Declining neighborhoods: Indy's auction block

It’s been 11 years since Minnie Crawford died — and at least five years since anyone kept up with the taxes on her Near-Northside Indianapolis home.

In Crawford’s absence, Mother Nature moved in. On a sunny morning in late May, the weeds behind 1909 Cornell Ave. could reach the chest of a grown man. The roof’s remaining asphalt shingles were warped. Ivy blanketed the rotting siding.

In 2010, three new duplexes and two houses went up on the block, a promising sign of redevelopment in an otherwise struggling neighborhood. But the next year, Crawford’s home entered the tax sale system, setting off a cycle of decline.

The first buyer paid $776.96 in delinquent taxes, then dumped the home for $1. The next flipped it for $1,000. Eventually, it landed back in tax sale; Denver-based Asset Recovery Inc. bought it sight unseen, then decided it wasn’t even worth the property taxes owed.

With no one caring for the house, code citations piled up, adding to the delinquent taxes. In September 2013, the Mt. Helix Real Estate Investment Fund bought the tax lien for $9,600 — but under Indiana law, it had to wait a year to take the deed. In the meantime, the San Diego-based company didn’t board it up or mow the grass. It didn’t even take title until June 24, 2015.

A month later, the city ordered the building demolished. And in October, it went back to tax sale — this time with $5,373 in nuisance liens on top of $1,868.63 in back taxes and penalties, which Mt. Helix eventually paid.

Six more years of blight in a neighborhood on the cusp of recovery. All triggered by a $776.96 tax bill.

Indiana’s convoluted tax sale system, which lures scores of investors each year with promises of cheap property and windfalls of up to 15 percent, is not just delaying the recovery in Indianapolis neighborhoods; it is hastening the decline. A months-long Indianapolis Star investigation found the tax sale system has sent more than 19,000 properties to government auction since the housing crisis began in 2008, many of them condemned to languish in a similar fate as Minnie Crawford’s.

All told, tax sales collected $152 million in delinquent taxes in that period but left a trail of wreckage in Indianapolis’ neighborhoods.

Over and over, properties like that of Minnie Crawford were sold for taxes to lien buyers. More than 2,700 properties have been sold for delinquent taxes two or more times since 2008, and of those, nearly 1 in 5 is still considered abandoned today.

Because many have been demolished, these figures likely understate the extent of the problem. But homes offered at tax sale since 2008 still accounted for 42 percent of the abandoned houses that remained standing as of July.

The system has given birth to a cottage industry of companies such as Mt. Helix, which are willing to buy hundreds of dilapidated properties sight unseen, even when the homes are beyond repair.

National experts in the fields of law, community development and real estate told The Indianapolis Star the tax sale system incentivizes those investors in ways that undermine the efforts of city officials, businesses and nonprofits to redevelop our most troubled neighborhoods.

Many experts say the tax liens sold by government are so corrosive to the real estate market that they should be abolished, but state and local officials, fearing a temporary disruption in tax collections, have resisted even modest reforms.

As the debate drags on, neighborhoods continue to decline. In one crime hot spot on the Near Eastside, 1 in 3 homes is now vacant, and some policymakers are losing patience.

“It’s a widespread mess,” said state Sen. Jim Merritt, R-Indianapolis. “I’m ready to open the doors and talk about all tax sales, whether it’s vacant or any other building. (But) I think local government views that as an abyss, that they’re worried about their costs on such an animal.”

There are many drawbacks to the tax sale system. Long waiting periods leave ownership of properties in limbo for years, sometimes as long as a decade. Properties are sold so cheaply they can be dumped on a whim. The system is so arcane it is almost inaccessible to the average person. It makes it easy for irresponsible investors to dump the costs of their bad decisions back on the city.

Nothing better illustrates the strange economics of the tax sale system than this: Many of the people who bid on homes at tax sales have no intention of buying them, let alone of maintaining them.

‘This is just a speculative investment’

When the housing bubble burst in 2008, property tax delinquency swelled in Indiana, exposing serious flaws in the way Indiana collects delinquent taxes, and pitting county treasurers against city planners trying to save poor neighborhoods from rapid decay.

