Legal foundation takes aim at ‘home equity theft’

When a property owner falls behind on their taxes, it’s customary for local government to seize the property and sell it off to satisfy the debt. In most states, the local government keeps only the proceeds necessary to satisfy the debt and cover administrative fees, then returns any excess proceeds to the property owner.

In a dozen states, however, governments can keep the entire sale price. It’s a windfall for the government and unfair to the homeowner who built up equity. Critics call it “home equity theft.”

It’s not hard to see how the practice can lead to abuse. In Michigan, for example, 85-year-old Uri Rafaeli lost his rental property when he underpaid a tax bill. A mere $8.41 miscalculation had grown to $285 in penalties and interest when Rafaeli’s property was seized. The county sold the home for $24,500, even though it was valued at over $80,000.

In 2020, the Pacific Legal Foundation took Rafaeli’s case to the state supreme court and won. The court ruled that the county had violated Rafaeli’s constitutional property rights when it took more than was owed to collect unpaid taxes.

PLF is working to stop this practice around the country. For example, they filed suit in Massachusetts in March, alleging that the city of New Bedford and a Boston-based developer deprived a homeowner of $210,000 in home equity after a recent foreclosure and sale.

Meanwhile, two Massachusetts representatives have filed a bill to eliminate the practice. Reportedly, 254 Massachusetts homeowners lost a collective $60 million in home equity in fewer than seven years when municipalities foreclosed and sold their homes. The tax debts were as small as $2,000.

While California offers its citizens better protection, legislators are working to improve those laws too. Currently, California officials who auction off seized property can hold unclaimed funds in trust for a year. If the excess proceeds aren’t claimed in that time, the government gets to keep them. Assembly Bill 1839 would require enhanced notification to property owners and a longer window to claim the funds.
The California bill also seeks to close a loophole that allows government agencies to sell seized properties to other agencies or nonprofits working on low-income housing. Those sales don’t generate excess proceeds, so the former owner receives no compensation regardless of how much equity is lost.

The PLF is fighting a similar situation in Michigan, despite the state supreme court’s ruling in the Rafaeli case. When Oakland County foreclosed on a family home, they sold it through a series of legal transactions to Southfield Neighborhood Revitalization Initiative, a private company managed by Southfield city officials. That company then resold the home for more than $300,000.

An interactive map on the PCF website suggests that “home equity theft” is legal in Alabama, Arizona, Colorado, Illinois, Maine, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, and Wisconsin.

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