Tax Day: A look at tax lien sales in Cuyahoga County

It’s that time of year again. The time for digging out your W2’s and crossing your fingers for a big refund. That’s right — we’re talking about Tax Day! Last year, in honor of the day, we put out a crash course on delinquent property tax foreclosure.

This year, we’re highlighting a new report from the Vacant and Abandoned Property Action Council on tax lien sales in Cuyahoga County.

Frank Ford, Chair of the Vacant and Abandoned Property Action Council (VAPAC), and Senior Policy Advisor at Thriving Communities Institute, shares more on the report, Property Tax Delinquency And Tax Lien Sales In Cuyahoga County, Ohio, below:

Can you explain in brief the process of tax lien sales in Cuyahoga County?

Frank Ford (FF): Ohio, like many states across the country, allows counties to sell property tax delinquencies to private investors in the form of “tax lien certificates.” The benefit for the county is that it gets the delinquent tax paid immediately. The tax lien buyer essentially steps into the shoes of the county and pursues collection of the debt, which includes the right to charge up to 18% interest and recover up to $2500 in attorneys fees. The tax lien buyer also inherits the county’s super-priority lien status which means it can bring a tax foreclosure lawsuit against the taxpayer and be assured that its claim is going to be ahead of banks and other creditors. Cuyahoga County presently sells tax lien certificates in bulk, meaning a single transaction may involve thousands of liens and millions of dollars in tax delinquency. The two most recent bulk buyers have been Aeon Financial LLC and Woods Cove LLC.  Tax lien sales have few downsides for properties located in healthy real estate markets. Taxpayers in these markets are very likely to satisfy the debt and “redeem” their property. And even if they don’t, foreclosed property in these markets is often quickly re-absorbed into the marketplace and rarely becomes vacant and blighted. The problem is with tax lien sales on properties in lower value distressed markets. In this regard bulk tax lien sales bear a resemblance to the problems experienced when banks hold thousands of mortgages in securitized pools. The bank, or in this case the tax lien buyer, is simply not motivated to assume responsibility for abandoned low value properties that emerge out of foreclosure.

What impact have tax lien sales had on vacancy and abandonment in Cuyahoga County?

FF: The City of Cleveland, together with local housing advocates, keeps track of large owners of problem properties. This began with banks holding 100s of distressed and vacant homes, then included out-of-state speculators to whom the banks off-loaded these properties. In recent years both Aeon Financial and Woods Cove have emerged among the largest holders of vacant property, a by-product of thousands of tax foreclosures. In December 2013 the Washington Post published an investigative report that documented the poor condition of Aeon homes. Similar problems are now coming to light with Woods Cove.

How is the issue of tax lien sales in Cuyahoga County a matter of racial and social equity?

FF: The research we’ve done suggests that homeowners in the predominantly African American communities on the east side of Cleveland and the east inner suburbs are the ones at greatest risk of losing their homes from tax lien sales.  And, accordingly, the other residents of these predominantly African American communities are the ones who suffer the consequences of the additional abandonment and blight. The Legal Aid Society of Cleveland has also documented cases where Woods Cove is requiring tax payers to enter into a “confession of judgment” agreement as a condition of entering into a payment plan to keep their home. It’s worth noting that harsh tactics like this are not employed by the County when it does its own tax collection. Tax lien sales transfer what is essentially a public function to a private return-driven entity that has neither a duty nor an interest in protecting taxpayers and residents of Cuyahoga County.

Your report mentions “The Michigan Model” as a potential way forward for Cuyahoga County. Can you explain what that would look like?

FF: US Congressman Dan Kildee, a former Michigan county treasurer, pioneered an innovative alternative to tax lien sales. Instead of selling the tax liens for quick operating cash, and giving up all right to control the collection and foreclosure process, Michigan counties can raise the operating cash they need by borrowing from banks and giving the banks “Delinquent Tax Anticipation Notes” (DTANs) as collateral. The key to this is that the Notes, when issued by the County, are equivalent to tax-free municipal bonds – the bank pays no taxes on the interest earned from repayment by the county.  Because of this tax benefit, banks offer the loans at only 1-2% interest. Meanwhile, because the county has retained the lien, and control over the collection process, the county can collect interest at 16-18% making a profit on the difference. And further, because the county retains control of the lien and the collection process, those properties that do become vacant can be re-directed to a county land bank or other beneficial owner rather than end up in the hands of a private tax lien investor.

What are some of the key action steps your report recommends for Cuyahoga County?

FF: Of course, we recommend that Cuyahoga County make a good faith effort to study the feasibility of applying the Michigan model in Ohio. But to the extent that tax lien sales continue, we recommend the county do the following:
1.  Increase internal collection capacity at the County Treasury to minimize reliance on tax lien sales.
2.  More carefully vet future tax lien buyers to insure their commitment and capacity to deal with vacant and distressed property.
3.  Require tax lien buyers to post a sizable bond to insure against future demolition and nuisance abatement costs incurred by municipalities.
4.  Require tax lien buyers to agree in advance to permit municipalities to inspect their vacant properties.
5.  Eliminate from future tax lien sales properties with a lower probability of redemption;  we found that properties valued at below $50,000 had the greatest likelihood of default. These properties should be handled directly by the county and not turned over to a private company.

Download the full report