Henry Johnson, a retired schoolteacher, has lived in a bungalow in North Kedvale for 42 years.
Four years ago his wife died. That same year, Johnson fell behind on his property tax payment.
“My wife was sick and she was an educator…she was able to help with everything, but after that there was a big drop,” Johnson said.
Per state law, Johnson was charged 1.5% interest for each month his property tax bill was overdue, or 18% over the course of a year.
After that time, delinquent properties like Johnson’s are eligible for the Cook County Tax Sale, which is administered by the Cook County Treasurer’s Office.
This is where a private investor redeems the debt and can make a big profit.
“It’s the poorest people paying the richest people – not just the wealthiest hedge funds,” said Cook County Treasurer Maria Pappas.
After buying the debt, the investor can turn around and charge the owner 12% interest each year. The owner has three years to repay this sum before losing his property completely.
During this time, the total interest amounts to 54%.
Henry Johnson’s initial tax bill was less than $1,800. Subsequent bills, interest and fees bumped his total payment to $8,173 – all due at once if he wanted to keep his house.
“What used to be an insurmountable challenge becomes something impossible,” said Tiffany Smith, associate director of Neighborhood Housing Services of Chicago.
She says the tax sale disproportionately hits black and Latino homeowners, especially seniors like Johnson who are on fixed incomes.
“They actually have their American dream, and we’re taking it away from them at a percentage of the house,” Johnson said. “It’s discouraging.”
Pappas and Smith say their offices are going door-to-door reaching homeowners ahead of time to check in and see if they’ve claimed the money the county actually owes them..
“We dig in and look at what they’re spending on their property taxes, if they have any exemptions,” Smith said.
Brad Westover is president of the National Tax Lien Association, a group that represents tax buyers.
He says the tax sale is necessary because without the penalty, homeowners would have no incentive to pay their taxes on time. Additionally, the private buyer provides the missing tax revenue due to the government.
“Sometimes they run into a budget deficit because of non-payment of property taxes,” Westover said. “This process is a means by which everyone pays their fair share.”
But Smith says the tax sale defeats the purpose for which it was intended.
“There’s a lot of self-eviction when these property taxes are sold,” Smith said. “It leads to vacant properties…it becomes a blight on communities that can ill afford it.”
To make matters worse, the investor rarely keeps the property when signing the deed. In fact, they can recover their initial investment.
A recent Cook County Treasurer’s Office study found that many tax buyers were using a loophole in state law to get a full refund of the property taxes they had paid.
That’s because they exploit what’s known as the law of “sale by mistake” to back out of a contract if something about the property doesn’t match what was advertised.
“The reviewer’s website says air conditioner, and there is no air conditioner, no toilet. Here, take it back,” Pappas said of what investors may claim.
The study found that local tax agencies have paid out $280 million over the past eight years to tax buyers as a result of the mistaken sale.
“It’s legalized racketeering and we have to break it and we will,” Pappas said.
Pappas says she is preparing legislation in Springfield to make big changes to the tax sale that:
Eliminate error selling
Cut first year overdue tax interest in half
Exempt those who owe $1,000 or less, which is 40% of all properties
And provide a payment plan for those who stay
Westover admits mistaken sale loophole has been exploited, says industry is open to all these changes
“If they don’t have the funds to redeem their tax bill in full, collecting partial payments over time makes perfect sense,” Westover said.
Johnson just paid off his debt last month after rearranging his bills and receiving a matching grant from Neighborhood Housing Services. He says he would have benefited from the proposed changes.
“There were a lot of sleepless nights and worries, but in my mind there was a way to make it happen,” Johnson said.
Follow Paris Schutz on Twitter: @paschutz