This report tells many stories of people who lost all their home equity because of their unpaid or underpaid property tax bills. However, this type of loss can afflict even homeowners who have never missed a tax bill.
In 2012, Francisca Leger purchased a home in Massachusetts. Like most, she purchased the home with the help of a mortgage and bought all the related insurance. Nearly five years later, Francisca received a letter from a private investor, Ithaca Financial, notifying her that it was “the owner of the property which [she] currently occup[ied].”
Her home had been taken for unpaid taxes. However, Francisca was never notified of any unpaid taxes. In fact, the unpaid taxes had existed on the property when she purchased it—something her mortgage lender should have found and addressed before finalizing her loan.1
Francisca had received only one notice that something was amiss. It read, “Complaint. . . to foreclose all rights of redemption concerning” her property. She did not respond, perhaps because the notice was difficult for anyone to understand, especially for someone who didn’t speak English, like Francisca. Besides, she had paid all the taxes that she owed and didn’t realize that there was a pre-existing tax debt on the property.
Ithaca Financial foreclosed on the property and then waited a year to inform Francisca—time in which she could have challenged the foreclosure.2
Francisca offered to pay the private investor the back taxes—almost $6,500 with interest—to keep her home. She even offered more, “into the 6 figures,” her lawyer told WHDH TV 7 News.3 However, Ithaca Financial wanted to keep the full market value of the home—more than $400,000—and did.
Francisca didn’t just lose her home and all her equity while paying her taxes and mortgage. Now, in her 70s, she still owes mortgage debt on the home she no longer owns.
Thousands of Homes Taken, Millions in Savings Lost
Many Governments Grossly Profit, But Others Value Homeowner Equity
Most homeowners do not intentionally let their homes be taken for unpaid property taxes—nor do they intentionally fail to pay their property taxes. In at least one case, an owner just miscalculated a late payment and never received further notice about it.8
The tax foreclosure process is complicated and difficult to understand. In many cases, a foreclosure notice is difficult for anyone but a lawyer to comprehend—or it sounds so ridiculous that people think it’s a scam.
Whether these Americans have intentionally or unintentionally decided not to pay their taxes, the government is due only what it is owed and nothing more. Taking homes without compensation for the equity is unjust and unconstitutional, and selling the right of foreclosure to a private investor does not change a jurisdiction’s constitutional obligations. A system that allows governments and private investors to take more than what someone owes creates a perverse incentive to work against the homeowner—not with the homeowner—to get the tax debt paid.
Governments also have incentives to sell or dispose of foreclosed properties for less than their full value:
- Some localities hand over homes, for a nominal fee, to a charitable or other entity that provides low-income housing, choosing such uses over selling the property.
- Some localities merely try to recoup unpaid taxes and costs, which makes them more likely to engage in a simple transfer of title or auction rather than in a competitive sale process.
- Some localities generate revenue by selling quickly to get homes off their books, often taking far less than what the home is worth or even less than the amount owed.
As a result, although homeowners lost more than $780 million in equity, government and private investors collected much less, leaving the remainder as good deals for under-market buyers. Nevertheless, government entities in the studied jurisdictions still collected $34 million more than they were owed, for an average of 32% above owners’ actual debt.
Some localities, even in home equity theft states, act differently. Some appear to wait for the debt to accumulate to the home’s value before foreclosing. Others never or rarely foreclose on properties, choosing instead to work with homeowners or wait for homes with tax debts to be sold in a market transaction. These municipalities then collect the tax debt and interest owed from the sale proceeds, and the original owner (or the owner’s heir) receives the balance of the home’s equity.
Private Investors Make Even Bigger Millions, But It Need Not Be This Way
Our data show that private investors (like Ithaca Financial) collected an estimated $260 million more than they were owed—accounting for an average of 69% kept above the homeowner’s debt. On average, private investors sell tax-foreclosed properties for close to their full market value and keep nearly all the wealth these homeowners have built.
Private investors do not need the incentive of full property value to invest in tax liens; we know from other states’ systems that the interest that they earn is more than enough. If the property owner redeems the property, the lienholder still receives interest in addition to being reimbursed for the price of purchasing the lien.
When such a property goes unredeemed, the investor in a state that permits home equity theft often gets to keep the entire home, earning a massive windfall. However, it does not have to be this way. As in other states, the law could provide for a resale of the property upon foreclosure, as in a mortgage. The proceeds from that sale would first go toward reimbursing the lienholder, with interest, before refunding surplus equity back to the property owner. This is the system in Florida, where a healthy tax lien investment market thrives off of interest rates as low as 5%.
Tax lien interest rates in other states range from 10% to 36% or more and can exceed the rates that credit card companies are allowed to charge. Such rates are not necessary, given Florida’s example, but they provide ample incentives for tax lien investments without the potential windfall of home equity.9
Conclusion
When Francisca Leger purchased her home in Massachusetts, she had no idea that the previous owner had unpaid property taxes on the home. Today, through no fault of her own, she has lost the property and her home equity, and she is still paying a mortgage. Even if Francisca willfully missed a tax payment on her home, however, she is still due her home’s value above the debt. So are the thousands of others who have found themselves caught up in tax foreclosure systems that steal all their home equity. States that permit home equity theft have ample reason and many options for stopping local jurisdictions and private investors from stealing the equity from people’s homes.
Localities and private investors foreclosed on and sold at least 8,500 homes from 2014 to 2021. Unfortunately, we do not have complete data to fully estimate how much was lost or kept. For the homes where we did have data, we found that:
- Homeowners lost more than $780 million in wealth on more than 6,400 of the homes based on their market value, above what they owed in tax debt. On average, homeowners lost 86% of their equity.
- Government entities, which often sell properties for a fraction of their market value, collected an estimated $34 million more than they were owed on about 2,800 of the homes.
- Private investors collected an estimated $260 million more than they were owed on about 3,400 of the homes.