Reading Pa "Wall of Shame"; Mayor McMahon; an ineffective solution to the problem of "blight."

The City of Reading has announced a new program to fight "blight" and force property owners to clean up their properties:

Reading (RED-ing') Mayor Tom McMahon on Monday [August 2] announced a new online "Wall of Shame" featuring blighted properties.

McMahon says the property owners' names will be posted along with pictures and addresses. He says he's serving notice to property owners who fail to take action on eyesore properties.

H/T AP

The Wall of Shame is featured here - (otherwise known as "Mayor McMahon's Wall of Shame.")

This "Wall" brings to mind several points.

• Reading enacted its own rental inspection ordinance a number of years ago. Obviously, the ordinance has not rid the city of "blight."
• Many of the properties pictured on the website probably have a tax sale or two in their title history, thus making it impossible for the owner to undertake expensive repairs without first obtaining clear title through litigation.
• The local PROA chapter has identified many "blighted" properties as being owned by the City itself (much like Harrisburg). It will be interesting to see if the "Wall" ever pictures any of those properties.

The second item on the above list helps to explain the first and third items. No matter how many ordinances the City enacts or how many fees the City imposes, the City cannot legislate "blight" out of existence. Once a property has been sold at a tax sale, it becomes nearly impossible to obtain financing without litigation or a payoff to the prior owner. These properties often end up being owned by the City when no buyers can be found at subsequent tax sales.

Tax sale challenge based on improper notice; Northumberland County Tax Claim Bureau

I wrote previously about properties that have been sold at tax sales and how those prior tax sales constitute title defects, requiring investors/owners to expend attorney fees to clear the title:

Once a property has been sold at a tax sale, that property suffers from a title defect. The former owner can file suit to recover his old property at any time, claiming that he did not receive proper service of process of the then pending tax sale. Service of process is a constitutional issue that can not be eliminated by city ordinance or other local measure.

Once a tax sale takes place, the only way to eliminate with certainty the resulting title defect is to file a quiet title action against the former owner (or have the former owner sign a deed in favor of the buyer). These curative actions are expensive and uncertain. It is impossible to determine how much such an action will cost because it is unknown whether the former owner will fight or whether the buyer can even find the former owner.

For this reason many former tax sale properties sit with title defects unresolved. With unresolved title defects, such a property usually can not be sold or financed. Without financing, the property cannot be fixed or renovated. The properties continue to deteriorate, contributing to blight within the city.

An example of how such a prior tax sale can create problems for the current owner was recently provided in the case of Steinbacher v. Northumberland County Tax Claim Bureau (decided by the Commonwealth Court in May 2010) (510 C.D. 2009). (I will not bore you with all of the legal details.) The appeals court decided that a prior owner could challenge a tax sale if the tax claim bureau had searched only a "single directory" to find the prior owner before selling the property at a tax sale. The court held that a single directory search was insufficient.

This ruling is not exactly groundbreaking. Tax sales are overturned often for notice-related issues. This case is simply a recent example. Former owners have many arguments to use as they try to show a court that they did not receive proper notice of a tax sale. (This decision applies statewide and is not limited to Northumberland County.)

Who should be interested in decisions like this?

1. Any investor that is tempted to buy properties at a tax sale and who wants to know what legal challenges he might face;
2. Any city government that is tempted to impose greater fees, costs and duties on non-owner occupied properties, without realizing that title defects like this one tend to make it impossible to finance repairs, regardless of how strong the city building code or inspection ordinance might be.

Downsizing in Detroit

From the Detroit News comes the story of the Detroit Mayor's plan to relocate residents within the city so as to consolidate the areas in which city services are needed:

Mayor Dave Bing said Wednesday he "absolutely" intends to relocate residents from desolate neighborhoods and is bracing for inevitable legal challenges when he unveils his downsizing plan.

In his strongest statements about shrinking the city since taking office, Bing told WJR-760 AM the city is using internal and external data to decide "winners and losers." The city plans to save some neighborhoods and encourage residents to move from others, he said.

"If we don't do it, you know this whole city is going to go down. I'm hopeful people will understand that," Bing said. "If we can incentivize some of those folks that are in those desolate areas, they can get a better situation."

"If they stay where they are I absolutely cannot give them all the services they require."

There are large abandoned areas of Detroit in which empty buildings sit. Detroit's population has been cut in half since 1950. I have heard discussions of this type before in which Detroit community activists recommend that large abandoned areas be returned to agricultural purposes.

I have heard of no other city where such a plan is being attempted, but Detroit may not be the last city to try to shrink itself.

There are large areas in Harrisburg occupied only by vacant lots or abandoned buildings. Such areas will grow if the city eventually adopts a recommendation to double property taxes.

If Detroit's plan works, it may be the first successful, peaceable effort to shrink a large city in history. The plan may become a model for other major cities.

