Cook County Makes Millions By Selling Property Tax Debt — But At What Cost?

Cook County Tax Auction
Elliott Ramos / WBEZ
Cook County Tax Auction
Elliott Ramos / WBEZ

Cook County Makes Millions By Selling Property Tax Debt — But At What Cost?

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Mark Hellner still remembers the time he barely saved a man from losing his house for just a fraction of its worth. It was a home in Chicago’s South Shore neighborhood, and the owner had gotten behind on paying property taxes.

“His wife had become ill, had a lengthy illness and died,” recalled Hellner, executive director of Center for Disability and Elder Law. “And he said he just quit paying attention to anything other than trying to keep his wife as comfortable as possible.”

By the time the owner sought help from Hellner, his unpaid property taxes had been sold to an outside investor through an annual county auction. He only had a few weeks left to pay roughly $20,000 of unpaid property taxes, interest and fees to that investor to clear the debt, or risk losing the $400,000 house. Hellner said the owner’s mortgage lender ultimately agreed to loan money to cover the debt, but the check arrived at Hellner’s office with less than an hour before the deadline.

“So I actually ran from my office to the [Cook County] Clerk’s office and paid the taxes so that he didn’t lose the property,” Hellner said. “That was one of the more horrifying things to me, because the man had substantial equity, he had a personal tragedy, and economic logic told me this should be very, very simple.”

Mark Hellner
Mark Heller, executive director for Center for Disability & Elder Law, has advised and educated homeowners in Chicago who houses are being auctioned due to unpaid taxes. Manuel Martinez / WBEZ

But the byzantine process that kicks in for homeowners who fall behind on paying their property taxes, and whose taxes are sold, is anything but simple. In Cook County, the annual tax sale is considered by many to be a necessary evil — pulling in money that taxing authorities require and are entitled to in order to run their school systems, fund police and provide other vital services. Last year’s auction, for delinquent 2016 property taxes, yielded more than $40 million.

But as property taxes have risen in the city and the county, the system also increasingly puts some of the lowest-income and most vulnerable residents further into debt, and at risk of losing their homes. Oftentimes in those worst-case scenarios, advocates say, it’s elderly African-American or Latino homeowners living on fixed incomes who fall behind and who lose their only source of wealth for a fraction of its true value.

What is the tax sale?

The Cook County annual tax sale takes place every year, nine months after taxes are due. This year, the delinquent 2017 taxes for roughly 45,000 Cook County properties will be offered in the online auction, which starts Friday.

“The home isn’t sold, but the taxes are sold,” explained Cook County Treasurer Maria Pappas.

Over the years, Pappas’s office has intensified efforts to reach property owners who are at risk of having their taxes sold. The outreach includes letters sent directly to property owners, clinics in community centers throughout the county, and beefing up the office’s website to allow property owners to see what they owe and pay their delinquent taxes online. The goal is to encourage the property owners to pay what they owe before the tax sale occurs, and to ensure that seniors and homeowners take advantage of discounts or tax freezes for which they may qualify.

Cook County Treasurer Maria Pappas (left) has held outreach events throughout the county ahead of the annual tax sale. Earlier this week, she spoke with homeowner Cathy Huynh at an event in Chicago’s Chinatown. Odette Yousef / WBEZ

If the owner does not pay, however, the property is listed in the online tax sale and investors have the opportunity to bid in a reverse auction. They bid on an interest rate that they would collect on the debt, anywhere from 0 percent to 18 percent, and the lowest bid wins. The tax buyer immediately pays all outstanding taxes on the property, starting with the tax year sold and any prior years.

When a property owner’s taxes are sold, a tax lien is placed on the property and starts the clock on how long the property owner has to gather and pay the money they owe to the tax buyer. For commercial and industrial properties, the redemption period is six months. For residential properties, it’s 30 months, but this may be extended to three years at the discretion of the tax buyer.

The trouble, say advocates who work with delinquent property owners, is that owners must pay the entirety of their tax debt, plus penalty interest and fees, in one lump sum. On top of that, the overall debt can grow rapidly the longer the debt remains unpaid.

The Cook County 2017 Annual Tax Sale is scheduled to occur May 3-8, 2019

Chicago residential properties listed for the 2017 Tax Sale (as of 4/16/19)

  • 13,670 residential properties were due to have their taxes auctioned
  • Represented $29,020,968.66 in unpaid taxes
  • Median unpaid taxes amount:$1,696.89
  • 3,728 owed $1,000 or less in unpaid taxes
  • 64 of those homeowners are veterans
  • 4,872 tax bills were returned
  • Smallest tax amount due: $100.56
  • Largest tax amount due: $110,534.97

Chicago wards with most homes in the property tax auction:

  • 34th (Carrie Austin) - 1,497 homes
  • 9th (Anthony Beale) - 1,013 homes
  • 16th (Toni Foulkes, incoming Stephanie Coleman)- 996 homes
  • 6th (Roderick Sawyer) - 950 homes

Initially, the penalty interest is the winning bid at the property tax auction, but it increases rapidly once the taxes are sold, said Dan Lindsey, director of the Consumer Practice Group at the Legal Assistance Foundation. “As time goes on, it just gets more and more challenging to do anything.”

Every six months after the tax sale, the initial penalty interest increases by the amount of the original bid. In other words, if a tax buyer wins by bidding 4 percent, it would mean collecting 4 percent interest on the unpaid taxes for the first six months, 8 percent for the next six months, 12 percent for the six months after that, and so on.

