In May, the Supreme Court issued a unanimous ruling in Tyler v. Hennepin County. The case centered on tax deed foreclosure, a practice that allows local governments to sell tax-delinquent properties at auction. The court found that Hennepin County, Minnesota, had violated the rights of 94-year-old Geraldine Tyler when it sold her $40,000 condo over $15,000 in back taxes—and pocketed the $25,000 difference.
This isn’t the first time property tax foreclosure has been in the news. In 2013, the Washington Post ran a series of articles about D.C. residents—many of them elderly, low-income, and Black—who had lost their homes over tax debts as low as $134.
The series caught the attention of Cameron LaPoint, an assistant professor of finance at Yale SOM. The Washington Post articles focused on individual cases, but LaPoint wanted to take a broader view. How widespread is property tax foreclosure, he wondered, and what effects does it have on communities?
LaPoint answers several of those questions in a new working paper. His research, focused on Washington, D.C., finds that property tax foreclosure accelerates gentrification and contributes to the racial wealth gap by forcing out non-white homeowners and clearing the way for high-end property development. He is currently working to expand his research to other cities and states and provide the first nationwide database of such tax foreclosures.
“In terms of who gets severely delinquent and who eventually gets foreclosed on, they are disproportionately non-white homeowners,” LaPoint says. Their homes, he discovered, often end up in the hands of developers: “You might see, several years down the line, that the single-family home that was foreclosed on ends up being converted to a more luxury residential unit.”
There are two types of property tax foreclosure, and the exact details of each vary from place to place. In tax deed foreclosure—the type at issue in the Supreme Court case—the government auctions off what’s sometimes called a “sheriff’s deed” to the property after several years of property tax nonpayment. A sheriff’s deed doesn’t allow the new owners to flip the home right away, LaPoint notes. They must first initiate legal proceedings to evict the previous owners, which can take months or years. Until the Supreme Court ruling, the government could keep the entire proceeds of the sale, even if it got more than the back tax it was owed.
In a tax lien foreclosure, the type covered in the Washington Post articles, the government sells not the deed but the debt itself. “What you buy is the right to foreclose at a future date,” LaPoint explains. In both tax deed and tax lien transactions, eviction and foreclosure aren’t inevitable, so buyers hoping to sell to developers are taking on some risk—although LaPoint’s research finds they are usually getting a bargain-basement price. And in both cases, homeowners are at risk of losing everything.
Studying property tax foreclosure took careful detective work, because relatively little information about the transactions is made public. In Washington, D.C., only about a third of tax liens are purchased by individuals or nonprofit organizations; the rest go to LLCs, many of which are registered out of state. The LLCs appear to act like venture capitalists, LaPoint says, placing many bets in the hope that a few will pay off: “They might buy hundreds of liens, foreclose on just a couple of them, and then quietly transfer those titles to a developer or to a secondary party.” LaPoint used databases of building permits and title records to track the ultimate fates of the foreclosed properties.
Learning about the other side of the transactions was equally tricky. For example, the government does not disclose any information about the race of foreclosed homeowners, so LaPoint found a way to infer that information using Census data that links race, surname, and location.
Using this data, LaPoint was able to observe the citywide effects of tax lien foreclosures. One of the most striking findings was that 70% of homeowners whose properties ended up in a tax lien auction had already paid off their mortgages and owned their homes outright. “That makes it even more sad,” LaPoint says, “because there’s more equity being stolen.” It also suggests that many foreclosed homeowners are, like Geraldine Tyler, elderly.
LaPoint found that tax foreclosure affects gentrifying and non-gentrifying neighborhoods differently. In non-gentrifying neighborhoods, the value of nearby properties dips in the aftermath of a tax foreclosure; in gentrifying neighborhoods, the opposite is true. “There’s a strong incentive to redevelop, potentially into luxury residential properties, and so prices can go up,” he says. In fact, “they can actually go up by more than what they fell by in distressed neighborhoods.”
The ultimate effect, in many cases, is that foreclosed Black and Latino homeowners in gentrifying neighborhoods are replaced by white residents—and suddenly priced out of the areas they’ve lived in for years. On the other hand, LaPoint notes, rising home values can benefit other longtime neighborhood residents, who witness their wealth rapidly grow.
LaPoint sees several potential ways to mitigate the harms of tax foreclosures. In particular, he thinks municipalities can take more proactive steps to prevent homeowners from getting behind on their property taxes to begin with. He has follow-up research suggesting many homeowners simply don’t realize that they must pay property tax after they pay off their mortgages.
The confusion is understandable, LaPoint says. Lenders typically manage escrow accounts for homeowners that are used to pay property taxes, insurance, and homeowner’s association fees; these expenses are built into homeowners’ monthly mortgage payments. Once the loan goes away, “you might not realize that you’re on the hook for paying those property tax bills yourself.”
Philadelphia, for example, saw a significant decrease in delinquencies when it began sending letters to homeowners outlining the potential consequences of nonpayment. “That’s a very low-cost way of improving compliance, to the extent that people just might not be aware that they have to pay the payments themselves,” he says.
Another approach would be for municipalities or banks to create escrow accounts similar to what lenders provide for mortgages but designed to automatically continue paying property tax bills even after the home mortgage has been paid in full. That way, homeowners could pay a portion of their yearly property tax each month, just as they’d been doing before. “If you have that as a default option,” LaPoint says, “I think it might help improve delinquency, given that the underlying mechanism here seems to be a lack of financial awareness.”