This paper was authored by Ron Malega, a Michigan State University graduate student whose internship with the Senate Fiscal Agency was sponsored by the United States Department of Housing and Urban Development.  Karen Hendrick, Linda Scott, and Fred Cremeans, of the Senate Fiscal Agency, provided word processing and technical support.  Suzanne Lowe, Bill Analysis Coordinator of the Senate Fiscal Agency, contributed to the paper’s completion. 

INTRODUCTION

METHODOLOGY

RESULTS/FINDINGS

 Summary of the Michigan Tax Delinquent Property Process

 Municipal

 County

 Tax Lien Investor

 State: Departments of Natural Resources and Treasury

MAGNITUDE OF THE PROBLEM

CONCLUSION

APPENDIX

RECENTLY ENACTED TAX REVERSION LEGISLATION

There are many major criticisms of the tax delinquent property process within the State of Michigan.  The process has been criticized as being very time consuming.  It also is considered very complicated, cumbersome, and easily abused.  Currently, it can take five or six years for tax delinquent property to be put back on the tax roll, acquired by a new owner, and/or demolished if the property contains an abandoned or unwanted structure.  Further, because of the confusion of some homeowners who are unfamiliar with the system, homes can be lost unnecessarily.

This paper reviews the process in Michigan for dealing with tax delinquent real property, including the responsibilities of local units of government and the State of Michigan, the rights of property owners and tax lien holders, and the role that tax lien investors play in the process.  The paper discusses specific complaints about the process and presents data on the number and location of tax delinquent parcels in the State.

It should be noted that the tax reversion process that is described below applies to taxes levied before January 1, 1999.  For taxes levied after December 31, 1998, the forfeiture, foreclosure, and sale of tax delinquent property will be subject to new procedures contained in recently enacted legislation.  This legislation was enacted in conjunction with several measures creating various homesteading programs.  In addition to revising the tax reversion process for all property, the recent amendments provide an accelerated process for certified abandoned property, as well as a temporary process allowing local units of government to dispose of an “emergency backlog” of tax reverted property.  A very brief overview of these measures is contained in the Appendix.

METHODOLOGY
A process analysis was conducted in order to identify both implementation and policy problems associated with Michigan's current tax delinquent property process.  Intensive interviews of people with specialized knowledge of the process were conducted.  At the State level, an interview was conducted with staff at the Department of Natural Resources (DNR).  At the county level, a representative of the Ingham County Treasurer's office was interviewed.  At the municipal level, a representative of the City of Lansing's Assessor's office was interviewed.  In addition to representatives of governmental interests, a private tax lien investor was interviewed to help explain the interest and role of the private investor.  Library searches also were conducted to reflect work done by governmental agencies that have a vested interest in the process.  Hard copies of government documents related to the tax delinquent property process also were used in analyzing problems with the current system.

RESULTS/FINDINGS:
Summary of the Michigan Tax Delinquent Property Process

Michigan’s process for dealing with tax delinquent real property is governed by the General Property Tax Act.  Property taxes on a piece of property must be delinquent for three years after assessment before the back taxes may be sold at the annual tax sale.  (As discussed below, the property itself is not sold outright at this sale.)  The tax sale is held on the first Tuesday in May of every year.  For instance, at a tax sale held in 1995, the unpaid taxes for 1992 will be sold.  This sale, which is held in every county, is to redeem the back taxes owed on the land and fixtures.  Exceptions to this general rule include “certified special residential property” (CSRP).  This property may be sold for back taxes if it is delinquent for two years in a row before the annual sale for tax delinquent land.  For example, at a tax sale held in 1995, the unpaid taxes for 1993 will be sold for a CSRP.
 
Start of Process:
          • A piece of property must be delinquent on property taxes for three years after assessment for it to be sold at
            the tax sale in May.