In 2008, Marion County Treasurer Claudia Fuentes issued 9,310 letters warning homeowners of delinquency; a year later, that number jumped to 22,133.

Most of those bills were paid off before they went to tax sale, but many weren’t. From 2008 to 2014, the treasurer offered 20,414 property tax liens at auction, collecting $152 million in unpaid taxes.

Marion County tax sales attracted investors from at least 31 states. Observers saw similar trends nationwide. And national experts say tax sale systems across the country were ill-equipped to deal with the fallout.

Tax sale procedures vary from state to state. In Indiana, investors buy tax liens against homes at auction. Homeowners have one year to pay back the investors, plus interest. If the owners don’t pay within a year, the investors have the right to take the properties.

For decades, the system’s flaws went largely unnoticed. Historically, homeowners redeemed 90 percent or more of the homes offered at tax sales nationwide, so relatively few homes ended up in investors’ hands.

But in 2008, only 60 percent of homeowners in Marion County paid up and got their homes back. In 2009, that fell to 49 percent, and it has risen no higher than 58 percent in any year since, according to an analysis by The Star. That caused huge problems in neighborhoods with high foreclosure rates.

First, the one-year waiting period prolongs the time an abandoned home sits vacant, an open invitation to squatters and drug dealers. If a home goes to tax sale multiple times, as thousands have, the ownership limbo can cause it to deteriorate beyond repair. Roofs collapse. Windows are broken. People steal everything of value.

The grace period is meant to protect homeowners who may be trying to muster enough money to keep their house. But investors can bid as much as they want on a tax lien, and owners must pay back the entire bid, plus interest. For valuable homes, that sometimes raises the tax bill tenfold, forcing the families out. For them, the grace period offers little relief.

But that’s not the only aspect of the tax sale system that troubles experts. Another glaring problem is the perverse economic incentives caused by the high interest rates the system offers investors. If a tax lien is paid off within six months, the investor is allowed 10 percent interest. After six months, the rate rises to 15 percent.

“You have an investment vehicle that has a far greater rate of return than you can get anywhere else today,” said Frank Alexander, co-founder of the Center for Community Progress, the nation’s top blight advisory group.

For context, the rate of return on a 30-year U.S. Treasury bond today is just 3 percent. The stock market typically grows about 7 percent but fluctuates wildly from year to year.

That creates neighborhood problems, because many investors aren’t really interested in owning and maintaining real estate. “They don’t want to become property owners or landlords,” said Andrew Kahrl, an assistant professor at the University of Virginia’s Corcoran Department of History who has researched the tax sale industry. “This is just a speculative investment.”

That has had serious ramifications in some neighborhoods. Imagine, for example, living next to the empty house once owned by Evelyn Flynn.

In 2009, Flynn died at the age of 83. That year, her home, at 3724 Calhoun St., was sold at tax sale for $3,000. An investor, Bassett Funding LLC, bought it, and someone — an estate, perhaps, or a bank — paid off the back taxes.

In 2011, it was demolished. But the property went back to tax sale anyway — sold to the Nebraska Alliance Realty Co. for $1,036.06. This time, no one paid off the taxes. And Nebraska Alliance didn’t want the lot.

In 2013, it went back again. Bought by TCLF 2012A LLC for $609.23. Again, no one redeemed the property, and again, the buyer didn’t want the land. Today this neighborhood is riddled with empty houses and vacant lots choked with so much brush it encroaches on the road.

This year, Flynn’s lot went back to tax sale a fourth time, the deed still in her name. Sold once again, for $1,938.48.

The buyer will have a year to decide whether to take the land. And Flynn’s estate — six years after she died — will have a year to decide whether it wants to pay off the taxes and keep it.

The problem is not only that the tax sale system kept Flynn’s property in limbo for six years. The Star also found that the more times a house goes to tax sale the more likely it is to remain abandoned. Yet more than 2,700 homes have been allowed to go to tax sale at least twice since 2008.

Much of it is due to speculators who don’t take the homes. In 2009, investors didn’t take the deed to 1 in 10 liens they purchased. Since 2008, investors have walked away from 443 properties in this manner, according to The Star’s analysis. One in four of these properties is abandoned today.

Fuentes acknowledges there are problem properties — “There absolutely are.”

