Deborah Foss is a 67-year-old grandmother in New Bedford, Massachusetts, who survives on a small fixed income from Social Security. She has several medical conditions, including chronic lymphocytic leukemia, COPD and neuropathy.
She used to be a homeowner, but now resides in her car.
She no longer has a roof over her head – largely because an investor in tax liens took the equity she had in her home. But with the help of a nonprofit legal group, she is fighting back.
Foss has filed suit against Massachusetts, challenging a law that allows private investors to confiscate all the equity owners have in their homes – above and beyond what they owe in back taxes and interest on the unpaid balance.
Pacific Legal Foundation is the nonprofit representing Foss, as well as homeowners in other states who have suffered the same fate. Between 2014 and 2020, according to PLF, Massachusetts has allowed the taking of some $37 million more than what owners owed in property taxes. In Foss’ case, she was delinquent on roughly $30,000 in back taxes, yet the private investor who purchased her tax lien foreclosed, taking a house that was valued at $241,600.
That’s what makes investing in tax liens so profitable. Though PLF does not have an exact count, “it’s fairly safe to say” investors have raked in “hundreds of millions” nationally, senior attorney Christina Martin told me. She called the practice “despicable.”
“When the government takes more than someone owes, it’s stealing, and it’s wrong.”
— David Deerson, Pacific Legal Foundation
Advocates Call It ‘Equity Theft’
While it’s entirely legal to collect on tax liens, PLF argues that collecting more than what’s owed amounts to “equity theft.” Said Martin: “We believe it’s not only unconstitutional, but excessive punishment.” And the Sacramento-based legal group is having none of it.
PLF, which defends people from government overreach, said 11 states – Alabama, Arizona, Connecticut, Illinois, Maine, Massachusetts, Minnesota, Nebraska, New Jersey, New York and Oregon – allow this sort of thing, which can affect commercial and residential property owners alike. A handful of other states have loopholes that allow the practice.
But a few states have seen the folly of legalized tax lien thievery and changed their rules. Last month, Wisconsin modified its law to ensure that property taxes are paid, while providing that former homeowners receive whatever is left over from the sale of their property. North Dakota and Montana have done the same.
In Michigan, meanwhile, the state’s supreme court found the old lien law violated the state’s constitution, ruling that people have a right to any surplus equity in their homes after back taxes are settled. In the case that spurred that ruling, Oakland County sold Uri Rafaeli’s house at auction for $24,500 because he underpaid his property tax by $8.41. The county took all of the proceeds.
Nevertheless, PLF is now working with eight homeowners in their suit against the same county Michigan’s high court ruled against. They are seeking to recover hundreds of thousands of dollars in equity lost when the county treasurer took their homes as payment for tax debts totaling only a fraction of their value.
According to PLF, the city of Southfield, Michigan (where Rafaeli lived), took advantage of a loophole in the state law that lets cities buy foreclosed homes from the county for the cost of the tax debt – while not paying former owners the difference. While this scheme is a boon to some well-connected businesses in the area, it perpetuates the predatory seizure of home equity, said attorney Martin.
“When the government takes private property, it must pay just compensation, no matter how it acquires the property,” she said. “The government has compensated homeowners with forgiveness of debts worth only a fraction of the homes that the government took. That is unconstitutional and unjust.”
Government Takes More than It’s Owed
In New Jersey, the group is aiding an East Orange property owner who is challenging a state tax scheme that allowed the city to take her commercial property because she paid her taxes late. The property was worth about $80,000 more than she owed.
Lynette Johnson purchased the property in 2014 but claims she never received her tax bill for that year. Unbeknownst to her, the city purchased a lien on her property, foreclosed and sold the property to private investors for $101,000 in 2018. The city kept every penny from the sale, leaving Johnson with nothing.
“Although the government can take property to settle back taxes, it isn’t entitled to anything more than it’s owed,” said David Deerson, the PLF attorney representing Johnson. “When the government takes more than someone owes, it’s stealing, and it’s wrong.”
Even in places where owners are allowed to keep what’s left over, state and local jurisdictions can sell tax liens to investors, usually for pennies on the dollar. Not only can those investors force the sale of the property, they can often charge whatever interest rate they want until the lien is finally satisfied.
Still, the news isn’t all bad, said Martin, citing Florida as an example. The Sunshine State requires investors to compete on the interest rates they charge. The winning bidder is the one offering the lowest rate, meaning delinquent owners will owe less interest. Investors can still foreclose to satisfy liens in the state, but what’s left over must be returned to the former owner.
There are several lessons here, with No. 1 being, “Pay your taxes.” States aren’t the only entities that can take your house in lieu of payment: Private investors can, too. So can Uncle Sam, if you don’t pay your income taxes.
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at email@example.com.