It can be even more punitive if the property owner fails to pay any taxes subsequent to those that were sold. In those cases, the tax buyer may purchase those unpaid debts and automatically collect a 12 percent penalty from the property owner. That 12 percent doubles the next year, and triples in the third year, if those taxes remain unpaid.

The end result is that property owners end up paying a lot more than the original amount they owed — all under the threat of potentially losing their homes.

So far, 1,901 homeowners in Chicago whose unpaid 2016 property taxes were sold at auction last year have managed to clear their debt. A WBEZ analysis showed that, on average, the property owners paid nearly three times what tax buyers paid for their unpaid property taxes. The largest differential for a single-family home in Chicago that year was a property in the Morgan Park neighborhood on the Southwest Side. The owner ultimately had to hand over more than $4,400 to a tax buyer who had purchased the unpaid taxes for only $326.

Property owners who do not scrape up the money could lose the property at the end of the redemption period. According to the treasurer’s office, this is rare – tax buyers often are in it for the high interest they accrue rather than the property itself. But in neighborhoods that are gentrifying, it could be a cheap way to gain a property for just a fraction of its value and then make big gains by flipping or selling.

Who’s Affected?

As of April 16, the treasurer’s office was preparing to list 48,186 properties in the tax sale. Of those, 25,794 were homes. Of the homes, 6,085 owed $1,000 or less in unpaid taxes. For the city of Chicago alone, 13,670 homes were to be listed and of those, 3,728 owed $1,000 or less. Since that date, the total number of properties with unpaid taxes slated for the sale decreased by roughly 3,000, as some owners paid what they owed.

A WBEZ analysis showed that homes in Chicago that were on the list are disproportionately concentrated in low-income communities on the city’s South and West sides. These communities are also predominantly African-American or Latino.

Residential Chicago properties slated for the Cook County 2017 Tax Sale

13,670 Chicago residential properties were due to be listed in the Cook County 2017 Tax Sale as of April 16th. (Data source: Cook County Treasurer’s Office)

chicago map of property taxes
Elliott Ramos / WBEZ

Pappas said she considers those who get into this situation to be the most vulnerable. She said homeowners often make their way to her office downtown with a stack of bills that they struggle to pay for utilities and other expenses.

“For a lot of people who come to this counter and lay out their receipts, $1,000 is $1 million to them,” said Pappas. “And they stand at the counter and they cry and they weep because their home is sacred to them.”

Virtually all the properties whose taxes are listed for sale are mortgage-free, according to the treasurer’s office. That’s because lenders, to retain their security position on the properties, will pay what’s owed in taxes and then collect the amount from the homeowners.

As a result, those who find themselves in trouble are often full owners of the homes they live in. Many are senior citizens, living on fixed incomes, which may not have kept up with rising property taxes over the years.

“They’re embarrassed, they’re ashamed, they don’t tell their family,” said Lindsey, of the Legal Assistance Foundation. “And people will come to us, sometimes a child or grandchild will come, they just found out at the end of the process, so everybody’s scrambling.”

Lindsey said his organization sees a couple dozen people come to their offices every year because they are at risk of having their taxes sold. His staff screens them to see if they may qualify for filing a Chapter 13 bankruptcy, which would extend the amount of time that homeowners have to pay the debt and allow them to set up a payment plan.

But Lindsey said there are limits to what his staff can do. In cases where a homeowner simply does not have enough income to cover what’s due, and future property taxes, there may be no options other than selling or forfeiting the house.

“If you’re caught up in it, you can lose an incredible asset, an incredible amount of your wealth, your ownership, over a relatively small amount of debt,” he said. “I do think that it should not be the case that somebody can lose their home for a small fraction of its value.”

Is this the best way to do it?

As draconian as the tax sale and accruing penalties may be for homeowners, it is effective. According to the treasurer’s office, it brings the collection rate for all taxes levied up to 98 percent. But many agree that the system could be kinder to those who are already living at the margins.

“People need time,” said Pappas. She said that homeowners once had more than nine months to pay their taxes before the tax sale, but that state legislators shortened that. Changing it, she said, may require many more people to speak up.

2017 Tax Sale Timeline:

  • March 1, 2018 - Installment 1 of 2017 taxes due
  • August 1, 2018 - Installment 2 of 2017 taxes due
  • March 6-7, 2019 - Properties eligible for the 2017 Annual Tax Sale are published in community newspapers
  • May 3-8, 2019 - The 2017 Annual Tax Sale
  • Late 2021 – Deadline for property owners to redeem their sold taxes

“Everybody in Cook County would march on Springfield and say, ‘Hey, you know what? Let’s give these people more time to pay,’” she said.

In the meantime, she said her office has worked hard through outreach in communities, and to elected leaders, to reduce the number of properties whose taxes are listed for sale. Four years ago, unpaid 2013 taxes for 53,553 properties, including commercial, industrial and residential, were offered to buyers. Last year, for unpaid 2016 taxes, that was down to 33,346.

Hellner said his office, similarly, has tried to reach property owners at the front end. Every year, the Cook County Treasurer’s Office shares the information of seniors who are on the list. Hellner’s office sends them letters explaining what the tax sale is, and informing them of property tax exemptions to which they may be entitled. This year, the office mailed more than 1,100 letters.

However, the treasurer’s office said there has been very little discussion, so far, about modifying the steep interest rates that some homeowners may become mired in after the tax sale. Ultimately, it would be up to the Illinois General Assembly to revise the property tax code, if those numbers are to change.

Odette Yousef is a reporter on WBEZ’s Race, Class and Communities desk. Follow her @oyousef.