A state law allows counties to effectively steal homes over unpaid taxes and keep the excess revenue for their own budgets.
By Eric Boehm,
An 83-year-old retired engineer in Michigan underpaid his property taxes by $8.41. In response, Oakland County seized his property, auctioned it off to settle the debt, and pocketed nearly $24,500 in excess revenue from the sale.
Under Michigan law, it was all legal. And hardly uncommon.
Uri Rafaeli, who lost his property and all the equity associated with it, is just one of thousands of people to be victimized by Michigan’s uniquely aggressive property tax statute. The law, passed in 1999 in an attempt to accelerate the rehabilitation of abandoned properties, empowers county treasurers to act as debt collectors. In the process, it creates a perverse incentive by allowing treasurers’ offices to retain excess revenue raised by seizing and selling properties with delinquent taxes—even when the amount owed is miniscule, and even when the homes aren’t abandoned or blighted at all.
Organizations representing property owners like Rafaeli say the practice is unconstitutional, inequitable, and unreasonably harsh. They call it “home equity theft”—a process that’s a close relative to the civil asset forfeiture laws that have been used by police departments to similarly deprive innocent Americans of their property without due process. They are now asking the state Supreme Court to restrict the practice.
“Michigan is currently stealing from people across the state,” says Christina Martin, an attorney with the Pacific Legal Foundation, a nonprofit law firm now representing Rafaeli and other homeowners in a class-action lawsuit that will go before the Michigan Supreme Court in early November.
“Counties have been authorized to take not just what they are owed, but to take people’s life savings.”
A Win-Win Situation
Rafaeli’s case—which has the potential to stop the predatory behavior of county treasurers across the state—began with a simple mistake.
In August 2011, Rafaeli purchased a three-bedroom, 1,500-square-foot home in the predominantly African American community of Southfield, Michigan, a lower-middle-class suburb just north of Detroit. “The investment was good to the state economy, and [at] the same time, it may produce a good rent for my retirement. A ‘win-win’ situation,” says Rafaeli, who lived in neighboring Macomb County at the time. (He no longer lives in Michigan.)
The $60,000 purchase was recorded by the Oakland County Register of Deeds on January 6, 2012. About six months later, in June 2012, Rafaeli was notified that he had underpaid his 2011 property tax bill by $496. Rafaeli made subsequent property tax payments on time and in full—and, in January 2013, he attempted to settle the unpaid tax debt, according to court documents.
But he made a mistake in calculating the interest owed, resulting in another underpayment of $8.41.
A little more than a year later, in February 2014, Rafaeli’s rental property was one of 11,000 properties put up for auction by Oakland County. It was sold for $24,500 in August of the same year—far less than what Rafaeli had paid for the property just three years earlier.
Today, real estate service Zillow, which rates the Southfield region as a “hot” market in the Detroit region, estimates the property is worth $128,000, But Rafaeli has missed out on reaping a financial reward for being an early investor in the area.
“I believed in the power of the U.S. to withstand the difficulties,” says Rafaeli, “and I believed in its fairness and dignity in doing business there.” Now, he says, he thinks differently.
“Punitive for Property Owners, and Profitable for the County”
In court documents, Rafaeli’s attorneys estimate there have been more than 100,000 properties—along with the “entire equity in them”—that have been taken by Michigan counties since 2002. “In thousands of instances each year, the proceeds for a given property sold at auction far exceed the delinquent tax amount and are far less than a delinquent taxpayer’s equity in the property,” they argue. “This results in millions of dollars in surplus proceeds and equity for the counties and tax sale purchasers.”
At the root of those seizures is a 1999 update to Michigan’s general property tax statute. That legislation, Act 123 of 1999, gave Michigan’s 83 county treasurers the authority to act as the primary agents for handing the foreclosure and auction of properties with unpaid taxes. It also expedited the process for seizing and auctioning homes that owed taxes, allowing county treasuries to sweep aside liens and other speed bumps in the tax foreclosure process.