Before the annual tax sale, procedural actions must be completed.  Each county clerk must file a petition with the circuit court seeking a judgment in favor of the State against the land.  The petition must include a description and list of property that is tax delinquent.  The county treasurer is required to mail a written notice to each person who has a recorded interest in the land.  This notice must be sent immediately after the filing of the petition and at least 30 days before the date of the annual sale.  A hearing, scheduled for a designated time before the annual sale, must be ordered to give all those with an interest in the property an opportunity to contest the taxes owed.  At this point, any person with an interest in the property may pay off the back taxes owed before the date of the hearing, file a written objection and attend the hearing, or take no action.  In addition, the order and petition also must be published in a newspaper circulating within the county, once a week for three consecutive weeks before the hearing.  Again, any person with an interest in the land who wants to protest the validity of the taxes must file a written objection before the date of the hearing.

Notification:
          • Before the county tax sale, interested parties must be notified that the delinquent taxes on the property will be
            offered for sale.
          • Notification takes two forms:
 
1. The county treasurer must mail a written notice to each person who has a recorded interest in the property.
 
2. The list of the property that will be offered for sale must be published in a newspaper with countywide circulation once a week for three consecutive weeks.

          • Any person with an interest in the property may attend a hearing to dispute the back taxes owed on the property
           before the county sale.

The delinquent taxes are offered for purchase at the annual tax sale.  This is a competitive sale.  The sale is not an outright sale of the property offered; rather, it is a sale of the lien for the unpaid taxes and charges.  At this point, two things can happen.  First, a private tax lien investor can pay the back taxes, associated fees, and interest owed on the property.  In this case, the investor receives a "Certificate of Purchase" indicating that the investor has purchased a delinquent tax lien.  The investor gains the right to collect a premium from the property owner who wishes to redeem his or her property.

County Sale:
      • The delinquent property taxes of a parcel are offered for sale to tax lien investors.
      • Not an outright sale of the property, but rather a sale of the “lien for the unpaid taxes and charges”.
      • Two-Tier Process:
      • Either a tax lien investor purchases the property’s delinquent taxes OR
      • The property is “bid off” to the State of Michigan.
      • The owner may redeem property by paying the delinquent taxes, fees, and additional charges.

If the owner fails to redeem the property within one year following the sale, the investor may turn in the Certificate of Purchase to the State Treasurer and then is issued a "tax deed".  The tax deed does not convey absolute title to the property to the investor.  To acquire title, the investor must issue a "demand for payment of taxes" to the owner, which still allows an opportunity for redemption.  All recorded owners and occupants of the premises must be served a demand through the sheriff and proof of demand must be filed with the county treasurer.  At this point, the owner has six additional months to redeem the property by paying the back taxes owed plus a 50% interest/penalty fee, $5, and the cost of the sheriff’s notice.  This payment can be made to the investor or the county treasurer's office.  If the owner fails to redeem the property within the six months, then the investor gains absolute title to the property.
 
Tax Lien Investor Tier:
     • A tax lien investor receives a Certificate of Purchase by paying the delinquent taxes, fees, and interest owed on a piece
        of property.
     • The tax lien investor gains the right to collect a premium from the owner if he or she wishes to redeem the property.
     • The owner has a specified period of time to redeem the property.
     • If, after the redemption period expires the owner fails to redeem the property, the tax lien investor gains absolute title
        to the property.

Second, if no investor pays off the back taxes at the county tax sale, then the property is "bid off" to the State.  At this point, the owner of the property has up to one year to redeem the land from the State Treasurer.  To redeem, the owner must pay the back taxes, fees due, plus 1.25% interest per month from the date of the tax sale to the involved party.  If the owner fails to redeem the property within one year after the county tax sale and before the next year's tax sale, the title to the property is vested in the State.  The owner is given an additional six months to redeem the property by paying back taxes, 1.25% interest, and a $50 conveyance fee.  After the six months, the owner can still redeem the property from the State by paying the back taxes, 1.25% interest, a 50% base tax, and a $50 application fee.  In addition, the Department of Treasury must offer a hearing to give all those with an interest in the land an opportunity to dispute the taxes.  (This is commonly referred to as a Dow hearing, in reference to a Michigan Supreme Court decision.)  If, at the hearing, the issue is not resolved in the owner’s favor, the State provides an additional 30 days after the hearing for the owner to redeem the proper by paying taxes owed, fees, and interest.  After the additional six months and/or the hearing, the DNR is allowed to sell the property at auction, offer the property to other units of government, or keep the property for the State.
 
