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Sunday, 16 September 2012 18:03

Tax auctions draw attention, but buyer beware

Written by  Matthew Gryczan / Crain's Michigan
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MICHIGAN — The record number of properties going up for sale in Michigan for nonpayment of taxes has created an entire industry of entrepreneurs who hope to profit from buying real estate for dimes on the dollar.

It’s a free market free-for-all as thousands attend what has become an annual summertime rite in the 83 counties throughout Michigan — each county hoping to sell all its tax-reverted properties in a first auction, with the owed back taxes as minimum bids.

But most times, counties have to resort to a second auction with no minimum bids as a way to make themselves whole.

The result: Contractors and do-it-yourselfers poring over lists of properties that they sometimes add to their self-directed individual retirement accounts, Internet bidders who purchase real estate with no intention of ever visiting or improving the properties, and individuals who just want to buy a vacant parcel or handyman’s special for themselves or their children.

In some instances, an original owner who allowed the property to lapse into foreclosure will regain ownership after the second auction — essentially wiping out all the owed taxes, mortgages and liens for pennies on the dollar. In other instances, landlords who have lost their properties in April for nonpayment of taxes will continue to collect rents until auctions are held months later, even though they no longer have any rights to the property.

Tony Moulatsiotis knows that there is money to be made — or lost — in buying tax-reverted properties. He just hopes that whoever buys real estate at cut-rate prices will try his best to make it work.

“What we try to avoid more than anything else is selling properties to absentee landlords — people who don’t have any intention of cleaning up or maintaining the properties,” said Moulatsiotis, treasurer of Muskegon County. He is gearing up for the second auction of properties Sept. 26.

Muskegon County listed more than 520 parcels for public auction in early August, with bidders purchasing 104.

That pales in comparison to the state’s foreclosure leader, Wayne County — which had nearly 13,500 properties in foreclosure last year, primarily in Detroit, according to statistics from the Michigan Department of Treasury.

Genesee, Oakland, Saginaw, Washtenaw and Macomb counties also have experienced high rates of foreclosures.

Free market free-for-all

Anyone who wants to strike it rich by purchasing property at a tax auction should have a chat with James Kane first.

“You never know what you’re going to be buying on the inside of a house — you have to plan on frozen pipes,” Kane said.

About six years ago, he and his wife started Kane Cos. Inc. in Comstock, near Kalamazoo, to buy properties and renovate them for sale or rental. Potential purchasers can look in the windows of residences if they trespass, but they rarely get a chance to go inside. In many cases, the keys can’t be obtained.

“You can be missing pipes, missing electrical systems that have been stripped for the scrap metal value,” Kane said. “I’ve had a couple where everything was stripped, even the floorboards. “

Kane has managed to bundle together a portfolio of about 17 properties, some of which he acquired at tax auction using funds from his individual retirement account — a method slowly gaining in popularity nationally as a way for investors to obtain higher rates of return on their IRAs.

IRA funds can be used to buy real estate so long as the holder of the IRA doesn’t use the property in any personal way and follows other federal tax restrictions.

Entrepreneurs such as Kane are becoming much more common at auctions of tax-reverted properties, said Marty Spaulding, general manager of and a partner in Title-Check LLC, a Kalamazoo company he founded that employs about 35 full-time workers at tax auctions and for other work for treasurers of about three-fourths of Michigan’s counties.

“There’s been a tremendous change in the character of the auction buyers over the last decade,” said Spaulding, who has worked six days a week since April organizing and holding the sales in what has become the busiest year in his 25 years in the business.

“Ten years ago, we had a lot of institutional investor types — people sent in to spend other people’s money,” Spaulding said. “They were doing shotgun buying — buying stuff almost sight unseen. They were banking on the fact that if they got good deals on enough property, they would make enough money on it to show a profit.

“Those people, fortunately, have died and gone away — they lost their money and they’re gone.”

Now a higher percentage of bidders intend to be owner-users of the properties, Spaulding said. “People buying stuff because they see the sign on the property next door, parents buying houses for their kids. People are hoping to get a good deal on something that they keep and use.”

Hitting bottom, bouncing up

“I think the real estate market has hit bottom and is starting to go back up,” Spaulding said. “A couple of years ago, there were a lot of fairly decent properties that we had a hard time getting any reasonable price out of. Now we are not having that problem.”

Spaulding estimated that the total amount of money that county treasurers are collecting from the property sales is probably 50-percent higher than what it was in 2007, largely because the crowds are bidding up prices.

But at the same time, Treasury Department statistics indicate that the number of forfeited properties rose about 129 percent, and foreclosed properties rose about 149 percent from 2005 to last year. Those numbers now are the highest since the data started being tabulated in 2005 — about 206,500 forfeited and 26,000 foreclosed properties throughout the state last year. No figures are available yet for this year.

Owners who don’t pay property taxes forfeit their properties to the counties on March 1 of the second year of delinquency. Fees and interest are applied to the delinquency, and property still may be redeemed at that point, Treasury said.

In the third year, parcels not redeemed are foreclosed by either the counties or state through circuit court action. At that time, all prior ownership interest is extinguished.

Thomas W. Cronkright II, vice president of Vets Title Agency in Grand Rapids, said his organization has talked with treasurers representing at least 20 counties who estimate that they are seeing more than 25 percent more parcels moving to auction compared with last year.