The legislation’s goals were “to encourage the rapid reuse of property, prevent the onset of blight, and improve the overall use of property” in the state, according to a 2011 University of Michigan report about the effects of Act 123 in Wayne County—where Detroit is located, and where the 1999 law has had the most devastating effects on homeowners.
Over the past decade, more than 150,000 properties in Detroit have gone through the tax forfeiture process, according to data collected by Jerry Paffendorf, the founder of Loveland Technologies, a Detroit-based mapping firm. The process, says Paffendorf, is “punitive for property owners and profitable for the county.”
Paffendorf became increasingly interested in Michigan’s unique tax foreclosure rules shortly after Detroit’s 2013 bankruptcy, when his company worked with an anti-blight task force to identify and photograph abandoned properties across the city. At the time, the media was fascinated with Detroit’s economic collapse—one of the most memorable signs of which were the homes being auctioned for $1,000 or less.
As he began tracking the supposedly vacant homes being auctioned off by the city, Paffendorf noticed an odd trend: Lots of them weren’t actually vacant.
“There was sort of an assumption that tax foreclosures were happening to abandoned buildings. You know, properties that people had left,” he tells Reason. But that wasn’t always the case. “We saw thousands of properties that had people living in them being auctioned.”
That was happening because of the accelerated foreclosure process created by Act 123, which harshly punished any Michigander for falling behind on property tax payments. Prior to 1999, the average time between a property falling into tax delinquency and foreclosure was five to seven years, but Act 123 reduced that timeline to a little over two years. The accelerated foreclosure process caught many homeowners who fell behind on their taxes during the Great Recession.
In Michigan, property taxes are due twice per year. Bills are sent in July and December, with payments due in April and November. If there are outstanding debts from the previous year, delinquent properties are turned over to the county in March the following year. The county buys the debt from municipalities—the funding comes from the county’s “delinquent tax revolving fund” (DTRF)—and the county effectively becomes the debt collector for the unpaid taxes. Under state law, counties are allowed to impose a one-time 4 percent administrative fee to each delinquent property, and may charge 1 percent interest for every month the tax remains unpaid.
If the property owner still owes back taxes by March 31 of the third year of delinquency—that is, two years and 31 days after the county took over the collection process—the county can foreclose and take the property to auction.
After a property is auctioned, the county keeps the proceeds and recycles the revenue through the same DTRF used to buy the debt from municipalities in the first place.
If the county ends up with a positive balance in its DTRF, the excess funds can be channeled into the county budget.
That’s how Wayne County has funneled more than $382 million in delinquent tax surpluses into its general fund budget since 2012, according to an analysis by Bridge magazine, a Michigan-based nonprofit publication.
In Oakland County, where Rafaeli’s Southfield property was seized and sold in 2014, the process has been lucrative too. According to the county’s most recent comprehensive annual financial report, its DTRF had $196.8 million in net assets.
The same document details plans to use the DTRF for a number of pet projects, including the construction of a new animal shelter and adoption center. The county also “anticipates the continuation of annual transfers from the DTRF to support General Fund / General Purpose operations in the amount of $3.0 million annually for FY 2019 through FY 2023″—totals that are in line with historical norms, according to the annual report.
That’s hundreds of millions of dollars in private equity that have been transferred to the two counties’ control—completely legally, under the terms of Act 123.
“It is simply government-sanctioned theft,” says private attorney Philip Ellison. Ellison has been involved in a series of class-action lawsuits targeting nine Michigan counties’ use of home equity forfeiture over the past six years, during which time, he calculates, counties in Michigan have pocketed more than $36 million in surplus equity seized from tax delinquent properties.
Ellison represents people like Donald Freed, a resident of Alma, Michigan, who had his home and 35 acres of land seized by Gratiot County, Michigan, over a $750 tax debt. The property was auctioned for more than $100,000—and, of course, the county kept the change.
