Home equity theft is unconstitutional. Equity is a discrete property interest protected by the Constitution. Local governments and investors are not absolved of constitutional liability simply because tax collection was outsourced to a private party and then the private party failed to protect the former homeowner’s equity.1 State laws too often incentivize bad conduct by investors, which can exacerbate homelessness, inequitable distribution of the tax burden, and poverty. But reforms can reduce such behavior.
There is significant variety nationwide in how localities collect real property taxes. While each state uses different, and sometimes confusing, terminology, the various systems have much in common.
Tax delinquency typically generates a lien on the delinquent property that secures payment of the tax debt and takes priority over all other liens or encumbrances.2 This lien normally imposes both an in rem (meaning against the property itself) and a personal obligation on the owner to pay back taxes along with any interest, fees, or costs allowed by statute. Municipalities are often eager to avoid growing tax-delinquency rolls and to recover the lost revenue, and they commonly use tax foreclosure systems to increase or accelerate the receipt of these funds.3
While many states handle foreclosure and sale of delinquent property within the government, the tax foreclosure laws of at least 30 states and the District of Columbia allow the sale of tax liens to private debt collectors or real estate investors (either individuals or investment companies), according to data from the National Tax Lien Association.4 In these states, localities can sell, auction, or otherwise transfer tax liens to parties that previously had no interest in the property.5
Securing a tax lien grants the purchaser the right to receive payments on the underlying tax debt plus any interest and costs allowed by statute. It typically does not confer legal ownership of the property. But, because the lien is secured by the delinquent property, the common remedy for continued delinquency is foreclosure.6 To redeem the property and avoid foreclosure once a lien has been sold, the delinquent taxpayer must make payments directly to the lienholder.
If a tax delinquency results in foreclosure, some states require a lienholder to seek a judicial or administrative sale of the property to the highest bidder.7 The resulting proceeds are distributed like a private mortgage, with the homeowner retaining the surplus once all liens and other encumbering debts have been cleared. This market-based solution prevents home equity theft.
However, in other states,8 the private investor or other lienholder simply takes absolute title to the property upon foreclosure, leaving the original homeowner and other lienholders with nothing. This transfer is without regard to the size of the tax debt or value of the property. What follows is often a private sale to a third-party buyer and a pocketing of the profits—representing the equity that rightfully belongs to the homeowner.
The Prospect of Home Equity Theft Incentivizes Bad Actors
States that transfer title to the lienholder and do not require that any funds be returned to the former owner facilitate obscene, unjust windfalls for private tax-lien investors at homeowners’ expense. Equity represents the amount an owner has invested in the property, and it constitutes the largest share of wealth held by Americans. For many, home equity is the only thing of significant value that they own.
Furthermore, home equity theft disproportionately impacts minorities, the poor, and the sick. In general, people do not purposely fail to pay their taxes. Instead, property tax delinquency is often the result of medical issues, unemployment, and rising tax liabilities. People in communities already struggling with economic hardship can face the prospect of losing their entire life savings to profiteering investors.
Despite these harms, the potential for massive profit has attracted bad actors and incentivized legal game-playing with taxpayer property.
As the Massachusetts Supreme Judicial Court recently noted, private tax-lien purchasers “might use … aggressive tactics” and “have no obligation or incentive to act in the best interests of the community.”9 Indeed, private investors are often unmotivated to provide more than the bare minimum notice required by statute. In home equity theft states, they have no reason to work with homeowners to set up payment plans or otherwise clear tax debts. Knowing the likelihood of enjoying a massive windfall upon foreclosure of the property, many private investors never even send a bill to the property owner—instead choosing to wait patiently for the period of redemption or appeal to expire.
A report from the Pacific Legal Foundation found that, in Massachusetts, just one private investor, Tallage, and its subsidiaries kept $15 million in equity value above what it had paid for tax liens it foreclosed between 2014 and 2020.10 Tallage’s tax lien foreclosures have rendered people homeless11, deprived sick people of their primary means of income12, and taken away family homes13—all under the auspices of state law.
One pair of homeowners, Neil and Mark Mucciaccio of Easton, nearly lost their home, worth $276,500, over a tax debt of less than $5,000.14 They had fallen behind after a series of financial and medical hardships, and Tallage stepped in to purchase a tax lien on their home. Tallage started the foreclosure process and sent a notice to the Mucciaccios. They do not recall receiving the notice, perhaps because it was written in legal jargon warning merely that the company intended to “foreclose a tax lien acquired under a certain Instrument of Taking.” Tallage foreclosed on the home and secured absolute ownership, leaving the Mucciaccios and their family with nothing. Fortunately, after PLF got involved, the Mucciaccios reached an agreement with Tallage and saved their home and equity. Many others are not so lucky.15
Unfortunately, Tallage is not unique. A Washington Post investigation into local tax-lien sales in the District of Columbia found that third-party investors had taken $39 million in property—some for tax debts as low as $44.16 The same injustice occurs across several states that facilitate this kind of home equity theft.