But when presented with The Star’s findings on chronic tax sale properties, she downplayed the extent of the problem. She doesn’t count 678 homes that were auctioned back-to-back in 2008 and 2009. That, she said, was a mistake.

And she excludes 687 other homes that were offered multiple times but were redeemed.

“Properties redeemed both times; what’s the problem?” said Cindy Land, administrative deputy for the Marion County treasurer’s office. “If it’s redeemed two times, three times, four times? What’s the problem?”

It may not be a problem for the tax collector. But for many neighborhoods, experts say, the problem is very real. If the taxes on an abandoned property are being paid late, there’s often no one maintaining the property or securing it from intruders. And neighbors are left to deal with the fallout.

Other jurisdictions take empty and abandoned homes out of the tax sale system. Some actually take seriously blighted homes away from their owners, even when the taxes are paid.

In Indiana, laws passed in the last two years give cities new tools. One allows cities to pull abandoned homes out of limbo, but so far Indianapolis hasn’t had enough time to use it. Another law cut the interest rates that lien buyers receive in an effort to reduce speculation in the market.

But the rate cut reduced the number of investors at Marion County’s last tax sale, causing Fuentes to suggest the high interest rates should be restored.

Others, however, say there are better ways to fix the system.

Reducing the interest rate is not enough, said Alexander, a professor at Emory Law School. “I actually think it’s a counterproductive move,” he said.

“I would’ve said get rid of tax liens.”

‘The numbers simply don’t work’

Various studies have shown that the tax sale system’s emphasis on short-term revenue can be harmful to tax collections in the long term.

A 2012 analysis by the Federal Reserve Bank of Cleveland found that tax-delinquent abandoned homes reduced values of nearby properties by as much as 7.6 percent. Other studies around the country have made similar findings.

In Marion County, the median assessed value of residential property declined 8.2 percent from 2008 to 2013, which reform advocates see as a troubling sign that the state’s short-term focus may be having detrimental long-term effects.

“We feel passionately in doing this work that a long-term perspective is what’s important to make these properties assets again in their local communities,” said Andy Fraizer, executive director of the Indiana Association for Community Economic Development. “And that is longer than election cycles. It’s longer than the next tax foreclosure process. It’s about getting this property back on the tax rolls for long-term redevelopment and asset growth.”

In some cases, even the short-term math doesn’t work.

For each abandoned home with code violations, the city Department of Code Enforcement spends $900 a year on mowing, cleaning up trash and the staff time required to inspect and issue violation notices. That’s more than the annual property taxes on many of the properties. And that doesn’t include the costs of emergency services to these homes, which are visited frequently by police and firefighters, The Star found.

Then there are the homes that need demolition — $10,000 a pop, or upwards of $25,000 in case of emergencies.

“With many of these properties, the numbers simply don’t work,” said state Rep. Ed Clere, R-New Albany.

What’s more, the tax sale system is far from a perfect tax collector. In Marion County, it has left $66.5 million uncollected since 2008.

The county does not track how much interest is paid to investors, but based on the amount of tax money collected, it is sure to exceed $10 million and is likely far higher.

“Why are we keeping the problem and exporting the profits?” Alexander said. “Why are we letting a Santa Monica investor get that profit instead of the revenue collector in Indianapolis?”

‘My question is why?’

One obstacle, reformers say, is that government is operating in silos instead of trying to devise a tax collection system that brings in the money but does no harm.

County tax collectors are clinging to the system despite a drumbeat of concerns raised by city planners.

“If we didn’t have the investors, there would really be no incentive for people to redeem those properties or pay their taxes in general,” said David Bottorff, executive director of the Association of Indiana Counties.

But it is not the investor that causes the homeowner to pay; it is the threat of losing the home.

Alexander says government can foreclose on a property just as an investor can.

“So if you’re selling tax liens, my question is why? Why wouldn’t you sell that yourself and capture the 10 percent return?” Alexander said. “And as for selling tax liens on (properties) that nobody in their right mind would buy, that’s just gonna be a merry-go-round. As soon as that purchaser wakes up, they’re not going to pay it again.

“That’s the true hazard property for the neighborhood.”