The same thing happened to Romualdo and Erica Perez, a father/daughter duo who bought a four-unit apartment building and an adjacent, abandoned single-family home in Detroit in 2012. Even though they were living in New Jersey at the time, Romualdo would drive 11 hours to Detroit on weekends to fix up the properties in the hopes of eventually relocating there to be closer to other relatives. Romualdo and Erica planned to live in the house and earn a living by renting the small apartment building.
“Every bit of money we saved and every spare minute we had went to fixing the house,” Erica says. “The plumbing, the electricity—everything.”
But the first year they owned the property, they underpaid their property taxes by $144. County tax records show that they made full payments, on time, every subsequent year. But Wayne County never informed them of the unpaid debt, they say, because the notices were sent to the wrong address. But the county should have known the correct address for the notices because more recent property tax payments indicated the proper address, says Martin.
In 2017, the county foreclosed on their property, sold it for $108,000, and kept the excess equity beyond the $359 owed in back taxes, fees, and interest. They, too, are suing the state with the assistance of the Pacific Legal Foundation, in a case that’s separate from Rafaeli’s.
Making Detroit a Worse Place to Live
In addition to destroying the livelihoods of individual property owners, Act 123 has made Detroit a less attractive place to live.
“Detroit’s collapsing structures and vacant lots didn’t just happen,” the Obama administration’s special Detroit Blight Removal Task Force concluded in its 2013 report. “They are the physical result of dire economic and social forces that pulled the city apart.”
The county’s aggressive home equity forfeiture scheme seems to be part of the problem. Over a two year period between 2017 and 2018, volunteers working with the Quicken Loan Community Fund, a Detroit-based nonprofit connected to the mortgage company, interviewed more than 60,000 property owners who owed taxes to the city. Most were aware that they owed taxes, but did not have accurate information about the process or the potential consequences.
Worse, the survey found that aggressive use of home equity forfeiture was leaving the city with more vacant properties, not fewer. “In theory, the annual tax foreclosure auctions are intended to take properties that are neglected and not generating tax revenue, and sell them to owners who will pay taxes and put the properties to productive use,” the Quicken Loans Community Fund report concluded. “In practice, most Detroit homes that have been tax foreclosed do not return to productive use. Instead, speculators who purchase cheap property at auction allow it to deteriorate without paying property taxes, leading to further depressed home values and blight.”
Paffendorf, whose company was involved in the Quicken survey, says that about 80 percent of tax-foreclosed properties end up abandoned. Some are vacant because they are going through forfeiture, and some are going through forfeiture because they are vacant, he says. But regardless of which way the causation runs, it’s fairly obvious that a law that was meant to return tax-delinquent abandoned properties to productive, tax-producing ones is failing to achieve that goal.
“If you sell houses with people living in them,” Paffendorf tells Reason, then “you’re only creating more vacant properties.”
An Incentive for County Officials to Steal
The aggressive use of home equity forfeiture under Act 123 has not only failed at its stated goal of returning abandoned homes to productive use, it has created a perverse incentive for county officials to effectively steal from their constituents.
On the morning of April 1, 2014, Linda Irwin, Cass County’s treasurer, emailed a county contractor to say she was “tickled pink” to have the opportunity to seize a $3.5 million lakefront property. The deadline for the property owner to settle an unpaid property tax debt had passed the day before and the county was ready to foreclose. In subsequent emails, the contractor joked with Irwin about using the property to host cookouts for county employees, according to court documents attached to a lawsuit against Cass County.
It wasn’t until three weeks later that Douglas Anderson, the registered agent who was handling the property and overseeing the construction of a still-unfinished home, became aware anything was wrong. In court documents, lawyers representing Anderson and property owner Sergei Antipov allege the county failed to provide adequate notice about the unpaid property taxes. Cass County argues that it took the appropriate steps required under law, sending two certified letters to the address. Both were returned as undeliverable, likely because there was no one actually living at the address yet.
It was not until April 18, 2014, weeks after the foreclosure deadline had passed, that county officials called Anderson to tell him the property was being seized. When Anderson and Antipov offered to pay the back taxes, the county refused to accept it.