Bid to the State Tier:
  ? If no tax lien investor purchases the delinquent taxes at the county sale, the property is “bid off” to the State.
  ? The State of Michigan offers the owner a specified period of time in which to redeem the property by paying the delinquent taxes, fees, and interest owed.
 • If, after the redemption period expires, the owner fails
  to redeem the property, the property is vested in the
  State of Michigan.
 • There are then three things that can happen:
  a. The State keeps the property for public use.
  b. The property is offered to other units of government for public use.
  c. The State sells the property outright to private persons at an auction.
Figure 1, in the Appendix, is a flow chart of the current delinquent property tax sale process, using an example in which a $1,000 tax delinquency begins in 1996.

Municipal
Though the tax delinquent property process arguably affects the municipality most severely, the role of the municipality is limited.  For each year that a property owner fails to pay taxes, the municipality must notify the owner of delinquency.  In addition, the municipality must notify the county treasurer as to which property is tax delinquent.  It is the responsibility of the county, not the municipality, to collect delinquent taxes.

The problem tax delinquent property presents to municipalities varies.  In some large cities, tax delinquent property, especially when abandoned, represents a serious challenge to the successful redevelopment of distressed communities.  In small communities and/or wealthy municipalities, tax delinquent property presents a less serious threat to a community's stability and prosperity.  Much of the concern municipalities have over the tax delinquent property process involves the reversion of property to the municipality.

The representative interviewed from the City of Lansing stated that the process from delinquency, through redemption and foreclosure is too long; it can effectively stall development projects.  Another concern of some municipalities is that an acquired parcel must be used for a public purpose.  This effectively limits what a municipality can do with the property and, at times, limits redevelopment.  Lastly, the representative indicated that because Michigan is a “nonrecording” State, finding title to a parcel of property is often difficult and leads to both taxing and notification problems; this can slow down the tax delinquent property reversion process.

County
The role of each county is to collect delinquent taxes in the name of the State.  The county is authorized to collect all delinquent taxes owed to any unit of government and/or taxing authority.  Specifically, each county's role in the tax delinquent property process is to serve notice of delinquency on owners and hold an annual tax sale.  At the tax sale, a county offers the back taxes of delinquent property for sale to private tax lien investors.  In addition, the county is the primary administrator of redemption for the owner.

The county is at the center of the tax delinquent property process.  Each county must maintain a list of tax delinquent property that can be offered for sale, notify the owner, publish the list of property to be sold at each sale in a circulating newspaper, conduct the tax sale, and function as the primary administrator responsible during the redemption and/or conveyance periods.  This complicated process often leads to problems of implementation.

The degree of difficulty with regard to administering the tax delinquent property process varies for each county.  The counties with the greatest ease concerning implementation are the ones that are the most computerized.  The counties with the greatest difficulty are the ones with little or no computerization.  The degree of computerization and skill of the county treasurer’s staff often dictates the county’s efficiency in compiling lists of property delinquent for taxes, serving notice on owners, and supervising redemption and/or conveyance.

A representative from the Ingham County Treasurer’s office said that there is an overall impression among many county treasurers and staff that the tax delinquent property process is too long and overly complicated.  The current minimum delinquency period is particularly disadvantageous to many property owners.  Under the current process, a property owner is responsible for paying the third year’s back taxes plus accumulated interest.  As stated by the representative, it is the impression of some county treasurers that the accumulated interest, over such an extended period of time, makes paying off the taxes difficult, if not impossible, for many property owners.  In addition, the current process is viewed as being confusing to many property owners--many of whom are senior citizens.  Apparently, many owners have difficulty understanding the delinquent tax notifications, redemption rules, and dealings with tax lien investors.