Michigan, where cities such as Detroit and Flint have struggled with blight for decades, abolished its tax lien system long ago.

There, homeowners still have a grace period. If the taxes are redeemed, the government, not an investor, gets the penalty interest. And on the day of the tax sale, the government sells the home instead of a lien.

That does two things: It eliminates investors that want only the interest returns. And it opens up the market to those who want the house but don’t want to put up cash in advance for a property that’s going to be stuck in limbo for a year.

Fraizer, with the Indiana community development group, said he tried to educate lawmakers and counties alike on the merits of the system but got nowhere. Instead, lawmakers have tried to reform the existing system. But even supporters aren’t convinced the changes will solve the problem.

“One of the big issues that I think we have to confront at some point is how can we make the tax sale process about selling real estate rather than selling these certificates that put these properties in a state of limbo,” Clere said.

When pressed, Fuentes cites two benefits of the tax lien system. It brings money in fast, and it reduces the number of properties the government is forced to handle.

“I don’t know that this was ever set up beyond a measure of collecting debt, and not putting it in the hands of government to become the new second-largest owner of property in the city based on uncollected debt,” she said. “It’s not set up for that.”

Others say that sort of thinking is exactly why investor-owned blight has been allowed to proliferate in the past several years.

“We tried many, many tools (to combat blight), and sadly the only one that’s truly effective is for the city to take title,” said Milwaukee Alderman Robert Bauman, co-chair of a special committee on redeveloping abandoned homes. “It’s conflicting, because some of the financial people here at the city say ‘what are we going to do with all of these properties?’ My argument has always been in return, we’re at least controlling our fate.”

In Indiana, the fate of many neighborhoods is in other hands.

‘This is just ridiculous’

Minnie Crawford’s home at 1909 Cornell Ave. never should have been sold, Steven Meyer fumes.

A former city planner, Meyer is the executive director of King Park Development Corp., which built the homes next door.

“This is just ridiculous,” Meyer said as he walked through the neighborhood in late May. “You look out the window of this brand-new construction building, and you see the chimneys collapsing” next door.

Set aside the pockets of blight, and it’s a desirable neighborhood. A few blocks away, homes have sold for as much as $307,000. And Meyer had sold at least two of the homes his CDC built on Cornell. A third had an interested buyer — but they walked away at the sight of 1909 Cornell, the chronic tax sale property whose last known occupant died in 2004.

“We’ve had our construction manager go through it, and there’s just nothing salvageable about it,” Meyer said. “These houses are very much so a cancer in the neighborhoods.”

The owner of the Cornell house, Mt. Helix — the company with the most abandoned houses in Indianapolis — eventually paid off the back taxes, but it hasn’t maintained the property or torn it down. On Nov. 10, Code Enforcement inspectors visited the house again after reports of illegal activity; someone had broken in.

Two blocks away, on Bellefontaine Street, another Mt. Helix home looks structurally sound, but at one point in September, the lock was punched out on the back door, leaving the home wide open to intruders. On a return visit by The Star in November, the home was still unsecured.

At Bellefontaine and 17th streets, three of the four corners are being redeveloped for commercial use. On the fourth is a vacant lot, next door to yet another Mt. Helix home, which has a tree growing out of its foundation.

Meyer says the home on Cornell wasn’t salvageable in the first place. The Bellefontaine home might have been. But because the government sold it for taxes rather than for redevelopment, it was allowed to deteriorate.

“Some of these houses, you’re looking at a cycle of four and five years of disinvestment,” Meyer said. “... Even a good house that goes through that, if it goes through twice, a house that hasn’t been taken care of for 10 years? It’s just a complete waste.”

Call Star reporter Brian Eason at (317) 444-6129. Follow him on Twitter: @brianeason.

About the series

Abandoned Indy is an occasional series exploring the causes of urban blight in Indianapolis neighborhoods, and the reasons it persists.

TODAY: How the tax sale system contributes to blight in poor neighborhoods.

MONDAY: Indianapolis land bank scandal still resonates in tough neighborhoods.

TUESDAY: Couple find it hard to take control of the abandoned house next door.

PREVIOUSLY: How negligent companies drag down neighborhoods. And how government helps them.