In Nebraska in 2018, L.E. Moss, a 73-year-old disabled veteran, lost his home valued at $60,000 to Vandelay Investments over a $500 debt. He had lived in the refurbished schoolhouse with his wife for 31 years. Tragically, Mr. Moss had the money to save his longtime home, but he received no notice until it was too late.17 The required certified letter was returned to Vandelay unopened, and the mandatory public notice was posted in a newspaper 45 miles away from the home. He tried to settle afterward, but Vandelay refused.18
Vandelay has also lobbied against a statute that requires notice to be mailed in an envelope that reads, “UNLESS YOU ACT YOU WILL LOSE THIS PROPERTY.” Further illustrating how this process attracts bad actors, Vandelay has repeatedly chosen to provide notice in newspapers that are published farther away from the property than other available publications.19
These examples show how state laws fail to incentivize fair debt collection and instead enable legalized equity theft by private investors that exploit vulnerable populations.20
Protect Home Equity with Private Investors
How to Avoid Private-Investor Pitfalls
In home equity theft states, opportunities for cronyism and abuse by tax-lien investors abound.23 The solution is to change the law to prevent home equity theft. But the problems with tax-lien sales are not limited to home equity theft states. Poor tax-lien provisions in other states have led to tax-delinquent homeowners experiencing excessively high interest rates, an arcane and archaic collection system, and paltry notice requirements.24 One problem is that once a tax lien has been sold to a private party, the locality typically cedes its ability to work with delinquent taxpayers to make payment easier and more likely (e.g., by establishing a payment plan, lowering interest rates on the debt, or providing additional notice).25
If a state chooses to continue permitting localities to sell liens to private parties, there are ways that localities can clear delinquent tax debts while protecting the interests of their local homeowners.
Interest, Fees, and Costs
Tax-lien sales in many states add new costs and fees that make redemption even more difficult for owners already struggling with other issues. Instead of setting excessive interest rates for tax liens, states have two good alternatives that other states already use:
- States (and sometimes localities) can set reasonable interest rates that impose a lower burden on delinquent taxpayers.
- States can require private investors to “bid down” the interest rate on a purchased lien. In other words, investors compete to offer the homeowner the lowest interest rate on the tax debt, which eases the burden on the delinquent taxpayer and makes repayment more likely.26
In some states, redemption requirements allow the private lienholder to demand full payment of the tax debt in a single lump sum, rather than through a series of smaller payments. Moreover, some states require investors to compete on paying a premium over the tax debt when they purchase the lien. Accordingly, to redeem the property, sometimes a debtor must pay what they owe plus the premium. This higher cost makes saving one’s home less likely, particularly among populations where tax delinquency most often occurs.
Instead, the state can require that multiple payments over time be accepted and can require a longer redemption period. Redemption periods currently range from six months27 to five years.28 Granting more time to redeem the property allows struggling taxpayers the opportunity to secure the necessary funds, and it allows the private investor to collect lucrative interest payments over a longer period.
Private investors should have to provide clear and adequate notice to delinquent taxpayers at every stage of the process. For example, the lien purchaser should have to notify the property owner that the tax lien has been purchased, how to make payments on the debt, and the consequences of nonpayment. In addition, notices should be provided when the investor initiates foreclosure and after a foreclosure judgment has been issued. These requirements will stop tax-lien investors from purposely keeping property owners in the dark while the redemption or appeals period expires.
In addition, because notices are often drenched in legal jargon and effectively convey no meaningful information to the average taxpayer,29 all notices should be in plain language explaining the taxpayer’s obligations and rights at each stage of foreclosure.
Rather than allow private investors to take full title to tax-foreclosed property, state law should require a subsequent sale of the property. The proceeds from the sale are applied first to satisfy the tax debt, and other liens, and the remainder is returned to the former owner. Some states, like Florida, already require such a sale, which protects the interests of the government, lienholders, and former owners at the same time.
In Florida, after a two-year redemption period, the lienholder may apply for a tax deed.30 This application triggers a new sale in which the property is sold to the highest bidder.31 Surplus proceeds are returned to the former owner.32
In this process, the property is sold at a market price, and delinquent taxpayers receive payment for the equity to which they are constitutionally entitled. Requiring resale to the highest bidder rather than a simple forfeiture of property to a private investor should be a key element of any tax foreclosure system.
Tax-lien investors too often engage in abusive and aggressive collection tactics, enabled by the law. The persistent bad behavior of some tax-lien investors does not mean that states must exclude them from the tax collection process. Rather, a state or locality can reorganize incentives to provide strong protections for property owners. Reforms should establish clear, limiting guidelines for how tax investors are able to collect on and foreclose tax liens and must permit former owners to recover payment for their hard-earned equity.