Land Banks Profit By Cutting In Front of People Wanting To Buy Property
A video report
Land banks are supposed to help eliminate blight, revitalize neighborhoods and contribute tax dollars to local economies. But increasingly, they are acting like development companies competing with the private sector.
In some cases in Michigan, land banks have scooped up property for the price of back taxes owed and resold it for the benefit of the land bank. Taxpayers lose because the practice bypasses private sector buyers who may offer more money for the properties at a public auction.
Michigan created land banks in 2003 to deal with overwhelming blight in places like Flint and Detroit. Land banks are public bodies that for five years can keep half of all taxes on properties they sell. And because they are taxing authorities, they capture a percentage of all local property taxes. Land banks were designed to use this money to do something positive with property that was worth less than the taxes owed on it.
"Most Michiganders would be surprised to know how many land banks there are in the state," said Audrey Spalding, director of education policy at the Mackinac Center for Public Policy who also is a national expert on the activities of land banks across the country. "There are about 40, [including] in Kent County [and] in rural areas of the state where really there was no need for them."
More than half of the state's land banks formed in the past three years. One is operating in Kent County where there is on average no more than 200 properties a year in tax foreclosure. By contrast, Wayne County typically has more than 15,000 tax foreclosed properties annually. When the land bank first opened in Kent County, it got first dibs on several dozen properties.
"They took all the properties they thought they could turn and flip and manipulate and make a profit and the ones where they had to put more money in them than they were worth, they didn't take," said Charlie Curtis, a real estate investor in the city.
After complaints, Kent County Commissioners ordered the treasurer to turn the properties back to the local governments. The local governments, though, sold the properties to the land bank, again for no more than the taxes and fees owed on them.
One of those houses was next door to Maria Diaz. She said she would have paid three-times more for a duplex the land bank purchased for $12,000.
"I'm shocked," Diaz, said, "No, I don't [think it is fair]. We don't get the chance. We don't get the chance to see this. I don't know how this happens."
Sharon Hall and Bobby Moore run an organization that tries to buy affordable housing for the homeless. One house interested them, but the city sold it to the land bank for just under $9,800.
Hall called the land bank to see if she could be on a list of non-profits that can get discounted homes.
"I asked how and [the clerk] said I had to go through the city and she said they don't even do that anymore, so I'm not able to acquire because there are certain qualifications you have to meet to get these houses," she said.
"It seems like at this point, almost everything we have done has been blocked," Moore added.
Spalding said auctions are fair because "anyone can show up and buy property."
"It's not a special interest deal," she said. "When a land bank steps in and takes all of this property, it's putting itself in the way. You have to come to the land bank and say, 'Can you please sell me this property?' and the land bank gets to choose who will buy it."
Proponents of land banks say they are needed to limit who is able to purchase properties.
"In many cases, the buyer does not upgrade the property," said Ken Parrish, Kent County treasurer and the chairman of the Kent County Land Bank Board. "In some cases, [people] will simply try and flip [the property] or throw a 'for rent' sign on it and rent it in its current condition, whatever that condition may be."
Parrish says the biggest function of land banks is to bring tax foreclosed property to market value, but determining that comes with risk. And, he said, if prices go up, there is a strong chance cities lose affordable housing.
One example is in Grand Rapids. The land bank acquired a home for $12,900. It sold it to a builder who hopes to sell it for $130,000 after a few months of repairs. If he can sell if for that price, the city will be able to collect higher taxes on the property. The sale may also drive up assessments throughout the neighborhood. Homeowners with fixed incomes who can't afford the higher tax may be forced to sell.
Two Michigan lawmakers, a Republican and a Democrat, have introduced bills to control the practices of land banks.
House Bill 5083, sponsored by Rep. David Rutledge, D-Ypsilanti, addresses the current law by clearly defining what is meant by private property and putting up parameters around the land banks.
House Bill 4626, sponsored by Rep. Ken Yonker, R-Caledonia, gives private investors legal recourse when local government bypasses the auction process.
Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.