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Foreclosure and disposition of tax-delinquent properties

Overview

Localities can use the disposition of tax-delinquent properties to achieve a range of different goals. Many communities prioritize the recuperation of delinquent taxes, but some cities, towns, and counties also strive to repurpose selected tax-delinquent properties to advance their affordable housing or community development goals. Still other communities prioritize keeping resident in their homes, even if it means forgoing some level of delinquent taxes. 

This brief discusses the range of available approaches and encourages localities to develop a strategic approach to advance local priorities. The brief includes information on the mechanics of tax foreclosure, best practices for using the disposition of tax-delinquent properties to achieve community goals, strategies for reducing the likelihood of tax delinquency, and alternatives to tax foreclosure for vacant property.

Approach

Properties are referred to as tax-delinquent when property owners do not pay the full amount of state or local property taxes assessed against the value of the property. Different legal options are available in different jurisdictions for dealing with tax delinquency. Generally, local governments may take an initial step toward tax foreclosure by either placing liens on the tax-delinquent property, or going through a series of legal steps to acquire its tax deed.[1] One of the following outcomes usually follows for properties with tax liens: a) the owner pays back taxes and keeps the property, b) a tax lien sale is held and the right to foreclose on the property is transferred to the lien purchaser, or c) the lien is transferred to the municipality or other entity such as a land bank. In cases where localities acquire the tax deed, the tax-delinquent property itself can be sold. The minimum bid in a tax deed auction is generally the total taxes owed plus interest, as well as costs associated with the auction. For a tax deed sale, some states immediately transfer the deed to the winning bidder while other states offer a redemption period during which the original owner can repay their tax debt plus interest to the deed purchaser in order to redeem the property.

A strategic approach to the disposition of tax-delinquent properties provides a process for determining which of these approaches to use for any given property in light of the jurisdiction’s needs. While tax foreclosures may generate much-needed tax revenue, it is important to also consider other possible goals that can be advanced through the disposition of tax-delinquent properties. For example, in distressed neighborhoods, tax-delinquent properties can be repurposed to advance community development goals, while in areas where the housing market is strong, tax foreclosure can provide a means for localities to increase the affordable housing stock. Another option is to prioritize keeping residents in their homes. This is especially important when tax delinquency is widespread rather than isolated, such as during as a recession or in lower-income neighborhoods. In such circumstances, tax abatement or relief programs can be used to stabilize neighborhoods and keep long-time residents in their homes.

Mechanics of tax foreclosure

The tax foreclosure process varies from state to state, and localities interested in adopting or modifying a tax foreclosure process should ensure they have the authority to make the changes they seek. Tax foreclosure can operate through either a judicial or non-judicial process, with both options available in some jurisdictions. Under a judicial proceeding (in rem foreclosure), municipalities must file a lawsuit to place a lien on or acquire the deed to a property with unpaid taxes after a certain period of time, usually two to three years. The court case could result in a settlement (e.g. a tax arrears payment plan is agreed upon), the owner paying off the taxes with interest and penalties, or the property being foreclosed. Once foreclosed, the municipality can take possession of the property or sell it at an auction. 

Non-judicial foreclosures enable localities to place liens on a property without a court filing. Once proper notice is given to the property owner, the lien can be sold at an auction, in which case the municipality immediately collects the sale price of the lien. The lien purchaser is then owed the value of the delinquent taxes, plus annual interest. If the original property owner does not pay back the lien purchaser within a certain period of time, usually two years, the lien purchaser has the right to enforce their lien and gain ownership of the property. 