According to the county source, it is the opinion of many county treasurers and staff that the tax lien investor is no longer needed due to county delinquent tax revolving funds.  A county revolving fund contains money that is dispersed to local municipal governments that have lost funds due to delinquent property taxes.  Municipalities then use these funds to continue to provide services to the community.  Counties establish these revolving funds by totally self-funding them, totally borrowing the money through a bond issue, or using a combination of self-finance and bonds.  A county that borrows the money for the revolving fund typically pays off the bond by collecting the delinquent property taxes, interest, and penalties.  Therefore, the role that the tax lien investor now plays is argued to be no longer necessary.  Also, according to anecdotal evidence, some tax lien investors have used misleading business practices to take advantage of an already confused property owner.

Tax Lien Investor
The private tax lien investor’s role in the tax delinquent property process is technically to provide funds so that the government may continue to operate despite loss of revenue from delinquent property taxes.  At the annual county tax sale, tax lien investors purchase the delinquent taxes from the county.  Though many tax lien investors understand their official role in the process, they recognize that they are involved in the tax delinquent property process to make a profit from the premiums they obtain from the owners who wish to redeem their property.

Tax lien investors can be broken down into three types:  1) the recreational buyer; 2) the small/mid-sized lien buyer; and 3) the large, nationwide corporation.  The recreational buyer is typically a private individual who buys liens as a partial investment strategy; this buyer usually buys few liens and is tied to a geographic location.  The small/mid-sized lien buyer is often an investment company that seeks to gain a substantial profit; these buyers typically attend many or all of the county auctions in Michigan and purchase many liens.  The large corporations also seek to purchase many liens and obtain a substantial profit; in addition, these corporations are nationwide, often purchasing liens in many different states throughout the United States.

In general, all types of investors wish to obtain the premium from the liens they have purchased and make a profit.  Few tax lien investors actually wish to obtain the property from the original owner.  These investors view their business as being similar to lending institutions that make a profit from the interest on loans:  Acquiring the property would decrease profit because the investor would no longer be able to obtain the premium from the owner.  It has been offered that owners redeem more than 90% of the delinquent taxes purchased by investors.  Due to the fact that investors do not wish to acquire the property, many investors purchase delinquent taxes on property with little or no research on the property.

The small/mid-sized lien buyers often conduct the most detailed research.  These companies typically investigate the parcels that appear to be the best investments; often they make site visits and obtain the tax payment histories of the owners from the county.  It is from this research that small/mid-sized tax lien companies can target the specific property that will guarantee the most profit.  The large, nationwide corporations typically conduct less detailed research.  Often these corporations use investment formulas to target property and/or purchase large quantities of liens to ensure a profit.

The level of research for the recreational tax lien buyer is specific to each investor.  It is the impression of the tax lien investor interviewed that, overall, most tax lien investors are less concerned with the physical development and/or redevelopment of property and more concerned with the premium from the lien.  The investor interviewed also suggested that, in general, tax lien investors in Michigan think that the current system is too cumbersome.  The investors appear to agree that there is too much paperwork involved at the county level.  In addition, the investor suggested that it is difficult to conduct history searches in some rural counties because they often have part-time treasurers.  In support of the role investors play, this particular investor suggested that the county revolving fund does not replace the private investor.  It was said that it is the investors who are predominantly successful in getting people to pay their back taxes.

State: Departments of Natural Resources and Treasury
If a piece of property is not sold for back taxes at an annual county tax sale, the property is "bid off" to the State.  There are two departments within the State of Michigan that are involved in the tax delinquent land process:  the Department of Treasury and the Department of Natural Resources.

