Michigan Tax Foreclosure After Rafaeli: Why the 2020 Surplus Ruling Reshaped Investor Strategy

The $24,500 Property That Changed Michigan Tax Foreclosure Law

In 2011, Uri Rafaeli owed $8.41 in unpaid property taxes on a rental property in Southfield, Oakland County. A payment error — he underpaid his 2011 tax bill by less than nine dollars — cascaded into penalties and interest. By 2014, Oakland County foreclosed on the property through Michigan's General Property Tax Act (GPTA) process and sold it at auction for $24,500. Rafaeli received nothing. Oakland County kept the entire surplus — $24,491.59 above what he owed — under the theory that Michigan's tax foreclosure statute extinguished all prior ownership interests, including any equity.

Rafaeli sued. In July 2020, the Michigan Supreme Court ruled in Rafaeli, LLC v. Oakland County that this practice constituted an unconstitutional taking under both the Michigan and U.S. Constitutions. The Court held that former property owners retain a vested property right in surplus proceeds — and counties cannot simply pocket the difference between the sale price and the tax debt.

For investors who buy at Michigan tax foreclosure auctions, Rafaeli didn't just change the payout rules. It fundamentally altered the title landscape, created new procedural requirements, and introduced risks that didn't exist before July 2020. If you're bidding in Wayne, Oakland, Genesee, or any of Michigan's 83 counties, you need to understand exactly what changed — and what can still go wrong.

How Michigan Tax Foreclosure Worked Before Rafaeli

Under the General Property Tax Act, MCL 211.78 et seq., Michigan counties follow a multi-year process to foreclose on tax-delinquent properties. The timeline runs roughly as follows:

• Year 1: Property taxes become delinquent on March 1 of the year following the tax year.
• Year 2: On March 1, unpaid taxes are returned to the county treasurer. Interest and fees begin accruing.
• Year 3: By March 31, the county treasurer must petition the circuit court to foreclose on properties with taxes delinquent for two or more years.
• Foreclosure Hearing: The circuit court enters a judgment of foreclosure, typically in March. Former owners have until the "show cause" hearing — and in some cases through the date of judgment — to redeem by paying all taxes, interest, and fees.
• Auction: Properties that aren't redeemed are sold at public auction, typically in September or October.

Before Rafaeli, the critical provision was MCL 211.78m, which stated that when a property sold at tax auction for more than the minimum bid (the total taxes, interest, penalties, and fees owed), the surplus went to the foreclosing governmental unit — not the former owner. The theory was that the foreclosure judgment extinguished all property interests, including any equity. Former owners lost everything the moment the judgment became final.

This created a perverse dynamic. A homeowner who owed $3,000 in back taxes might lose a property worth $150,000, with the county pocketing the entire sale price. Investors, meanwhile, could bid with confidence that they were acquiring clear title — no prior owner had any residual claim to the property or proceeds.

What the Michigan Supreme Court Actually Held

The Rafaeli decision, issued July 17, 2020, turned on Article X, Section 2 of the Michigan Constitution, which prohibits taking private property for public use without just compensation. The Court held that surplus equity in a tax-foreclosed property is a property right — and seizing it without compensation violates the Takings Clause.

Critically, the Court didn't invalidate tax foreclosure itself. Counties can still foreclose, still auction properties, and still collect what they're owed. What they can't do is retain proceeds exceeding the tax debt. That surplus belongs to the former owner.

The Court explicitly rejected Oakland County's argument that the GPTA's statutory scheme eliminated any property interest in surplus proceeds. Justice Markman, writing for the majority, noted that the right to equity in property has deep roots in common law and cannot be legislated away without constitutional consequence.

The ruling applied retroactively, meaning former owners whose properties were sold before July 2020 could potentially claim surplus funds — a prospect that sent county treasurers scrambling to assess their liability exposure.

The Legislative Response: 2020 PA 256 and the New Surplus Framework

Within months of Rafaeli, the Michigan Legislature amended the GPTA through 2020 Public Act 256, effective December 22, 2020. The amended statute, codified at MCL 211.78t, establishes a formal process for distributing surplus proceeds after tax foreclosure sales.