One aspect that the article does not address is the title defects resulting from tax sales. If Detroit is anything like Harrisburg, there are many properties that have been sold at tax sales, thus creating a title defect on those properties. Those properties will remain unusable even after a consolidation unless arrangements are made (either through litigation or payment) with the owners that lost the properties at tax sales. The City will have to deal with not only the current occupants, but any owner whose interest was supposedly extinguished through prior tax sales. This problem might also hamper Detroit's relocation efforts, as properties to which Detroit attempts to relocate residents might also be encumbered with tax sale related title defects.

Tax sale title defects will continue to hinder municipal efforts to consolidate or otherwise revitalize blighted areas of cities.

Tax sales; title defects; the arbitrary one-year period.

Click here for a previous post relating to title defects resulting from tax sales:

Once a property has been sold at a tax sale, that property suffers from a title defect. The former owner can file suit to recover his old property at any time, claiming that he did not receive proper service of process of the then pending tax sale. . . . Once a tax sale takes place, the only way to eliminate with certainty the resulting title defect is to file a quiet title action against the former owner (or have the former owner sign a deed in favor of the buyer). These curative actions are expensive and uncertain. It is impossible to determine how much such an action will cost because it is unknown whether the former owner will fight or whether the buyer can even find the former owner.

Occasionally I hear about settlement companies that tell buyers that such a property will be insurable "after one year." Details are sketchy because I have heard of this only second hand, but it appears as if some settlement companies have established an arbitrary one year period after which they will purport to insure a former tax sale property - regardless of whether the title defects have been resolved.

Keep in mind that the "one year period" has no legal significance. Title defects resulting from a tax sale do not go away after one year. If a buyer purchases a property under these conditions, the buyer will have difficulty selling the property, regardless of the fact that he used a corner-cutting settlement company to do an end run around the title defects.

Check here for future posts on the consequences of buying a property with title defects (with or without the blessing of a settlement company).

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Update - click here to see some of the consequences of buying property with title defects.

Tax sales and title defects in Harrisburg, PA

I wrote earlier about tax sales, and the likelihood that an increase in property taxes and related expenses would lead to more properties being exposed to tax sales, as owners abandoned their already marginal properties in the face of these new and higher expenses.

Once a property has been sold at a tax sale, that property suffers from a title defect. The former owner can file suit to recover his old property at any time, claiming that he did not receive proper service of process of the then pending tax sale. Service of process is a constitutional issue that can not be eliminated by city ordinance or other local measure.

Once a tax sale takes place, the only way to eliminate with certainty the resulting title defect is to file a quiet title action against the former owner (or have the former owner sign a deed in favor of the buyer). These curative actions are expensive and uncertain. It is impossible to determine how much such an action will cost because it is unknown whether the former owner will fight or whether the buyer can even find the former owner.

For this reason many former tax sale properties sit with title defects unresolved. With unresolved title defects, such a property usually can not be sold or financed. Without financing, the property cannot be fixed or renovated. The properties continue to deteriorate, contributing to blight within the city.

Every year a few investors take the necessary steps and spend the money required to clear their tax sale properties of title defects. They clear these properties one lawsuit (or one quitclaim deed) at a time. Meanwhile, hundreds more properties are exposed to new tax sales (and new title defects) every year. Every year the city gets deeper in the title defect hole, as more tax sale defects are created than are resolved.

The City of Harrisburg owns hundreds of properties that were unsold at prior tax sales. Countless more have been purchased at tax sale and remain burdened with the same title defect(s). Increasing the tax rates will only compound the problems. Fewer investors will attempt to purchase these properties and undertake the expense involved in clearing the title after the cost of such ownership has been drastically increased, as the City's consultant now proposes.

Tax sale title defects will now be made more burdensome, and will contribute more to the downward spiral in the real estate market.

Harrisburg tax increases, tax sales, title defects

I wrote last week of a recommendation by consultants hired by Harrisburg to double the property tax for city properties (plus large increases for trash, sewer and water). I have written of potential consequences from these increases, including increased litigation over property assessment, downward pressure upon prices and values and financial distress for owners.

Another consequence of the proposal would involve local taxes. Investors whose cash flow does not cover a property's expenses will often simply allow the property to be auctioned at tax sale. This is particularly true where the investor cannot sell the property because the property value has declined below the balance on the investor's loan(s). Doubling the property tax will increase the likelihood of properties being sold at tax sale, as more properties will suffer from negative cash flow as a result of the newly imposed tax costs (and related municipal charges).

Contrary to popular belief, an increase in properties being sold for unpaid taxes does not mean that more properties will be available for investors to purchase. It means, instead, that more properties will suffer from title defects. These title defects inhibit sales, financing and repairs, thus contributing to the general decline in the real estate market.

Check this post for future updates on the consequences of tax sales and resulting title defects.
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Update - click here for more detail on title defects resulting from tax sales.