The Department of Treasury is the unit of the State that initially "claims" the property for back taxes; the Department is required to serve notice of failure to pay back taxes on the owner.  The Treasury Department keeps track of property until either the redemption period expires or the owner of the property pays the back taxes owed.  During this time it is the responsibility of the DNR physically to inspect each parcel that is bid off to the State; the purpose is to assess who has title to the property and determine if anyone is living on the premises.  The DNR also administers the statewide sale of foreclosed property held by the State.

The DNR’s representative who was interviewed indicated that the State’s objective is to get property back on the tax roll as quickly as possible.  With the current system it can take as many as five or six years to return a parcel of tax delinquent property to the tax rolls if the process runs smoothly.  The Department of Natural Resources has indicated that this period of time is too long and needs to be shortened.  One problem apparently is that the DNR has nearly 12,000 pieces of property to inspect yearly with a staff of four people; therefore, this slows down the process because the DNR cannot inspect that many sites with so few employees.

Another problem concerns the “certified special residential property” designation.  Under the CSRP category, the tax delinquent process can be shortened by one year if participating municipalities make a list of their abandoned residential property that is tax delinquent for two years in a row.  The certified special residential property designation was enacted to curtail the effects of abandoned and blighted residential property on neighborhoods.  According to the interviewee, however, no municipality has used this option since the law’s inception.

It has been suggested that the current practice of using tax lien investors and the county auction is both cumbersome and often disadvantageous to the property owner.  It was said in the interview that the tax lien investor is part of an antiquated law.  The tax lien investor's funds are no longer necessary due to the fact that counties can set up revolving funds from which to obtain the money needed to run local government.  Therefore, if the tax lien investor were eliminated from the current tax delinquent process, the annual tax sale held by each county would no longer be needed.  The DNR source indicated that because the tax delinquent land process is confusing for many owners, they have failed to understand their rights and responsibilities, and on occasion have been taken advantage of by tax lien investors who use misleading methods to collect the money owed to them.

MAGNITUDE OF THE PROBLEM
To help gauge the magnitude of the problem that tax delinquent property may present, descriptive data from the 1998 tax sale summary are included.  (See Figure 2 and Table 1 in the Appendix.)  During the 1998 county sales, delinquent taxes for 1995 were sold.  Overall, 55,706 pieces of property statewide were offered for sale at all the county-level sales in Michigan.  This represents $46,674,867.40 in delinquent taxes.  Statewide, roughly 61% (33,797) of the parcels offered for sale at all county auctions were sold to tax lien investors.  Approximately 39% (21,870) were bid off to the State.

Using a figure offered by both the DNR employee and the tax lien investor who were interviewed, about 90% of the back taxes that are purchased by tax lien investors are redeemed by the owner.  Therefore, it may be estimated that, for the 1998 tax sale, approximately 30,418 pieces of property will be redeemed by the owner from the tax lien investor.  Approximately 3,379 will become owned by tax lien investors because the owners will fail to redeem their property.  More generally, the map in Figure 2 indicates that southeastern and western Michigan contained the greatest total number of delinquent parcels that were offered for sale during the 1998 annual county sales.

Counties with the most delinquent property for 1998 taxes were:

  1.  Wayne County with 17,445 parcels.
  2.  Oakland County with 4,092 parcels.
  3.  Genesee County with 3,817 parcels.
  4.  Kent County with 1,693 parcels.
  5.  Saginaw County with 1,568 parcels.

Counties with the least delinquent property for 1998 taxes were:

  1.  Keweenaw County with 18 parcels.
  2.  Luce County with 61 parcels.
  3.  Baraga County with 86 parcels.
  4.  Benzie County with 105 parcels.
  5.  Ontonagon County with 110 parcels.

