The Michigan Supreme Court ruled in 2020 that municipalities cannot profit from tax foreclosure. Going forward, any proceeds from foreclosure auctions must be given to the previous owner.
That’s been a big relief to families that struggled financially during the pandemic, fell behind on their property taxes and were at risk of losing the equity in their home.
It may also be a boon to speculators, making the practice less risky in a city that’s been inundated by real estate entities that buy property and don’t truly invest in them — instead, waiting for them to appreciate in value. With the 2020 ruling, they won’t be penalized as much for not paying taxes either.
This was the first year that all foreclosed property owners in Wayne County could file a “Notice of Intent to Claim Interest” form, giving them the opportunity to collect proceeds from the sale of the property they lost. The tax foreclosure auction was canceled in 2020 and limited to only unoccupied properties and vacant land in 2021.
Outlier Media acquired all the claim of interest forms submitted to Wayne County this year through a Freedom of Information Act (FOIA) request. Overall, there were 284 forms submitted, with 259 in Detroit. But only 197 of the Detroit properties were actually being foreclosed. That’s likely because the filing deadline was in June, but the auction wasn’t until September and some properties were redeemed in that time.
The most curious filing was for 34 properties in and around the Packard Plant formerly owned by Fernando Palazuelo through his company, Arte Express LLC. The city actually submitted those filings.
The city considers the deteriorating complex a public nuisance and is trying to compel the Peru-based developer to pay for its demolition. It recently approved a $1.69 million contract to raze part of the 40-acre complex.
“We thought it might be necessary to protect the city’s interest going forward because of the money required to remediate the blight and demolish the buildings,” said Charles Raimi, interim corporation counsel with the City of Detroit.
But Raimi said the city has since withdrawn its filings, saying “everything’s changing in this area.” It’s unclear whether it’s legal for a municipality to file claims of interest for a property it doesn’t own.
Palazuelo bought the Packard Plant in late 2013 for just $405,000 at the Wayne County tax foreclosure auction and declared that he would rebuild the long-abandoned and historic factory complex designed by Albert Kahn. Some estimated costs for the project reached $500 million. But none of his plans ever came to fruition.
The county foreclosed on 35 of Palazeulo’s properties in and around the Packard Plant after years of tax delinquency. He owed nearly $784,000.
The county’s tax foreclosure auction takes place in September and October. The city and Palazuelo have recently been marketing the site as vacant land, possibly for a large industrial project.
But Raimi said he’d be “very surprised” if the Packard Plant parcels sold.
“We have the right to demolish any of those properties and hold Palazuelo or anybody else that acquired those properties liable for the cost of demolition,” he said.
Parcel information assembled by Regrid shows that Palazuelo is behind on taxes for another 11 Detroit properties totalling nearly $101,500. He is current on taxes for just one property at 1651 E. Grand Blvd. In 2020, Arte Express said it planned to renovate that building to house a restaurant.
Outlier did not receive a response from Arte Express to emails sent to a company address.
Other speculators made use of the new ruling as well.
The company UYESTATE LLC was foreclosed on 11 of its 14 properties in Detroit and claimed interest on nine of them this year. It purchased three homes at the Wayne County tax foreclosure auction in 2018 and 2019 — two for $7,500 and one for $12,900. 2022 was the first year those three homes were eligible for the auction because two of them were occupied, which made them ineligible to be foreclosed last year.
UYESTATE is registered to Michigan Registered Agent, an LLC filing company based in Okemos, Michigan. A representative for the company said it “wouldn’t be able to confirm or give any information” about UYESTATE.
Another company, Life Hacks LLC, claimed interest on six properties foreclosed this year. It has purchased 30 homes at the auction over the years, though most have been bought since 2000. Twenty-one are either foreclosed or at risk of foreclosure. Life Hacks currently owes $59,240.59 in property taxes to the county. All but one of these homes are currently occupied, according to Regrid’s vacancy data.
The ability to claim interest not only reduces risk for speculators but might even allow them to profit without investing in or paying taxes on the property if real estate values appreciate. There is no law preventing an owner from claiming interest on property multiple times over multiple years.
“While the county is concerned that speculators may take advantage of the new laws and has frequently expressed such concerns, any changes to the ‘rules’ would have to be by legislation,” said Darci McConnell, a spokesperson for the Wayne County Treasurer’s Office, in an email to Outlier. “The Treasurer does not have the authority to make changes to the law.”
Speculators have raided the county’s tax foreclosure auction in the past, especially in Detroit, buying properties in bulk for cheap. Between 2005 and 2015, 90% of properties bought at the auction went to speculators.
This year, 78 of the 197 properties that claimed interest were from LLCs. Just 17 out of all the properties, less than 9%, received the Principal Residence Exemption, a property tax discount that is only available to owners who live in their home.
But Alex Alsup, vice president of Research and Development at Regrid, a provider of nationwide land parcel data, isn’t sure the ability to claim interest will result in more speculation.
“I would say that, as long as home values remain high, it doesn’t make very much sense to play that game of buying at auction, collecting rent, not paying taxes, and then filing a claim and letting the property go back to auction,” he said. “But who knows?”
For one thing, less than 6% of the 3,465 foreclosed properties claimed interest this year.
“There’s not always as much logic as you’d expect to the behavior of bidders, speculators amidst the auction,” Alsup said. “With home prices as high as they are this year, I figured we’d see a lot more claims than we did from landlords. But a lot of them didn’t file for one reason or another.”
Reach AARON MONDRY at email@example.com or 313-403-7221. Sign up here for our weekly newsletter The Dig to get quality info and insights on Detroit neighborhoods.