Interrupting the blight cycle: managing the future of properties in tax foreclosure sales through pre- and post-sale initiatives.

• Author: Kirtner, Ellen

CONTENTS INTRODUCTION I. TAX COLLECTION, DELINQUENCY, AND FORECLOSURE A. Property Tax Problems in Wayne County, Michigan B. Wayne County's Basic Tax Collection Procedures C. Foreclosure Prevention Initiatives D. Wayne County's Tax Foreclosure Sale E. Land Bank Disposition II. ENCOURAGING RESPONSIBLE AUCTION BUYERS AND REDUCING POST-SALE DELINQUENCY III. SOLUTION ONE: TARGET BLIGHT AND DELINQUENCY WITH POST SALE REVERTER A. Wayne County's Approach to the Reverter Clause B. Future Interests as Helpful Governmental Tools C. Homeowners' Potential Challenges: Agreement Construction and Equity D. Delays in Taking Possession IV. SOLUTION TWO: PRESALE AFFIDAVIT: KEEPING PROBLEM BUYERS OUT V. PRACTICAL CONCERNS AND POLICY CONSIDERATIONS A. Treatment for Bulk Real Estate Investors v. Owner-Occupants B. Reversing Blight C. Halting delinquency or Preventing Future Delinquency CONCLUSION INTRODUCTION

Vacant, abandoned, and blighted properties have troubled communities for decades, starting with foreclosures caused by "flipping" (1) schemes in the early 1970s. (2) The mortgage crisis in 2007, however, created "unprecedented surges in vacant homes across many metropolitan areas, including regions that had not experienced significant vacancy problems earlier." (3) Between 2000 and 2010, vacant housing in the United States increased by 4.5 million, or forty-four percent. (4) Vacant properties are not only visually problematic: vacant properties cause surrounding properties to decline in value and fall into disrepair, and vacant properties encourage criminal behavior in the declining neighborhoods. (3) These properties may have become vacant for a variety of reasons, one of which being overwhelming tax debt. (6)

A tax-delinquent property is not an immediate source of blight, but tax delinquency can carry over onto the financial value of the surrounding homes. (7) "The untimely payment of property tax bills is another form of financial distress, and delinquent property taxes are likely to cause negative spillovers on nearby properties that are similar to [mortgage] foreclosures." (8) Because of this, tax-collecting governments must find solutions to tax delinquency and blight that encourage repayment of at least some of the lost tax revenue and provide an enforceable way to ensure renovation and repair to blighted properties, but that also avoid the creation of undue hardship, such as home loss, for financially troubled homeowners.

Local governments use tax foreclosures as an opportunity to reclaim delinquent, problem properties and attempt to put them to more productive use, whether by directing the properties to a land bank program or by reselling the properties to new owners. (9) When tax-foreclosed properties are put to sale, local governments have an opportunity to recoup some of the lost tax revenue. (10) Because local governments manage property-tax collection through authority given by state statute and local procedures, the processes vary widely from place to place, as do the rates of successful collection. (11) Tax foreclosure and foreclosure sales serve as tools to redirect problem properties. However, when used in troubled housing markets, those same procedures may merely send problem properties from one irresponsible owner to another. (12) Because tax delinquency and foreclosure are strong indicators of blight and distress in a neighborhood, (13) government involvement in shaping tax foreclosure programs is particularly important in cities facing depopulation and decreased housing demand. (14) Local governments generally put considerable effort into processes for obtaining and selling properties, but greater issues may arise following that sale. (15) "A decision to maximize income through the sale of city-owned property to the highest bidder may offer short-term financial benefits but choke off development opportunities offering substantially greater benefits in the long run.... [Disposition policies should still balance their immediate fiscal demands against long-term goals." (16) This is particularly true when foreclosure auctions offer properties for minimum bids below the outstanding tax balance due. Purchasers may walk away with properties they are either unprepared to cope with (e.g., significant blight requiring extensive repairs, high future property tax liabilities in comparison to the minimal initial purchase price), or purchasers may obtain properties with negative intentions (e.g., plans to milk property value by renting out the property without making repairs or paying taxes). (17)

