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Buying a Foreclosed Home in Detroit? Property Owners Should Know About This Little-Known Tax Rule First

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This week, thousands of properties in Detroit went from private to government ownership due to a seldom heard-of foreclosure process called “reversion.”

Detroit has been plagued by foreclosures and other issues with properties in recent years, such as the water shut-offs that left many without utilities last year.

This year almost 20,000 properties were subject to reversion, in which properties purchased at tax foreclosure auctions still owe back taxes. Because this isn’t a well-known expectation among new homeowners, many suddenly find themselves receiving a foreclosure notice just a few months after purchasing the home.

Normally, a property is only subject to tax foreclosure if three years’ worth of taxes are unpaid. However, for repeat offenders, so to speak, property owners can receive this notice within just 18 months.

How are they already behind on their taxes? The foreclosed properties at auction are already technically 12 months behind on their taxes.

Within six months, the county marks the taxes as unpaid, which “reverts” the property back to foreclosed status. The problem, of course, is that the property is already owned, and those who may have purchased the home from a third party may not even see a foreclosure notice.

This doesn’t just spell trouble for homeowners but for property managers, as well. As they collect rent from tenants, they also may have to pay between 8% and 10% of that rental rate to a property management company; suddenly owing unexpected taxes can make things difficult for those who own multiple previously foreclosed properties.

In fact, owning such properties is becoming increasingly common as more investors turn to real estate investment trusts (REITs). Retirees, especially, are investing in property rather than traditional bonds because they pay larger dividends, according to CNNMoney.

But no matter which type of property Detroit residents have purchased at a foreclosure auction, the reversion notice can come as a shock, arriving less than one year after they received their deeds.

Fortunately, the amounts owed are fairly low, and most property owners are able to pay the bills once they come in. Of more than 9,000 properties in Detroit that faced reversion on May 26, none owed taxes in 2013 and had been acquired that year; as of now, they owed an average of just $1,780, and more than 600 of them owed just $500 or less.

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