City, County Look to Address Blight Through Title Reform

Blighted properties are ugly, costly, and dangerous—but local laws may need fixing first

Last Thursday evening, after four hours of meetings with various city and county departments, Dan Kildee and Amy Hovey of the Genesee Institute held court over a crowded room of community activists, citizens, and government officials at the Cansler YMCA. The two, traveling from Flint, Mich.—an emblem of the changing fortunes of the American auto industry and the ravages of urban decay—had come to discuss the problem of blighted and vacant properties and what city and county governments can do about them.

These properties present a particular challenge to local government. Not only do they not generate tax revenues, they also deflate surrounding property values, delay housing and retail investment, attract crime and infestation, and drain tax dollars through maintenance costs or as they move through the tax-sale process. And in the aftermath of the unprecedented run-up in real estate prices and housing stock, they may become a much greater concern as neighborhoods, businesses, and governments face a glut of abandoned homes and buildings.

Cynthia Stancil is the incoming president for the Parkridge Community Organization, sprung from the near-downtown neighborhood in the midst of urban renewal. She says these properties and absentee landlords, who often cannot be contacted when there's a problem with their properties, force residents in her neighborhood to resort to the complaint-oriented codes system, which she says "really doesn't solve the problem. It puts a Band-Aid on the problem."

It's a problem not limited to Parkridge but acutely felt there as residents attempt to shed decades of neglect to restore it to its early-20th century roots. Stancil and her husband moved from a downtown loft into Parkridge three years ago, and she says the house they restored was condemned and had not been occupied since the 1970s.

The good news across Knoxville, Kildee and Hovey said, is that the city's on the right track.

"You're way ahead of most everybody," said Kildee, also a county treasurer for Genesee County, Mich., to the audience. He and Hovey praised aggressive efforts from local officials and community organizations to quantify the scope of the issue, a key first step to resolving it.

"That doesn't mean you don't have problems," Kildee added. "In some areas it looks like those problems are difficult."

Those areas Kildee mentioned specifically are the amount of time it now takes for local government to foreclose on a property—currently about seven years—and the lack of marketable title tax foreclosures eventually produce. Marketable title is another way of saying clear transfer of ownership, and when property owners cannot obtain marketable title, then there may be challenges to who rightfully owns a piece of property.

So while these houses, buildings, and lots are trapped in legal limbo—the result of a wildly outdated framework—in the physical world they continue exacting real costs on owners attempting to return them to productive use and neighborhoods attempting to return to life.

The Tax, Man

It all begins with delinquent property taxes. When a property owner fails to pay those taxes, the only option at the city or county's disposal is the tax sale (or tax foreclosure). That process begins four years after the first delinquent tax payment, and takes between one-and-a-half to three years to complete. During this five-and-a-half- to seven-year period, the property continues to deteriorate, so that by the time of its actual sale, any structure attached may be gone or in a ruinous state.

Meanwhile, it's costing taxpayers money. The average cost to the city to propel a property through a tax sale is $800, plus administrative work, and each tax auction, which includes the sale of many properties, also carries a $40,000 cost for publication, required by statute. These costs are tacked on to the price of the property, so are mostly recouped when it's sold.

Only, more often than not, the properties are not sold.

Over the past 10 years, 1,050 properties in the city and county came to auction; of those, 626 found no buyer, so ownership devolved to the city or county, meaning that government ate its costs and was then saddled with the future costs of maintaining the premises. "Unfortunately, with ownership comes liability," explains County Trustee Fred Sisk.

Who are these delinquent taxpayers? In more than half of these cases, the owners "are long-deceased and their heirs are a lot of times deceased, or you can't really find them. Or you find them and they're not interested, they don't want it, they can't afford it," says Donna Dyer, collections manager for the city's finance and accountability office.

But even when the properties are sold, and the city recovers its nominal costs, the purchaser receives a problematic deed known as a Clerk and Master's deed. On its face, it seems the same as a warranty deed. "With the Clerk and Master's deed, there is a deed for the property. Everybody assumes that everything is right," Sisk says.

Everybody, that is, except the people who matter most: The vast majority of title insurers do not trust that the city or county government has done due diligence, so they won't insure the property.

According to Dave Cook, redevelopment administrator at KCDC, "the key is, have the people been notified of the tax sale? And when people cannot be notified of the tax sale, that's when title insurance companies don't want to deal with it."

Dave Schumacher is president of California-based Tax Title Services, Inc., the only company nationwide able to obtain title insurance without going through a quiet title action, a lawsuit that clears any claims or potential claims and results in a clear title that companies will insure. He's worked in the title industry for years, and confirms that the stigma against tax-foreclosed properties in the industry stems from a fundamental distrust that governments will meet the standards for notification required to stand up in court.

