As you can imagine, getting the information on who is currently responsible for maintaining the property is difficult. To help the cities keep an active and accurate database of responsible parties, states have passed laws for lenders to notify the municipal clerk’s department responsible for vacant property registrations
with contact information for the entity initiating the foreclosure or responsible for maintenance. Such laws exist in New Jersey where the investor should be careful in verifying that the attorney working for the lender correctly notified the clerk on the active foreclosure or vacant registration. The law states that registration ordinance applies to lenders as well as titleholders, to make it easier for a city to get the responsible party information more readily.
The agreement lenders typically say that they have no legal right to enter the property under the foreclosure and before the REO to get out of the city violations or fines related to property registration. However, cities point out that under the mortgage agreement in the United States, there is a clause that gives lenders the right to protect the value of the asset, implying the entry to vacant or abandoned property.
Vacant Property Registration Ordinances (VPROs)
Let’s discuss the extent of penalties and violations that the city can assess against the property. Again, the city needs the property to be registered if vacant or abandoned, or if the lien holder starts a foreclosure process
. To keep the foreclosure process active, the lender needs to renew the registration on a yearly basis. The purpose of a vacant property registration ordinance (VPRO) is to ensure that the owners of vacant properties are known to the city and other parties of interest, so that the owners of vacant properties are notified on any obligations related to codes and regulations on substandard property management.
If the city does not have an owner of the property registered in their database or the annual registration is not paid for, the city may want to create ordinances that can impose penalties for continuing to maintain a vacant property, or incentives for rehabilitating and reusing the property. The city will study the market condition affecting the property of interest and verify that the interest holder will have some equity. The city wants to put financial pressure on the lien holder if it would make sense financially to fix or maintain the property for reuse, rental or resale, where the owner can sell or rent the building for more than it costs to rehabilitate or where public funds are offered to make up the difference. In other conditions, such an ordinance may lead to the owner walking away from the building entirely.
In some cases, penalties and interest may be negotiable to make sure the city gets the property fixed while collecting for any accrued fees and to keep the fees low enough to have enough equity in the property. There is a fee structure that the city typically puts in place to make sure city costs are covered to deal with the property, including covering costs incurred by the municipality to deal with vacant properties.
Typically the registration will have a clear description of the property by address, parcel number, contact for the owner, information on lienholders, any active violations or registration status, as well as all penalties for violations.
In many cases, the information is only available to the lienholder or the owner of the property, as contact information is considered private data. Lenders or foreclosure attorneys may use the borrower’s SSN to access the status.
Hundreds of cities, counties and towns in the United States have enacted VPROs.
Why Are Penalties so High?
Clerks are setting the fees very high to encourage the owners or lienholders to take care of the issues with the property ASAP and without delays. In large jurisdictions, the city will hire an attorney’s office to handle a large amount of fee collections and skip tracing to find interested parties to address violations or issues. The interest and penalties are typically set to the highest allowable in the state’s statute. In the case of continuous violations and passiveness of the lienholder to cure the issue, the city may choose to collect through tax structures and extra yearly assessments or public sale auctions to the investor, creating strategies to collect and cure in more than one way.
Vacant property registration in California will cost anywhere from $0 to over $600.
The city may choose to waive or defer penalties if the investor or owner will sign an agreement to rehab the property. This is a great strategy for not paying the violation, rather working with the city to rehab and cure for possible forgiveness. If the rehab takes a few years, some cities will offer rebates for a course of the construction. The city of Wilmington in Delaware, as an example, has set graduated fee schedules: with every year that the building remains vacant and must be re-registered, the fee goes up.
The District of Columbia took a different approach through the taxes against the property with floating assessment and taxation based on the property being vacant. The District of Columbia taxes an occupied residential property at $0.85 per $100 value, but vacant properties at $5 per $100 and blighted property at $10 per $100. This worked well for the city as it instantly creates an incentive to get the property to standard and/or living condition. However, in weaker real estate market cities, this strategy might not work, as cities risk increasing tax delinquency rather than motivating property improvement.
Administrative Action Against the Owner
Typically, owners take it upon themselves to improve the property, rather than risk having the city or a non-profit do it and bill them for the cost, or risk losing the property. Under New Jersey law, cities can create abandoned property lists, where the law permits the city to take properties on the list through spot blight eminent domain, a powerful and speedy procedure under New Jersey law. In the City of Newark, where they have used this process, they find that roughly one-third of owners of vacant, abandoned properties rehabilitate them and put them back into use rather than risk having the city take the property.
When Baltimore initiated a concentrated vacant property receivership program in the Patterson Park neighborhood, they found that roughly half of the owners voluntarily improved their properties, in order to avoid the possibility of a receiver being appointed by the court for that purpose.
The City of San Diego requires the owners of vacant, boarded structures to file a Statement of Intent with the city, including “a plan and timeline for the lawful occupancy, rehabilitation or demolition of the boarded structure.” Failure to carry out the terms of the statement of intent can result in significant financial penalties.
Vacant Property Receivership: A Powerful Tool for Cities
In some states, the city can assume the property receivership, which means that the city takes temporary control of vacant properties with an option to assume full control and ownership transfer. Owners are given a period of time to restore the property to get control back or else a non-profit or city will take title and ownership for city auctions to investors. Typically, the lien is a superior lien except only to tax liens.
In Newark or San Diego, the owner may be given the right to demolish the property in lieu of fixing it if this costs less, unless the city wants a particular building to be preserved, for example, historical district buildings.
Receivership will work in similar fashion as bankruptcy receivership. The city will apply to the court to establish a court appointed receiver of the property for property restoration. Once the court approves the receivership, the receiver assumes control of the property and can borrow money from the receivership to spend on property rehab. Once the property has been rehabilitated, the owner may be able to regain control by making the receiver whole, or the property is sold by the court or the receiver.
Not all states allow municipal receiverships, but many states do. There are strong state statutes on creating receiverships in Massachusetts or Pennsylvania. If the building is not realistically recoverable, the city will not bother with going through the receivership. Typically the cost of receivership may not be recoverable as a priority lien in many states. However, if there is enough equity in the property, the city is likely to attach the receivership lien as a junior lien.
In addition to Massachusetts and Pennsylvania, New Jersey, Ohio, Indiana and the city of Baltimore have strong vacant property receivership laws.
In summary, investors should be able to find the issues related to vacant properties in one of few ways:
- O&E Report (Current Owner Search or Prelim) – watch for city violations, Lis Pendens notices by city, city orders, selection of contractor to perform work on the property or receivership notices
- Unrecorded Lien Search aka Township Search for Code Enforcement Liens – watch for permit and city violations
- Vacant Property Registration Searches
- Contacting active foreclosure attorney for confirmation of registration
- Review of the foreclosure file for all correspondences with city or owner
- Review of bankruptcy file (if available) for city claims as the interest holder.