A local government can take five main actions for properties with tax debt:[2]

  1. Do nothing and allow the property tax debt to increase over time as penalties and interest are added to the taxes owed. As the amount of the tax debt grows, the property owner has less incentive to maintain the property and pay off back taxes, the tax-delinquent property becomes increasingly risky for potential private buyers to acquire, and the local government loses tax revenue.
  1. Sell tax deeds or liens to the highest bidder, usually private investors or developers, allowing local governments to receive tax revenue immediately. A tax deed purchaser gains title to the property and may try to rehab and resell the property. A tax lien purchaser receives the right to the repayment of the lien, or to foreclosure on the property absent payment, in the future. Since tax lien investors want to maximize profits, they will likely invest the bare minimum to maintain the property and allow subsequent years of taxes to go unpaid; in some cases, they may wait years before electing to enforce their liens. Once they foreclose, they may upgrade and resell the property or demolish and rebuild. 
  1. Convey tax liens to municipality or land bank. Rather than conducting a public tax lien auction, counties or cities can decide directly transfer tax liens on a property to a municipal authority or land bank. These entities may also be transferred tax liens that remain unsold after public auctions. It is useful for land banks to have these liens in their possession since it can then either acquire properties by foreclosing on their tax liens or receive the revenue from interest and penalties to pay off the initial loan and fund other land bank operations.
  1. Foreclose on the property and transfer title to municipality, land bank, or community development corporation (CDC). This can occur in cases of a judicial foreclosure where the county or city gains title to the property and elects not to conduct a public sale of the property. The municipality can convert the property for public use or convey it to a land bank or CDC to achieve community development goals.  
  1. Use tax abatement and relief programs to reduce the current tax burden and the need to place further tax liens on the property in the future.

Using a tax foreclosure system to achieve community goals

The ideal tax foreclosure system efficiently and equitably collects tax revenue needed to pay for government services while promoting community stabilization and property maintenance. This is a balancing act; selling tax liens to private purchasers will enable a locality to recoup revenue in the short-term, but will cede control over the fate of the properties if the lien purchaser gains title. Municipalities have the opportunity to leverage tax-delinquent properties to advance housing and community development goals only before the disposition of these properties. To leverage tax-delinquent properties for these purposes, it is important for localities to consider what goals they want to achieve through the tax foreclosure process and put procedures in places to achieve them. Ideally, each tax-delinquent property would be screened in advance of a foreclosure sale to determine the appropriate method of disposition for it. 

Neighborhood housing conditions and the property’s occupancy status are two primary factors that can be helpful for determining the proper strategy for tax-delinquent properties. The following table outlines the relationship between these conditions, tax foreclosure strategies, and potential outcomes for the property by the strategy:

Property and Neighborhood Characteristics Tax Foreclosure Strategy Potential Outcomes
Vacant property in a lower cost neighborhood with sufficient affordable housing Sell lien or deed to highest bidder Property lien or deed doesn’t sell, and property is conveyed to the municipality.
Convey property to land bank or CDC Property is demolished and converted into a community garden or public building.
Occupied property in a lower cost neighborhood with sufficient affordable housing Sell lien or deed to highest bidder Lien purchaser does not enforce lien in hopes that taxes will be paid back with interest. If not paid back, the purchaser gains title, rehabs the property, and attempts to sell it.
Convey property to land bank or CDC Land bank packages this parcel along with adjacent parcels for larger-scale development, such as multifamily or retail/commercial development.
Tax abatement or deferral Owners are able to maintain homeownership; municipality prevents a potential vacancy.
Occupied property in a higher cost neighborhood without sufficient affordable housing Sell lien or deed to highest bidder Developer gains title of the property, evicts tenants, demolishes the structure, and builds new market-rate housing that rents or sells at unaffordable levels.
Convey property to land bank or CDC Land bank sells property at a low cost to developers who commit to affordable housing production.
Tax abatement or deferral Owners are able to maintain homeownership; municipality prevents displacement.

Local roles and policy alignment

Local responsibility for enforcing the collection of property taxes and overseeing the tax foreclosure process varies throughout the country. Sometimes collection and enforcement falls solely on either the county or the city, and other times counties and cities work together. It is important that counties and cities try to align their policies and priorities for dealing with tax delinquent properties so that conflicts don’t arise when making decisions on specific properties. For example, the Genesee County Land Bank works with the City of Flint to determine the best disposition strategy to use for each property it might acquire in Flint. The Board of Directors of the Land Bank includes members from the City of Flint to ensure representation and policy alignment. More information on this partnership and the Genesee County Land Bank is presented in the examples section below. 