"People are entitled to due process," Schumacher says, "meaning, anybody who has an interest in that property is entitled to get notified in order to protect their property and have the right to pay those taxes. And that's where... the tax collectors don't necessarily do that correctly, or not at the level that meets the constitutional rights of parties."

So the title, in insurers' eyes, is cloudy, vulnerable to claims months or even years down the line. With potentially tens of thousands of dollars at stake, and only a modest amount to be gained from insuring the properties, the risk is simply too great.

And without title insurance, the owner of the tax-foreclosed property cannot secure a loan or mortgage against the property to rehabilitate it; selling it presents the same problems to any potential buyer.

"It almost becomes a self-fulfilling circle of, the only people who can afford it are people that can do it out of pocket and they'll build something really cheap, you know, just a slumlord type of deal," Sisk says.

But it doesn't have to be. The purchaser of the tax-foreclosed property does have the option of filing a Quiet Title motion. But this costs time and money—six months to a year and anywhere from $3,000 to $8,000. All the while, the property, already a problem to the community, continues to deteriorate.

"So now you can't do anything with [the property] for six months to a year," Schumacher explains. "Meanwhile, the city's slapping liens against the property; the house has been abandoned and needs work; people are breaking into it; it's vacant; and in some cases it's getting demo'd, but you can't do anything with it because the property needs to cleared, the title needs to be cleared."

In addition to these burdens, Dyer and Sisk argue these extra costs present yet another hurdle to potential homeowners or long-term investors, shrinking the pool of available purchasers along with the chances the property will be sold at auction and rehabilitated. "We spend probably 15 minutes before every tax sale explaining this to potential buyers," Sisk says. "You'll see where some of them just get up and leave."

Cook, over at the KCDC, agrees this is yet another encumbrance. "When we look at tax foreclosure properties, we see it as an extra cost of doing business," Cook says. "Because we typically would have to go to court to clear the title, whether we do it with a quiet title or an imminent domain against the property."

Blame the Yeoman

Most of the laws in Tennessee governing tax foreclosures in this century were written during the 19th century, when far more people owned farms and worked in agriculture. During that time, with year-to-year variations in weather and crop yields, a grace period of two to four years before beginning tax foreclosure made sense.

But reforming laws at the state level won't be easy. Both Sisk and Dyer fear the supremacy of property rights will complicate and possibly override any efforts to speed up the process by which local government can seize property and repurpose it.

"I think the initial gut reaction will be, ‘This is government trying to take over people's property,' and that we're diminishing property rights... or at least that's the reaction that we want to avoid," Dyer says. "What property rights we need to be concerned about are the property rights of those people who are paying taxes."

Dyer points out that in the city, more than 95 percent of property owners pay their taxes on time, and another several percent pay them within three years. "So you're talking about less than 2 percent of property owners, anyway, who would be having this action taken against them. And so let's talk about preserving the property rights of 96 percent of people who are paying their taxes and they're keeping their property up," Dyer says. "There is no merit to the argument that we're diminishing property rights."

At the moment, the city and county are awaiting the Genesee Institute's recommendations before moving forward on any reforms. In Genesee County, Kildee was able to reduce the tax foreclosure period to 25 months, so that may indicate the sort of recommendation he'll make here.

Sisk and Dyer say that, in addition to an expedited foreclosure process, they would like to see Quiet Title become integrated into the tax-foreclosure process. This would shift the burden from the purchaser of the property to the local government, and while it may add to the cost of the property's final price, they argue it would create conditions for these properties to quickly be placed back into productive use—on the tax rolls and off the government's books.

Sisk adds that resolving marketable title isn't the entire solution to fixing blighted and vacant properties, "but you gotta have somebody that steps in and takes a risk, and the only way I know of is to get people to take that risk is if there's a reward for them at the end."

Another option Schumacher hopes city and county governments will consider is rewriting statues or ordinances to allow notification to be outsourced to his business. He says in other states, his company is often hired by local governments to conduct notification; through an overkill approach, they resolve the question of due diligence for insurers without the need or cost of Quiet Title.

In any case, it's not clear these solutions require changes to state laws. The city and county, upon receiving the recommendations from Genesee, hope to reform as much as possible at the local level, working with title companies, their own departments and community organizations to make these properties more attractive to investors and homeowners.

And that, they say, is the goal: to transition from a mentality in which these properties are liquefied, to one in which they're invested in.

"It's about...taking a piece or property that doesn't have any hope and putting it into a more productive use, even if it means that we have to wash our hands of what taxes have accrued so far," Dyer says. "If we can put it back in productive use and get it back on the tax rolls, in a productive manner, then it begins to generate revenue again rather than being a drag on city services."