“It’s a done deal,” Irwin told a local newspaper in June 2014. “They’ve tried to send us a check for $100,000, and I’ve returned it. I’ve had my council look at it, and we’ve done everything right. We didn’t make any mistakes. They did.”
Maybe so. But the county—and the contractor, Title Check, which works with county treasurers across the state and gets to keep a portion of the proceeds from auctioned properties—does not appear to have done much to alert Antipov that he owed taxes.
Antipov’s situation bears many similarities to the forfeitures that targeted the Rafaeli and Perez properties, among others. In each case, the property owners alleged that they were not given sufficient warning about their delinquent taxes. In some cases, that’s because county officials were mailing notices to unfinished homes or properties without permanent residents. In others, like Rafaeli’s case, the notices were delivered to tenants who failed to pass along the information to their landlord, mistakenly believing that the county would inform the landlord separately.
The county officials involved in each of those lawsuits contend in court documents that they complied with the notification requirements written into state law. Although Act 123 does require that county treasurers make three attempts to contact tax delinquent property owners, attorneys representing the homeowners say more should be done.
“They don’t have to sue in the normal sense,” says Martin. Because the legal action—the forfeiture—is filed against the property itself, the notice required is significantly lower than what is required in other legal matters. And some counties don’t include delinquent taxes on subsequent property tax bills, she says. “There is no notice on the new assessments that says ‘you have not paid a prior year’s bill.'”
In Cass County, officials don’t appear to have done anything beyond the bare minimum. Antipov’s attorneys say it would have taken a quick online search to find that the property was owned by an LLC registered in Anderson’s name and with his Indiana address. Antipov, who owns a metal fabrication company in Indiana, owns another property in Cass County and would have been on the county’s tax rolls (and likely known to the treasurer’s office) But neither the county nor Title Check made anything other than the bare minimum effort to avoid running out the clock established by Act 123.
“This is a major asset,” Irwin said in 2014. “We can sit on it and decide what to do with it, or we can move forward with an auction.”
Irwin died in 2018, but Cass County is still engaged in a lawsuit over the property. The county has racked up more than $250,000 in legal fees since 2014 defending its right to seize Antipov’s property, documents show. The home is still unfinished.
And while some county officials use Michigan’s aggressive foreclosure law to benefit their budgets or to provide a setting for backyard barbeques, others use it in ways that are more openly designed to advance municipal self-interest.
Wayne County Treasurer Eric Sabree has also been caught on camera admitting that Wayne County and the city of Detroit will sometimes conspire to manipulate the auction process. During a 2015 appearance on “Detroit Wants To Know,” a local web series, Sabree talked about how the treasurer’s office will bundle properties together in order to make them more attractive to potential buyers—or perhaps less attractive, so the city of Detroit can keep certain parcels for itself.
“It’s a group of properties we put together, because we cooperated with the city of Detroit…Nobody will buy this bundle, and then we can just give it to the city, and then the city will use the demolition funds to tear them down,” he said. “And in the bundle, we also had some good properties, which the city then sold to fund the demolition and the management of the properties they took.”
It’s not only the city that benefits. In February, the Detroit Free Press and The Detroit News published a joint expose showing that Sabree’s relatives purchased several homes in county-run tax foreclosure auctions. When confronted with the allegations, Sabree dismissed the rules that forbid treasurer’s office employees or their family members from bidding in those auctions as “intrusive and unrealistic.”
Sabree did not return requests for comment. But in July, an ethics board voted 5-1 to clear him of any wrongdoing, concluding that his wife’s purchase of properties in 2011 did not violate the ethics rules because the rules were adopted in 2012. Wayne County Executive Warren Evans told the Detroit Metro Times that he was “not sure that the Board’s action today did much to address” the concerns about Sabree’s behavior.
In Oakland County, the suburban county north of Detroit where Rafaeli’s property was seized and sold in 2014, there were 86 properties included in the county’s 2019 land auction, held in October. In 2018, the county auctioned off 79 properties that had been seized due to unpaid taxes, according to a list obtained by Reason via Michigan’s freedom of information law. That’s down from nearly 300 properties that went to the auction block as recently as 2015 in the same county.
