How a Michigan Man Lost His Rental Home Over an $8 Tax Bill

How a Michigan Man Lost His Rental Home Over an $8 Tax Bill

3 min read
Paul Moore

Paul Moore is the managing partner of Wellings Capital, a private equity real estate firm.

Experience

After college, Paul entered the management development track at Ford Motor Company in Detroit. After five years, he departed to start a staffing company with a partner. They scaled and sold the company to a publicly traded firm five years later.

After reaching financial independence at the age of 33 and a brief “retirement,” Paul began investing in real estate in 2000 to protect and grow his own wealth. He completed over 85 real estate investments and exits, appeared on HGTV’s House Hunters, rehabbed and managed dozens of rental properties, built a number of new homes, developed a subdivision, and started two successful online real estate marketing firms.

Three successful commercial developments, including assisting with the development of a Hyatt hotel and a very successful multifamily project in 2010, convinced him of the power of commercial real estate.

Press

Paul was a finalist for Ernst & Young’s Michigan Entrepreneur of the Year two years straight (1996 & 1997). Paul is the author of The Perfect Investment – Create Enduring Wealth from the Historic Shift to Multifamily Housing (2016) and has a forthcoming book on self-storage investing. Paul also co-hosts a wealth-building podcast called How to Lose Money and he’s been a featured guest on 150+ podcasts, including episode #285 of the BiggerPockets Podcast.

Education

Paul earned a B.S. in Petroleum Engineering from Marietta College (Magna Cum Laude 1986) and an M.B.A. from The Ohio State University (Magna Cum Laude 1988). Paul is a licensed real estate broker in the state of Virginia.

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Email [email protected]
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Twitter @PaulMooreInvest
How to Lose Money podcast

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You read it right.

Uri Rafaeli is a small-time single-family home investor in Michigan. He’s a retiree using single-family rentals as a way to make ends meet. Like many BiggerPockets investors, he’s not backed by a corporate staff who dot every “i” and cross every “t.”

Who would have guessed he would lose his property over $8.41 in back taxes?

This could happen to any of you. Read on to make sure you’re not a victim.

The Backstory

Like many smart real estate investors, Rafaeli saw the last recession as a great time to buy. He acquired a single-family home in Southfield, Michigan, for $60,000 in 2011. Southfield is a mostly nice suburb north of Detroit.

After fixing up the home, this retired engineer put it on the rental market. About 30 months later—without his knowledge—the home was auctioned off for $24,500. All because of his $8.41 delinquent property tax bill.

Rafaeli, now 83 years old, lost the house and his income stream. And the county pocketed the proceeds from the sale.

He’s not alone. Over 100,000 others have lost their homes this way in Michigan alone. This all stemmed from a 1999 law that was passed to help Michigan streamline the process of repossessing abandoned homes in the wake of Detroit’s economic woes.

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Related: Professional Property Management vs. Self-Management: A Look at the Pros & Cons

When I lived there 20+ years ago, we heard there were 15,000 abandoned homes and buildings in the city of Detroit alone. I understand the problem.

Even if Oakland County had paid Uri the $24,500 minus $8.41, this figure would pale in comparison to his $60,000 investment plus repairs. And it would not compensate him for years of lost rental income and the fact that this home has approximately doubled in value since 2011.

How It Happened

In 2012, Rafaeli was notified that he had underpaid his 2011 property taxes by almost $500. He made his following property tax payment on time and attempted to settle the debt with the county a year later, in January 2013. Unfortunately, he did his own calculations of interest and penalties. He was $8.41 short of the county’s figure. This bill ultimately grew to $285 with penalties and additional interest.

Oakland County tried to collect the debt on numerous occasions. They mailed notices to the property address, and these notices were apparently discarded by the tenants.

They also mailed notices to Uri’s personal address, but he had moved out of state and forgot to notify the county. Apparently the county didn’t have the automatic address update feature with the USPS.

In 2014, the county seized this home along with 11,000 others and put them on the auction block. Someone got a steal on this one!

Related: The Ultimate Guide to Real Estate Taxes & Deductions

Rafaeli was unaware of all this and continued to make annual property tax payments. He realized something was amiss when he stopped getting rent payments from the tenants… who no longer lived at the confiscated home.

Both the county court and the court of appeals ruled in the county’s favor. Rafaeli has now appealed to the state’s supreme court. It’s expected that the case will be decided by next summer.

So you’re not a Michigan property owner? You may still be a victim if you own property in 14 other states with similar laws.

Avoiding Disaster

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I think the lessons here are pretty obvious, but let’s review them.

  1. Don’t calculate your own interest and penalties. Uri is an engineer, and the math was certainly not the issue. We can all imagine how a mistake like this could have been made.
  2. Don’t count on the government to forward your mail. I’ve moved twice in the past five years. My mail was automatically forwarded and the address changed on 95%+ of my mail. I didn’t have to fill out a lot of pesky forms. But wouldn’t you know that one important piece of mail was not forwarded as I expected? It almost caused me serious problems.
  3. Don’t count on your tenants to forward mail to you. This is not in their lease provisions. They also may not receive mail without their name on it or realize what it is.
  4. Consider outsourcing your real estate investments. My wife’s uncle bled to death when his drunk buddy pulled his tooth in a bar. He should have gone to a professional. If you are a full-time real estate investor, go for it! You can set up the systems and staff to do everything you need to do to succeed. But if you have a well-paying full-time job—or, like Uri, are trying to enjoy your retirement—consider outsourcing critical functions to a professional property manager or passively investing with a professional syndicator.

I’m regularly reminded that many investors work far harder than they need to, to make less than they could. Don’t make that mistake.

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Have you experienced any investing disasters?  What happened?

Share your stories in the comments.

One solo real estate investor in Michigan lost his rental property over one small tax error. Hear the story and learn how to avoid a similar crisis.