of Service (Shut-offs)

In some cases, utility companies may have the right to place a lien on the property receiving the utility service. This lien secures the charges owed to the utility. For city water and electric utilities, the statutory lien can usually only be enforced by shutting off the service. Shutting off a customer's utility service, or even threatening to do so, can be an effective way to encourage payment. However, utility companies must strictly follow the relevant statutes and regulations when enforcing such shut-offs, and customers have procedural protections under state and federal law.

Other Considerations

The availability of collection practices can depend on the type of municipality that owns and operates the utility, as well as the specific utility service involved. Additionally, there may be time limitations on collecting delinquent utility debts. For example, in Washington State, utilities cannot file a court action to collect on a delinquent account that is more than six years old.

Research the regulatory framework for utility companies

Regulatory frameworks for utility companies are designed to protect consumers against undesirable monopolistic practices. In the United States, utility companies are regulated at the state and municipal levels by public service commissions. The Federal Energy Regulatory Commission (FERC) is the U.S. government agency responsible for regulating the interstate transmission of electricity, natural gas, and oil.

The Utilities Act 2000 (Utilities Act) in the ACT is an example of a regulatory framework for utility companies. The Act provides a framework for the Independent Competition and Regulatory Commission to regulate certain aspects of the provision of utility services. To provide a utility service in the Territory, a utility must be licensed under the Utilities Act or be exempt. The Commission is responsible for the licensing process and monitoring licensees' compliance with their legislative and licence obligations.

Utility companies often hold "natural monopolies" over a certain service, even when they are privately owned. Government regulations aim to protect consumers in these cases by controlling the prices utility companies charge, their budgetary processes, their ability to construct new facilities, the services they are allowed to offer, and their energy efficiency programs.

Regulations can impact a utility company's profit margins. While they can increase the cost of doing business and lower earnings potential, they also provide utilities with certain monopolistic characteristics by granting them exclusivity in certain regions and reducing competitive threats.

Utility companies are considered stable investments that provide regular dividends to shareholders, making them a popular choice for buy-and-hold investors. However, it is important to understand the regulatory framework before investing in utilities, as regulators control allowed returns and investments and cost recovery.

Explore the advantages of investing in utility stocks

Utility stocks are a popular choice for investors looking for stable, long-term investments that offer predictable dividend income. Here are some advantages of investing in utility stocks:

Stable and Defensive Investments:

Utility stocks are known for their defensive nature and stability. They tend to be less volatile than other stocks and can hold up well during economic downturns or recessions. This is because utilities provide essential services such as electricity, natural gas, and water, which are always in demand regardless of the economic environment. As a result, utility stocks can be a good addition to an investment portfolio to reduce risk and stabilize dividend income.

Predictable Dividend Income:

Utility companies often pay consistent and high dividends to their shareholders due to their reliable revenue streams. The dividends from utility stocks are usually higher than those from other equities, making them attractive to income-seeking investors. Additionally, the dividends from utility stocks receive preferred tax treatment, further enhancing their attractiveness.

Long-Term Holdings:

Investors typically buy utility stocks as long-term holdings. The stable prices and good dividend income make them suitable for buy-and-hold investment strategies.

Low Interest Rate Environment:

Utility stocks tend to perform well in low-interest-rate environments. During these periods, investors seek out investments that provide consistent dividend income, which utilities can offer due to their stable cash flows.

Recession Resilience:

Utility stocks are considered recession-resilient because of the constant demand for their services. Even during economic downturns, people and businesses continue to require electricity, natural gas, and water, resulting in regular and predictable cash flow for utility companies.

Limited Competition:

Utility companies often operate with government regulatory protection, which acts as a barrier to entry for competitors. This allows utility companies to establish themselves as dominant forces in their communities, states, or regions, further enhancing their stability and attractiveness to investors.

Clean Energy Opportunities:

The shift towards clean and renewable energy sources presents growth opportunities for utility companies. With the increasing focus on renewable energy and the availability of government incentives, some analysts predict strong growth for the utility industry in the coming years.

Analyze the impact of delinquent utility bills on consumers and investors

Delinquent utility bills can have a significant impact on both consumers and investors. For consumers, the immediate concern is the potential loss of essential services such as water and electricity. During the COVID-19 pandemic, governments and utility companies imposed moratoria on late fees and disconnections for non-payment, recognizing that these services are essential for people's health, safety, and comfort. However, as these moratoria started to expire, consumers faced uncertainty regarding the accessibility and affordability of their utility services.

The inability to pay utility bills can also result in financial strain and stress for consumers. In the US, the total unpaid electric bills as of July 31, 2020, were estimated to be almost $10 billion, a burden that could ultimately fall on consumers. While utility companies and the government have programs to assist delinquent customers, these options may not be feasible for those who are still unable to pay.

For investors, delinquent utility bills can impact their investment decisions and financial returns. Utility stocks are often viewed as a safe investment due to the regulated nature of the industry and the consistent dividends paid out by utility companies. However, delinquent utility bills and the inability of consumers to pay can increase the risk associated with these investments. Investors may demand higher returns to compensate for the increased risk, or they may choose to withdraw their capital and invest elsewhere. This could lead to higher rates for consumers in the future.

Additionally, delinquent utility bills can affect the cash flow and profits of utility companies, making it challenging for them to maintain consistent dividend payouts. In some cases, dividend reductions or eliminations may occur, impacting investors who rely on stable and growing dividend income.

The impact of delinquent utility bills also extends to local governments and communities. Local governments have various collection practices available, including collection agencies, courts, payment plans, liens, and shut-offs. However, these practices can be complex and depend on the type of municipality and utility service involved. Ultimately, delinquent utility bills can affect the entire community, as unpaid bills can strain local government resources and impact the accessibility and affordability of essential services for all residents.

Frequently asked questions