CONCLUSION
Tax delinquent property is an issue that affects Michigan's urban centers.  In part, the problem has been defined as being one of time.  The process takes too long.  It has been suggested that the process delays the time it takes property once again to be tax-generating for a municipality.  In addition to this, it has been suggested that the current process reinforces and contributes to the deterioration that is taking place in Michigan's inner cities.  This policy analysis has attempted to offer a holistic examination of the process that will afford insight to legislators, administrators, and concerned citizens.

It should be noted again that many of the tax reversion procedures have been changed for taxes levied after 1998.  The recent amendments are designed, in large measure, to expedite the process by which municipalities gain title to tax delinquent property.  These amendments are part of a legislative package that allows municipalities to engage in homesteading programs, in which eligible individuals and nonprofit organizations may acquire housing or vacant land at a nominal cost.  According to proponents of this legislation, facilitating the tax reversion process will relieve municipalities of undesirable parcels, provide a supply of property for homesteading programs, and promote urban redevelopment.  It may be years before the impact of these amendments becomes apparent.  Whether the legislation effectively addresses the common complaints about the tax reversion process, such as its complexity and lengthiness, remains to be seen.

RECENTLY ENACTED TAX REVERSION LEGISLATION

Public Act 123 of 1999 (House Bill 4489) amended the General Property Tax Act to provide that, for taxes levied after December 31, 1998, tax delinquent property is subject to forfeiture, foreclosure, and sale as provided under Public Act 123.  The Act repeals sections of the General Property Tax Act on certified special residential property; repeals, as of December 31, 2003, sections governing tax sales and notice; and repeals, as of December 31, 2006, sections governing redemption, challenges to tax sales, responsibilities of the Department of Natural Resources, and other matters concerning tax-reverted property.

The revised process requires county treasurers to conduct title searches; requires notices of tax delinquency, forfeiture, and foreclosure to persons with an interest in the property; requires oral advice about foreclosure to occupants and tenants of tax delinquent property; and allows owners of foreclosed property to appeal to the Court of Appeals and/or bring an action to recover monetary damages in the Court of Claims.  Public Act 123 establishes new fees on each parcel of tax delinquent property; creates the “Land Reutilization Fund”; allows a foreclosing governmental unit to sell tax reverted property and deposit the proceeds into a restricted account, which may be used only for reimbursing the delinquent tax revolving fund and paying costs of sale, foreclosure, and maintenance; and requires any remaining balance to be transferred to the Land Reutilization Fund.  The Act is effective October 1, 1999.

Public Act 132 of 1999 (Senate Bill 488) created the “Certification of Abandoned Property for Accelerated Forfeiture Act” to allow local units of government to make a declaration of accelerated forfeiture of tax delinquent abandoned property.  The Act establishes criteria for the identification of abandoned property; requires notice to property owners or to the taxpayer of record; and allows a property owner or a person with a legal interest in the property to file an affidavit claiming the property is not abandoned.

Public Act 133 of 1999 (Senate Bill 489) amended the General Property Tax Act to provide that, for taxes levied after December 31, 1998, certified abandoned property is subject to forfeiture, foreclosure, and sale as specified in Public Acts 123 and 133.  Public Act 133  also provides that a person who holds a tax deed to abandoned property may quiet title to that property after a title search, notice by mail or publication, a building inspection, and posting of a foreclosure notice; allows owners of foreclosed property to bring an action to recover monetary damages within two years after judgment is made; and specifies the requirements for property to be considered abandoned.

Public Act 134 (Senate Bill 507) created the “Tax Reverted Property Emergency Disposal Act” to allow a local unit of government (a city, village, or township) to obtain clear title to tax reverted property whose title has vested in the local unit before January 1, 2000, and dispose of that property, if a declaration of emergency backlog is made and approved as provided in the Act.  The Act also requires notice for all persons with a recorded interest in the tax reverted property; allows a local unit to bring a quiet title action; and allows objections to a quiet title action.  If a judgment is entered, the Act allows the local unit in which the property is located or a person claiming an interest in the property to appeal to the Court of Appeals.