Some states ostensibly allow property owners to claim their surplus equity, but the claims process these states set up is so complicated and difficult as to effectively continue the practice of home equity theft. As we show below using data from Michigan, such confusing procedures result in most property owners not claiming their equity at all, leaving money on the table for lienholders or the government to take. The outcome is the same as home equity theft, but it is hidden in the shadows of the claims process.
Shadow equity theft happens because property owners bear the burden of asking the government for their constitutionally mandated compensation, and they must ask for it before their property is sold, requiring them to claim the surplus equity before it even exists. Failure to navigate this backward process results in accidental waiver of the constitutional right to just compensation.
Below is information on the states that have a process that can result in shadow equity theft. For Michigan, we also provide data on claim rates by property owners.
Instead of trading one unconstitutional system for another that does little to protect property owners, these states should amend their laws to provide a constitutional process for returning sales proceeds for equity to property owners. States such as Nebraska and Massachusetts should serve as models for reforms in the states listed below.
Alabama
In 2024, Alabama created a system for property owners to claim excess equity. Although this system ends equity theft in theory, the state has created an onerous process that requires owners to demand a sale of their property before the redemption period has even expired.1 Should they fail to do this for any reason, the property forfeits to the state or private tax lienholder to do with as they please.2 Not only do property owners have to navigate the already complicated tax foreclosure and redemption system, but they are now forced to engage in an additional complex process to even have a shot at receiving the proceeds from the sale of their property.
Arizona
In 2024, Arizona created a system for property owners to claim excess equity. Although this system ends equity theft in theory, investors or the government can still unconstitutionally seize equity if property owners do not ask the court to protect their property rights. The 2024 law requires owners to request a sale of their property during the foreclosure process, and then the court must determine if a sale is likely to result in more than $2,500 in equity beyond the taxes and fees owed.3 Only then will the property be sold and equity preserved.4
Michigan
Since 2020, property owners have been able to claim payment for their equity once their foreclosed property is sold at auction and all delinquent taxes and debts have been paid. But to do so, the owners must submit a notarized form before the auction, not knowing if their property will sell or if it will sell for any more than the debt owed.5 In other words, the amount of surplus equity, if any, cannot be known until after property owners are required to claim it. Additionally, if their form is accepted, they must file another, duplicative motion, appear at a hearing in court, obtain a favorable judgment, and pay the government a 5% sales commission to recover their property’s equity.6
Unsurprisingly, few property owners manage to successfully navigate this burdensome process. According to public records obtained from Oakland County, Michigan, for 196 tax-foreclosed properties that sold in 2022 for more than what was owed, only nine people successfully claimed the surplus money that the Constitution says belongs to them.7 The rest of the surplus proceeds that were available for property owners to claim— $3,221,297 of $4,160,896 total—went to the government.8
New Jersey
In 2024, New Jersey created a system for property owners to claim payment for their equity. Although this system ends equity theft in theory, the onus is on property owners to demand compensation from the government before they even know how much money will be at stake. Property owners must opt in and request a judicial sale or internet auction after a lienholder has initiated foreclosure proceedings, but before the court enters a foreclosure judgment.9 This leaves limited time for property owners to claim their surplus money and involves filing documents with a court. If a property owner fails to request a judicial sale or internet auction during this limited time, the property owner is unable to recover any surplus proceeds.10
New York
In 2024, New York created a system for property owners to claim excess equity. Although this system ends equity theft in theory, the onus is on property owners to demand compensation from the government, and if the owner fails to do so, the government is free to take or transfer the property without selling it. If the property is sold, owners must file a claim for surplus proceeds with the tax court to receive any surplus.11 For residential property, the request must be filed within three years of the confirmation of the report of sale.12 Property owners must claim surplus for other types of property before the confirmation of the report of sale.13
Resources
Oakland County, MI Auction and Claim Data