Founded in 2009, Vets Title Agency has responded to the spate of foreclosures by expanding its title insurance work to include coverage of tax-reverted properties. Title insurance companies generally are loath to provide coverage to a buyer of foreclosed property because the source of the deed is not the prior owner, but a deed established through circuit court judgment.

Vets Title reduces the risk of initiating coverage by combing through thousands of court documents that show whether “parties of interest” — former deed holders, spouses, contractors with mechanics liens, mortgage holders — have been properly notified of the impending auction.

Winning bidders of tax-reverted properties want title insurance because it gives them options when it comes to getting mortgages on the properties or selling the property to others. Lenders generally won’t write a mortgage on a property without title insurance.

Cronkright said he thinks Michigan counties will see the number of delinquent properties stay at or rise from the current level for the next two years, the result of the Great Recession and its aftermath. “My theory is that the market headed south in 2007, people lost their jobs, and their cash reserves were completely burned up by 2009,” he said.

Ottawa County Treasurer Bradley Slagh said there were about 70 percent more lots than last year at the public land auction that he held jointly with Allegan County in August, but he cautioned that number of parcels doesn’t mean that total acreage is up. Condo sites and dockominiums that fall into foreclosure can inflate the number of parcels significantly. For instance, one lot in Ottawa County contained 89 parcels of property.

Spaulding said two major categories of properties that have exploded over the past few years are condominium sites and undeveloped projects.

“There are a lot of residential developments that have gone bust,” he said. “Someone leveraged a development project with say 200 site condo lots, and all of the sudden the housing market went south.

“We have got complete developments for auction in Leelanau County, Ottawa County, … up in Petoskey — we’ve got them all over the place. Sometimes, the infrastructure is not done or buildings are only halfway completed.”

In many cases, the high-quality properties up for sale, such as housing developments, are owned by lenders who are either voluntarily walking away or not paying attention to the proceedings and losing them, Spaulding said.

“Some of our best auction buyers are the banks,” he said. “They will send in attorneys or someone from their office to try to buy a quality property back because it doesn’t look good to a bank auditor if they lost something through incompetence.”

Pig in a poke

It’s almost a myth that properties up for foreclosure are nice, single-family houses in good neighborhoods where the home owners have lost their jobs and can’t pay their taxes.

Although that happens, the lion’s share of property in foreclosure is valued under $10,000, and “a huge portion of that is under $1,000” state equalized valuation, Spaulding said. The reason: The bank or other lender often will oversee the sale of a house before it reaches a tax auction.

Foreclosed property is often “property that people voluntarily let go because they couldn’t sell it — they couldn’t give it away; the kids didn’t want it; they got divorced and the ex-spouse wouldn’t even take it; they’ve been carrying it for years and paying taxes, and they just don’t want to anymore.”

To a good extent, the free market system helps clear the system of bottom-of-the barrel properties. Some individuals such as Kane invest elbow grease and undertake some disgusting tasks to bring a property up to its former value.

At one recent auction, Spaulding warned the audience a couple of times that a two-story house with a $6,200 minimum bid looked decent on the outside, but it reeked inside from refuse left by the former occupants and probably had frozen pipes.
The house sold for $34,250.

But second sales — an auction of properties that didn’t sell in the first round and now have no minimum bid — bring out a raft of speculators and online bidders who have no intention of visiting the properties they buy, Spaulding and Moulatsiotis said.

“The one thing that the online bidders have in common is the fact that they’re not buying a piece of land — they are buying a deed as a commodity,” Spaulding said. “It might as well be a title to a car.”

The ruse is to buy a deed for $50 or $100 and sell it for double that amount on online auction sites such as eBay, posting creative copy and stock photos that bear no resemblance to the property.

Online buyers “get fed this big schmooze campaign about what a deal they are getting, with all these pictures of beautiful lakes and soaring eagles,” Spaulding said. “And the next thing you know, they’ll buy something with nine junk cars on it.”

Moulatsiotis has a staff person in the Muskegon County treasurer’s office that works full time trying to keep distressed properties in the hands of individuals who will either occupy or maintain the properties headed for tax auction.

“I don’t know of anyone who has come up with a system to prevent the sale of these properties to absentee landlords,” he said. “You really have little control over who you are selling properties to. The highest bidder gets it, and that’s how the law is.”

The Muskegon County treasurer’s office doesn’t allow people who have lost properties through tax foreclosure to bid on their properties, but someone intent on beating the system may have a friend or relative bid. It’s nearly impossible to closely screen bidders when hundreds of individuals show up on auction day, Moulatsiotis said.

In March, Gov. Rick Snyder said his administration is exploring a change in state law to forbid individuals with unpaid taxes or who own blighted properties from buying any more property at auction.

The Muskegon treasurer’s office works with renters of homes slated for auction to have them continue to occupy the home during the foreclosure, sometimes rent-free, to discourage vandalism and reduce blight. The office offers advice on how to buy a home for a modest sum and helps identify hardship cases that may be eligible for aid before a home falls into forfeiture.

“The solution is to try to find good, dependable people who will take care of the property,” Moulatsiotis said. “We spend thousands of hours a year trying to do that.

“Are we perfect in our system? Absolutely no. How else are we going to fix it? I am not sure at this point.”

This story ran in an abridged form in the September edition of Crain’s Michigan Business. More state and Southeast Michigan news can be found at

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