A variety of individuals purchase properties from local government tax foreclosure sales. Some individuals use these auctions as a means to purchase affordable homes to live in, while others purchase the properties as investments. (18) Mallach divides these investors into a few groups: "Rehabbers" purchase poor-condition properties, fix them up, and sell them to homebuyers; "flippers" purchase similarly distressed properties to sell, but do not fix any of the issues and often engage in misleading behavior to make the sale; (19) "milkers" purchase distressed properties, make few changes to the condition, and rent the homes out; (20) and "holders" purchase properties to rent out in fairly good condition. (21) All of these types of foreclosure-sale buyers have the potential to impact areas struggling with foreclosure. (22) While rehabbers and holders would likely best benefit a property, these individuals are much harder to attract to urban Rust Belt properties, as the necessary renovations on these distressed properties will often cost more than the increase in the property value. (23) "In those cities or neighborhoods where most investors are flippers or milkers, a case can be made that their activities at most delay abandonment for a year or two, while perpetuating dangerous and unhealthy conditions." (24) Bulk buyers, though easily assumed to be flippers or milkers, may fall within any of these categories. (25) In most cases, tax-collecting governments would rather see properties sell at auction to new taxpayers than sit empty, but Mallach suggests sitting empty would be preferable to ownership by some of these more troublesome buyers. (26) Mallach recommends setting ground rules for responsible investment in these communities rather than cutting investors out of the picture altogether. Not all investors will act irresponsibly, and it may create more damage to block all investors than to manage the problematic ones. (27)

The procedures vary widely, but tax delinquent properties will almost always go through a process that includes forfeiture, foreclosure, and subsequent sale or transfer. These sales are almost always auctions, whether in person or online. (28) When dealing in large quantities of low-price properties, tax-collecting the potential cycle of blight emanating from the initial tax foreclosure sale, tax-collecting governments must either target problem purchasers before selling tax foreclosed properties or create mechanisms to police buyer behavior following the sale. Using the long-standing property doctrine of possibilities of reverter, quick-moving local governments may be able to effectively force out problem buyers after the sale. This practice, however, will not translate well to tax-collecting governments managing large foreclosure sales with high incidents of delinquency. If a government is going to use a possibility of reverter for tax foreclosure tales, the tax-collecting government must write its deed clearly to prevent disputes about its meaning, communicate clearly with the public about the reverter procedure and the conditions that trigger the reverter, and maintain sufficient resources to reclaim the property quickly and decisively when any of the triggering conditions are met. For many governments, managing a reverter program is just not realistic. In such a case, presale limitations and restrictions on buyers provide more easily managed alternatives that can still help to curb delinquency post-sale. Successful implementation of these programs would require the state legislature to pass enabling legislation, along with strong county or municipal leadership to create on-the-ground procedures based on the state's collection options.

This Note will examine the Wayne County's novel use of a reverter plan in its postauction tactics, along with its preauction tactics, to suggest when and how other local governments may successfully apply similar programs to their own problems with blight and delinquency following tax auctions. This Note will also consider from a practical, policy perspective whether reverter programs are actually the best choice for local governments struggling with vacant, blighted, and tax delinquent properties. Because Wayne County took such a drastic measure to combat tax delinquency and blight in such an accelerated process, this Note focuses on the economic climate and policy of Wayne County in analyzing the legality and policy considerations of a tax foreclosure reverter clause. However, other cities grapple with similar issues of bulk buying, absentee landlords, and homeowners simply unable to afford property tax payments. (29) As such, a thorough examination of the implications of the plan within the Wayne County and its existing tax foreclosure procedures will help in determining whether the reverter program might be replicated in other local government systems.

1. TAX COLLECTION, DELINQUENCY, AND FORECLOSURE

   To discuss local responses to tax auction buyers, it is helpful to understand the procedure through which ordinary properties find their way into foreclosure and to auction. This Part details the property tax and foreclosure activities in Wayne County, Michigan as those procedures apply to the County's reverter plan and presale delinquency-prevention programs.

   1. Property Tax Problems in Wayne County, Michigan

      Wayne County, Michigan, home to Detroit, has...