Property Tax Investors Exploit Loophole, Add Financial Burdens to Struggling Cook County Homeowners

Retired schoolteacher Henry Johnson has lived in a bungalow on North Kedvale for 42 years.

Four years ago, his wife died. That same year, Johnson fell behind on his property tax payment.

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“My wife was sick and she was an educator ... she was able to help with everything, but after that there was a big dip,” Johnson said.

Per state law, Johnson was charged 1.5% interest for every month his property tax bill was late — accruing to 18% over the course of a year.

After that period, delinquent properties like Johnson’s are eligible for the Cook County Tax Sale, which is administered by the Cook County treasurer’s office.

That’s where a private investor buys the debt and can make a big profit off of it.

“It’s the poorest people paying the richest people — not only the richest, hedge funds,” said Cook County Treasurer Maria Pappas.

After the debt purchase, the investor can turn around and charge the homeowner 12% interest every year. The homeowner has three years to pay this off before possibly losing their property altogether.

During that time, the total interest accrues to 54%.

Henry Johnson’s original tax bill was less than $1,800. Subsequent bills, interest and fees shot his total payment up to $8,173 dollars — all owed at once if he wanted to keep his home.

“What was an insurmountable challenge becomes something that’s impossible,” said Tiffany Smith, associate director of Neighborhood Housing Services of Chicago.

She says the tax sale disproportionately hits Black and Latino homeowners, especially seniors like Johnson who are on fixed incomes.

“They actually have their American dream, and we’re taking it away from them at a percentage of the home,” Johnson said. “It’s disheartening.”

Pappas and Smith say their offices go door to door to reach homeowners ahead of time to check and see if they haven’t claimed money the county actually owes to them.

“We dig in and look at what their spending on their property taxes, if they have exemptions,” said Smith.

Brad Westover is president of the National Tax Lien Association, a group that represents tax buyers.

He says the tax sale is necessary because without the penalty, homeowners wouldn’t have incentive to pay taxes on time. Plus, the private buyer provides the missing tax revenue owed to the government.

“Sometimes they have a budget shortfall because of the non-payment of property taxes,” Westover said. “This process is a means by which everybody pays their fair share.”

But Smith says the tax sale defeats the purpose it was intended for.

“There is a lot of self-eviction when those property taxes are sold,” Smith said. “That leads to vacant properties … it becomes a blight on communities that can ill afford it.”

To make matters worse, the investor rarely keeps the property when it comes time to go to deed. In fact, they can get their initial investment back.

A recent study from the Cook County treasurer’s office found that many tax buyers used a loophole in state law to get a full refund on the property taxes they paid.

That’s because they exploit what’s called the “Sale in Error” law to get out of a contract if anything about the property doesn’t match up with what was advertised.

“The website of the assessor says air conditioner, and there’s no air conditioner, or no toilet. Here, take it back,” Pappas said of what investors can claim.

The study found that local taxing bodies paid out $280 million over the last eight years to tax buyers as a result of the sale in error loophole.

“It’s a legalized racket and we need to break it up and we’re going to do that,” Pappas said.

Pappas says she is preparing legislation in Springfield to make big changes to the tax sale that would:

  • Eliminate the sale in error law
  • Cut the first year’s delinquent tax interest in half
  • Exempt those owing $1,000 or less, which amounts to 40% of all properties
  • And provide a payment plan to those who remain

Westover admits the sale in error loophole has been exploited, and he says the industry is open to all of those changes

“If they don’t have the funds to redeem their tax bill in full, then collecting partial payments over time makes perfect sense,” Westover said.

Johnson just paid off his debt last month after rearranging bills and receiving a matching grant from Neighborhood Housing Services. He says he would have benefited from the proposed changes.

“There was a lot of sleepless nights and worry but back in my mind there was some way somehow I was gonna get it done,” Johnson said.

Follow Paris Schutz on Twitter: @paschutz

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