County Treasurer Andrew Meisner, who is a defendant in the Rafaeli lawsuit going to the Michigan Supreme Court, did not return repeated requests for comment on this story.
His office says it tries to help homeowners avoid foreclosure. In a press release issued in March 2019, Meisner said his office has “contacted hundreds of property tax owners to discuss their options to avoid foreclosure” before the April 1 property tax payment deadline. “Preventing foreclosure is in everyone’s best interest,” said Meisner, in the same statement. Yet the evidence clearly shows that county officials and budgets have benefited from aggressive seizures and sales.
An Unconstitutional Fine
If Rafaeli is victorious before the Michigan Supreme Court, the next step would be to enter into negotiations with Oakland County to determine a fair market value for his lost property and he would be entitled to “just compensation.” And so would lots of other Michiganders. “If the Michigan Supreme Court in the Rafaeli case…rules in favor of the property owners, counties will be required to make an appropriate refund,” says Ellison.
Legally, the matter is fraught. Counties seizing excess revenue above and beyond the amount necessary to settle the unpaid debts could be considered a taking—in which case it would be subjected to the Fifth Amendment, which promises that “private property [shall not] be taken for public use, without just compensation.” The Michigan Constitution offers similar protections against government taking private property without compensation.
Oakland County has prevailed in lower courts by arguing that the seizure of Rafaeli’s property was a forfeiture. But that argument runs into other legal problems: For one, even under the wide leeway that is afforded in asset forfeiture laws, there must be an allegation of underlying criminal activity. Not paying property taxes is a civil violation, but not a criminal one.
“Traditionally, civil forfeiture would only apply to the product of the crime or the proceeds of the crime,” says Martin. Although many states and localities have stretched their use of civil asset forfeiture to include cases where no one is actually convicted of a crime—often as part of drug enforcement—the legal doctrine requires that the property seized must be “tainted with criminal activity,” she says.
But if that’s the way courts want to look at it, then the Eighth Amendment’s prohibition against excessive fines would apply. It doesn’t matter that a state law, like Act 123, might authorize such a forfeiture if it is unconstitutional.
In a landmark U.S. Supreme Court case last year, Timbs v. Indiana, the high court ruled that the excessive fines clause applies to both state and federal proceedings. In Timbs, the state of Indiana attempted to seize a $42,000 vehicle that had been used to transport illegal drugs, but the Supreme Court determined that taking the value of the vehicle—which was many times in excess of the allowable monetary fine for the crime Tyson Timbs had committed—violated the Eighth Amendment.
That might matter for the Rafaeli case. “Tax foreclosure is not the same thing as a forfeiture,” Wesley Hottot, an attorney with the Institute for Justice, a nonprofit libertarian law firm, tells Reason. Hottot was the lead attorney in the Timbs case.
“But even if they were right,” Hottot adds, the forfeiture in this case violated the excessive fines clause of the U.S. Constitution, he says, “because it was grossly disproportionate to the minor offenses involved.”
In a brief submitted to the state Supreme Court defending Oakland County’s use of home equity forfeiture against Rafaeli, the Michigan Association of County Treasurers makes several arguments in favor of the existing arrangement. The current system allows for counties to more easily? address blight, the group argues, despite evidence, like Paffendorf and Quicken found, that it has made blight worse in some places.
Elsewhere, the group’s arguments seem to contradict one another. Ruling that tax foreclosure is a taking “could eliminate any incentive for property owners to pay delinquent real property taxes,” the MACT argues, because the threat of punishment must exist for property owners to comply. But, later, the group argues that the seizure of an entire property to pay a smaller debt is “not intended to be punitive” and therefore does not run afoul of the Eighth Amendment’s prohibition on excessive fines.
At the very least, the group’s attorneys argue, the legislature—not the courts—should be responsible for fixing Act 123, because it would be able to do so “without destroying the tax collection process.”