Tax foreclosure best practices

The literature on tax foreclosure points to a number of best practices that result in more efficient tax foreclosure systems that allow municipalities to better meet community needs. Some of these best practices may require legislative changes to state and local property tax enforcement and sale policies. Best practices include:

  • Establishing expedited judicial foreclosure proceedings for tax delinquent properties that also have code violations to rapidly deal with properties that may pose greater costs to the community. Most legislation stipulates that the property be vacant in order to use an expedited tax foreclosure. 
  • Allowing for bulk petitions that process many properties in one hearing to increase efficiency in jurisdictions that use the judicial foreclosure process.
  • Allowing for the sale of tax delinquent property for less than the statutory minimum bid, which is usually the total amount of all delinquent taxes, plus penalties and interest. Since the market value of some nuisance properties may be lower than the minimum bid, eliminating this floor price could incentivize investors or developers to purchase and rehabilitate the property. Another approach to dealing with vacant and tax delinquent property, vacant property receivership, is described later in this brief.
  • Enabling localities to have more discretion on how to deal with tax delinquent properties. In Michigan for example, a series of laws eliminated the automatic step of a public auction and instead transferred foreclosed properties to the local governments, who could choose whether to sell the properties at a public auction, retain the properties for public use, or convey to a land bank for management and disposition. 
  • Granting land banks “super-bid” powers to acquire tax delinquent properties prior to them being auctioned off to ensure the community’s needs are met, such as the need for affordable housing or open space. 
  • Creating plans to establish priorities in the disposition of tax foreclosed properties. For example, Albany County, New York has discretion to sell and convey all properties acquired by it through the in rem tax foreclosure process. Sales and conveyances are approved by the governing body of the tax district, based on which option will result in the most benefit to the community. The County’s disposition plan lays out a preferential order for these sales and conveyances, the top three being 1) convey back to the County for public use; 2) sell back to previous owners who demonstrate financial hardship; and 3) sell to owners of adjacent properties.
  • Taking steps to ensure that properties undergoing tax foreclosure are maintained during the process and don’t contribute to neighborhood property value decline or safety risks. This can be done using code enforcement for properties that are occupied, and through vacant property registration ordinances for those that are vacant. Refer to our brief on creating and managing vacant property inventories for more information.
  • Ensuring the equitable treatment of residents in the tax foreclosure system. It is important to periodically review tax foreclosure data to see if certain categories of residents are foreclosed upon and displaced more often than others. Tax foreclosures can disproportionately impact racial and ethnic minorities, the elderly, people with disabilities, and low-income homeowners. Among other steps to address, localities can examine whether their property assessments are fair, especially for owners of lower-value properties. 

Keeping homeowners in their homes

Localities can use property tax abatement or deferral programs as a way to keep homeowners with delinquent taxes in their homes. These programs are structured so that if you meet certain income eligibility requirements, you may reduce the amount your property tax delinquency and create a deferred repayment plan to pay back taxes. An example of these types of programs as implemented in Detroit is discussed below.

Property tax exemption and relief programs can also be used to reduce the likelihood of a homeowner becoming delinquent on their taxes to begin with, helping to address racial or ethnic disparities in foreclosure rates. State or local governments may provide property tax exemptions to eligible homeowners. For example, in Washington State, your property tax can be lowered if you have limited income and are over 61 or unable to work due to disability. Alternatively, property tax relief programs cap the amount of property tax that homeowners have to pay as a share of their income. In many cases, property tax prevention programs are administered by the state, particularly when the credit is issued through the state income tax. Local governments should publicize these programs and leverage them to avoid tax delinquency and foreclosures in applicable situations. In some states, localities also have the ability to provide property tax relief directly.

