Client: Chicago Community Trust
Source: Rock River Current
ROCKFORD — From the outside, the two-story cream-colored house on Fourth Avenue doesn’t look like it would inspire the ire of city officials.
Sure, there are a few busted windows and overgrown weeds, but there are far more decrepit properties in the city.
City officials, however, say the vacant home exemplifies how a loophole in the state’s delinquent tax sale system traps properties between abandonment and new ownership. A process called “sale in error” prevents the city from stepping in to ensure the house goes to a responsible owner, leaving it deteriorate rather than being sold to someone who would invest in fixing it up.
“The property is probably still salvageable, but we’re still not able to utilize these tools to take acquisition,” said Karl Franzen, the city’s director of community and economic development. “This is a great example of a zombie house or property purgatory where it’s just cycling.”
Illinois law allows private investors to step in when property taxes aren’t paid. They purchase the tax debt and seek repayment from the owners, along with interest up to 18%. If the owner doesn’t repay the taxes after three years, the tax buyer can take ownership of the property. However, that’s rarely the investor’s goal.
Instead, tax buyers file a “sale in error,” which allows them to avoid taking ownership of properties that may be blighted or have city liens against them. The sale in error is meant to protect tax buyers from owing money on sales that never should have taken place, such as when the land is held by the government or going through bankruptcy proceedings. However, Illinois law allows refunds for minor errors, even when they’re made by the tax buyer themself.
For example, the sale in error can be granted for small matters such as a $100 lien against the property for city workers mowing the abandoned yard, City Attorney Nick Meyer said. The Cook County Treasurer’s Office cited a case when the cost to redeem was misstated by the tax buyer by 3 cents.
Tax buyers then get the money they paid refunded by the county treasurer, often with interest of up to 12% tacked on. Meyer said that gives tax buyers a risk-free gamble without having to research the condition of the property they’re investing in.
Since 2010, the county has refunded nearly $8.5 million in taxes from nearly 2,100 sales in error, according to records from the Winnebago County treasurer.
The problem for municipalities like Rockford and other taxing bodies isn’t just refunding the money. It’s because the sale-in-error process prevents them from stepping in to get the property into the hands of a responsible owner through either the regional land bank or trustee program.
Resetting the clock
The trustee program can take control of the property after three years with no taxes paid, and the land bank can do so after two years without tax or water bill payments. However, when a sale in error is filed it “resets the clock,” so to speak, before the city can step in, Franzen said.
“It can take a property that is just a couple years tax delinquent and keep it in purgatory to the point where it is unrehabible and not market viable,” Franzen said. “We need to be able to intervene in a timely fashion.”
The city wants to see properties stabilized, rather than demolished. But when one gets stuck in the sale in error cycle for long enough that can be the only option left after years of deterioration.
“This is not about taking care of the worst of the worst. That’s what demolition is for,” Franzen said. “This is about protecting investment that we already have established.”
Rockford joined a coalition of Illinois cities including Peoria, Decatur, Kankakee and Chicago to push for a legislative fix to the sale-in-error process. The proposed legislation would remove the provisions that restart the redemption period after a sale in error occurs. That would allow the city or trustee to market the property for sale before it deteriorates beyond repair.
The Illinois House held a subject matter hearing in March to discuss the potential changes.
“We don’t want to stop tax purchasers from operating: What we want to stop is a risk-free gamble that only negatively impacts the cities and the neighborhoods,” Meyer said. “It would be a dramatic change in our ability to get access to properties faster and get them over to private investors faster, but it’s not really dramatic changes in the entire system itself. …
“The intent of the sale-in-error process is now being exploited for something it wasn’t meant to do.”
Buying at a distance
For the most part, tax buyers are limited liability corporations that hail from Chicagoland or elsewhere outside of Winnebago County. For example, last year all but one tax buyer who filed a sale in error petition was an out-of-town corporation. The sole LLC from Rockford was refunded less than $4,800 out of $288,000 total refunded, treasurer’s records show.
“People aren’t buying the taxes because they want the property. These are institutional actors who are buying the taxes as a risk-free investment, and they’re using the sale in error as a mechanism to get out of the investment when they realize they didn’t do their due diligence on the property and there are code issues or fines,” Franzen said. “So really all we’re doing is not holding institutions accountable for not doing due diligence that they should be doing on these properties.”
At Winnebago County’s most recent tax sale, 97% of tax sales went to out-of-town buyers.
“Winnebago County registers over 1,000 properties each year as legally abandoned, sitting vacant for years, deteriorating and dragging surrounding areas down with them,” Winnebago County Board Chairman Joe Chiarelli said in a statement. “This legislation will give local governments and land banks more control over abandoned properties to work with developers and residents to restore them and get them back on the property tax roll for the benefit of everyone in our county.”
The home at 1518 Fourth Avenue, which is just south of Lincoln Middle School, is one of the five most recent properties to have a sale in error recorded, according to treasurer’s records. However, the city identified potential problems years ago. The property was condemned in 2018 after complaints from neighbors, Franzen said.
Ripple Creek Investors of Chicago bought the taxes in 2019 and had its petition for sale in error granted about two months ago. That means it may take an additional two to three years before the city can step in.
“We want to protect this house as much as possible, because having it there and having it be activated helps that neighborhood so much more than demolition,” Franzen said.
The process can also take hold in commercial corridors. Another of the most recent sale in error properties is at 708 Seventh St. in Midtown.