At other times, county officials have pleaded poverty. “They were on the verge of [bankruptcy] for quite a while. It was up to elected officials and administrators of local governments to take the initial steps (to collect taxes) and somehow they just didn’t do it,” Ray Wojtowicz, a retired Wayne County treasurer, told Bridge in 2017. It’s clear that counties in Michigan now count on being able to pad their budgets with revenue from homes seized for having unpaid taxes.
The burden of aggressive property tax enforcement, meanwhile, falls heaviest on poor communities. Wealthier homeowners have easier access to the legal and accounting assistance necessary to avoid underpayments or to quickly address any problems. Once property is seized, there’s no guarantee of due process or even a court hearing. Homeowners don’t even have access to public defenders; those are allocated only in criminal cases.
In some counties, Act 123 has “created this incredibly unhealthy incentive where the county isn’t just satisfied when they make enough to cover what they would have made in taxes,” says Paffendorf. “They are relying on these surpluses from people who are in debt.”
University of Massachusetts law professor Ralph Clifford has spent years studying home equity forfeitures in Massachusetts. The state has a less aggressive foreclosure law, but similarly allows municipalities to pocket excess revenue when tax delinquent foreclosures occur. His research shows that an estimated $56 million is appropriated from Massachusetts taxpayers every year. After reviewing all such seizures—known as “tax deed” actions, under Massachusetts state law—that took place between August 2013 and July 2014, Clifford found that towns in the state collected $42.87 for every dollar in taxes owed. His analysis includes one instance in which a property assessed for a value of $24,000 was taken to cover a $26 tax bill.
“As far as I can tell,” he told Reason, “it’s all just blatantly unconstitutional.”
Reforming the System
“We’d had these situations for decades, where people have lost their entire homes over a few hundred dollars of unpaid property taxes,” Montana state Sen. Tom Jacobson (D–Great Falls) tells Reason. “They would lose their entire homes. Forty years. All that equity. Over a few hundred bucks.”
Shortly after his election to the state legislature in 2012, he introduced a bill to require that property owners be compensated for what is taken—minus the debt owed and any interest.
But Jacobson says he was surprised by the level of opposition he witnessed. Lobbyists for counties (which handle property taxes in Montana, like in Michigan) said the bill would hurt their budgets.
He reintroduced the bill during the 2015 and 2017 sessions—Montana lawmakers meet for a formal session only once every two years, though they have an interim session in off years where much of the groundwork is laid, though no votes are taken. By the third time though the process, lawmakers agreed to add additional notification requirements before a property could be seized.
This year, the state legislature passed, and Gov. Steve Bullock signed, a bill giving property owners the right to the remainder of the equity in their homes after the tax debt is settled. The bill also requires that properties cannot be sold for less than 50 percent of their assessed value—an important caveat that should prevent some of what has occurred in Michigan.
The reforms also flip the counties’ incentives. Instead of being able to profit off delinquent taxes, says Jacobson, officials will now have an incentive to make sure the taxes are paid up front and on time—or they’ll have an incentive to help taxpayers find ways to meet their obligations.
A Penalty More than 8,000 Times the Underlying Debt
In Michigan, however, the practice of seizing homes over tiny underpayments of property taxes is likely to remain in place unless the courts step in. A bill introduced in the Michigan state House by Rep. Gary Howell (R–Lapeer) to reform Act 123 collected a handful of co-sponsors this year but did not receive even a committee vote.
Which means there will be more people like Uri Rafeali, who lost a home over an $8.41 mistake. His property, bought as an investment, is valued at an estimated $136,000. The penalty imposed by Oakland County was more than 8,000 percent greater than the underlying debt.
But today, while the legal battle over its fate plays out, the house sits empty. It generates no tax revenue for the city or county. It earns no money for Rafaeli or his wife in their retirement.
“The Constitution was written to prevent the government from violating a right that preexists the Constitution,” says Martin. “If this can happen to multimillionaires and to the poor, to the elderly….If this can happen to Mr. Rafaeli, it can happen to anyone.”