Alternatives to tax foreclosure for vacant and abandoned property

Tax foreclosure can be a slow and administratively costly process. Vacant property receivership is an alternative mechanism to return vacant properties to productive use without going through the tax foreclosure process. Vacant property receivership allows a municipality or a qualified non-profit entity to be a court-appointed receiver of the vacant property without actually taking title of the property. Criteria for properties to be eligible for receivership vary, but could include an owners’ failure to comply with a notice to rehabilitate or demolish due to code violations. Once appointed, the receiver can borrow and spend money to rehabilitate the property. If the owner does not regain rights to the property by paying back the receiver, the court can order the property sold and the proceeds distributed back to the receiver for expenses incurred. Under the right circumstances, receivership policies can be used to accomplish some of the same objectives as tax foreclosure, such as rehabilitating properties and returning them to the tax rolls. For more information on vacant property receivership policy and implementation, refer to this article on the Housing and Community Development Network of New Jersey’s website.

Examples

  • Genesee County, Michigan uses their tax foreclosure process to feed properties into their land bank for the purpose of advancing community goals, such as preventing the decline of neighborhood property values or increasing green spaces. The County Treasurer acquires and transfers tax foreclosed properties to the Genesee County Land Bank, either properties unsold at auctions or properties that are candidates for demolition, public use, or use in a side lot or other land bank program. Through this process the Genesee County Land Bank came to acquire over 14,000 parcels of tax foreclosed property from 2004 to 2015, including fifty percent of all vacant lots in the City of Flint. The Genesee County Land Bank established a database of each tax foreclosed property that the Land Bank might potentially acquire in Flint. The Land Bank evaluates these properties to assess their condition and potential for reuse. The Land Bank then determines which disposition strategy to use for each property: demolition, rehabilitation, placement into side lot program, green space, or other use. This proactive process helps the Land Bank to keep its wide array of property management and construction contractors informed about potential projects in the pipeline.
  • The Tax Title Program in Multnomah County, Oregon facilitates the sale of properties that have been foreclosed due to unpaid property taxes, including properties within the City of Portland. Some of the properties offered at the sale may have liens placed by the City of Portland, and those must be paid off by the title purchaser within 30 days of the sale. The tax title program generates revenue from any difference in sale price between the minimum bid (owed taxes) and the winning bid. Since 2016, 100% of the net proceeds of the title sales (around $7.6 million) have been deposited into a fund to provide affordable housing for youth and families with children in Multnomah County.
  • The City of Detroit’s tax foreclosure crisis reached its peak in 2015, when nearly 25,000 properties went up for auction, including more than 6,400 owner-occupied homes. Since that time, the City has increased its efforts to reduce tax foreclosures by expanding its Homeowners Property Tax Assistance Program (HPTAP) and the Pay As You Stay (PAYS) program. HPTAP offers property tax exemptions of 100%, 50%, and 25% based on income and number of household members. The PAYS program allows HPTAP eligible homeowners to create a tax payment plan that (1) eliminates all interest, penalties, and fees on taxes owed (2) limits tax balance to no greater than 10% of the home’s taxable value, and, (3) allows taxes to be paid back over 3 years with 0% interest. The City reports that it approved 30% more tax exemptions in 2019 than 2018, and that tax foreclosures of occupied properties have been reduced by more than 94 percent since 2015.  The City suspended all foreclosures for 2020 due to the COVID-19 pandemic, but delinquent taxes are still owed.

Related resources

Implementation resources and state/local examples:

Sources used in drafting the brief:

[1] According to the National Tax Lien Association (NTLA), 36 states and 2,500 jurisdictions allow tax lien sales, and 31 states allow tax deed sales. A number of states use a combination of the two.

[2] Statewide legislation (or lack thereof) may limit the options available to localities for each of these strategies. Adapted from Frank Alexander, Land Banks and Land Banking: 2nd Edition, Center for Community Progress, 2015.

See also:
Creating and managing vacant property inventories
Demolition of neglected properties
Land banks
Property tax relief for income-qualified homeowners

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