Great news: North Dakota ends home equity theft

Co-authored with Michael Fedorchak, the state director for AFP North Dakota.

There is cause for celebration in North Dakota, as it joins the growing list of states that forbid home equity theft.

Until recently, local North Dakota officials could seize and sell valuable properties when the owners fall behind on property tax payments and then keep all the profits as a windfall. The owners? They get nothing.

Until April, the repugnant practice was legal in North Dakota. But thanks to the leadership of courageous state legislators and a forward-looking governor, a new law took effect April 23 that bars local officials from employing this abusive form of governmental theft.

To understand how it works, consider the case of Kevin Juhl of Drayton, who was out of state on a long freight haul when his wife called, sobbing. She told him that Pembina County officials had taken title to their home and were preparing to auction the property. The Juhls had fallen a couple of years behind on their property taxes, which run around $575 per year. They planned to pay it back with interest but lost track of the deadline.

To their shock, state law allowed the county to take full ownership of their property—including all their hard-earned equity. And the county demanded they pay $45,000 to get their home back.

Kevin was stunned that county officials could take the home he and his family had worked so hard to buy over such a small debt and with little warning.

“We are hardworking people who pay our share,” he said. “It felt like a setup.” But their story is just one of many.

Most states sell tax-delinquent property in auctions to the highest bidder and use the proceeds to pay all taxes, penalties, interest, and costs. Any leftover money belongs to the former owner.

North Dakota was among only a dozen states allowing the government to take more than it is owed. Property owners who owed back taxes were at the mercy of predatory local officials who would swoop in, seize their homes, and auction off the homes for cash. The owners got nothing, regardless of how much equity they might have held in the property.

It’s worth noting that the tax amounts owed are frequently relatively meager—often only a few thousand or a few hundred dollars. In one notorious case in Michigan, a homeowner lost his home for underpaying his taxes by $8.41. Michigan has since ended home equity theft, thanks to PLF’s lawsuit.

Thankfully, the Juhls’ case ultimately had a happy ending as well.

With help from their state representative, the county allowed them to get their property back by paying their debt, plus penalties and interest.

But such outcomes are not always guaranteed. Data acquired by Pacific Legal Foundation for 23 of North Dakota’s 53 counties show that between 2013 and 2019, roughly 500 homes went through tax foreclosure for debts averaging around 1% of the homes’ values.

In most cases, the counties allowed the original owner to get their property back by paying only the delinquent taxes, fees, and interest. But 80 of the 500 homes were sold to new owners, meaning the original owners lost their homes and their equity for a debt representing a fraction of their property’s entire value.

Of course, many property owners do, in fact, fail to meet their tax obligations. In such cases, under North Dakota’s new law, county officials are still able to collect taxes, penalties, interest, and costs from tax-foreclosure auctions. But in the event of a foreclosure sale, they’re required to return sale profits to the former, rightful owners. That would end the incentive for counties to foreclose, and it would be conducive to the same mercy Pembina County eventually chose to show the Juhls.

Kudos to North Dakota’s political leaders for choosing a different course that respects and protects homeowners’ rights. Governor Doug Burgum’s signing of the new law last month brings an end to the unnecessary and unconstitutional practice of taking more than it is owed.

It goes without saying that people have a responsibility to pay their taxes, and government can impose reasonable consequences on delinquent taxpayers. But at the same time, government should protect private property, not enable theft or excessive punishments. A debt is a debt, but taking more than what is owed is theft.

With North Dakota joining the roster of states where home equity is now a thing of the past, it’s only a matter of time before others are likely to follow, and we can end these abusive foreclosures once and for all.