Under the current framework:

1. Surplus Calculation: After a property sells at auction, the county treasurer calculates the surplus by subtracting the minimum bid (taxes, interest, penalties, fees, and sale costs) from the sale price.

2. Notice to Former Owners: The treasurer must notify former owners — and any other parties with a recorded interest — that surplus funds may be available. Notice must be sent within 30 days of the sale.

3. Claim Filing: Former owners have two years from the date of sale to file a claim for surplus proceeds. Claims are filed with the county treasurer.

4. Priority of Claims: If multiple parties claim surplus funds, the statute establishes a priority order. The former owner's interest comes after any superior liens that were extinguished by the foreclosure — which is where things get complicated.

5. Escheat: Unclaimed surplus proceeds eventually escheat to the county, but only after the two-year claim period expires and all proper notices have been sent.

Why This Creates New Title Risks for Auction Investors

Before Rafaeli, Michigan tax deed sales were among the cleanest in the country from a title perspective. The foreclosure judgment wiped out virtually all prior interests — mortgages, liens, ownership claims. Investors acquired fee simple title, full stop.

The Rafaeli framework doesn't change the title conveyance itself. A tax deed under MCL 211.78k still conveys title free of most prior encumbrances. But the existence of a surplus claims process creates several complications:

Surplus Disputes Can Cloud Title Indirectly

When former owners or lienholders dispute surplus distributions, they sometimes challenge the underlying foreclosure process itself. If a claimant can demonstrate procedural defects — improper notice, incorrect minimum bid calculation, failure to properly serve interested parties — they may move to set aside the foreclosure judgment entirely.

This happened in Bowles v. Oakman, a 2022 Michigan Court of Appeals case in which a former owner who was denied surplus proceeds challenged the constitutional adequacy of the foreclosure notice she received. While she ultimately lost, the litigation created a title cloud for two years.

Redemption Period Complexity

Michigan's tax foreclosure process includes multiple opportunities for owners to redeem. Under MCL 211.78g, owners can pay delinquent taxes through March 31 of the third year (the last day before the foreclosure petition is filed). Under MCL 211.78j, redemption remains possible until the circuit court enters the foreclosure judgment.

Post-Rafaeli, some former owners have argued that the constitutional right to surplus proceeds implies a corresponding right to enhanced redemption notice. While courts haven't broadly accepted this argument, it creates litigation risk. An investor who purchases a property in October 2024 might face a 2025 lawsuit from a former owner claiming inadequate notice of redemption rights.

The "Show Cause" Notice Problem

MCL 211.78i requires counties to provide notice of the show cause hearing — the proceeding at which the court considers objections to foreclosure. Notice must be sent by certified mail and posted on the property. If the county can't locate the owner, it must publish notice in a newspaper.

In practice, notice failures happen. The former owner moved. The address on file was outdated. The certified mail was signed by someone other than the owner. Post-Rafaeli, these notice defects carry more weight because former owners now have a constitutionally protected interest (their surplus equity) at stake.

In Genesee County, several 2021 and 2022 foreclosures faced challenges after former owners claimed they never received proper show cause notice. While most of these challenges were resolved short of setting aside the sale, they created months of title uncertainty for auction buyers.

County-Specific Variations: Wayne, Oakland, and Beyond

Michigan has 83 counties, and each treasurer administers tax foreclosure with some procedural variation. While the GPTA provides the statutory framework, counties differ in their auction procedures, surplus distribution timelines, and documentation practices.

Wayne County — home to Detroit — conducts the largest tax foreclosure auctions in the state. The Wayne County Treasurer's Office processes thousands of parcels annually. Post-Rafaeli, Wayne County implemented an online surplus claim system, but the volume of claims has created backlogs. Investors buying Wayne County tax deeds should expect that former owners may file surplus claims months after the auction — and should monitor for any litigation filed against the county that names specific properties.

Oakland County — where the Rafaeli case originated — has been particularly careful about notice compliance since 2020. The county now documents its notice efforts exhaustively, creating a paper trail that reduces (but doesn't eliminate) the risk of successful challenges. Oakland County properties acquired at tax auction generally have cleaner title chains than Wayne County properties, but investors pay a premium at auction reflecting this.

Kent County, covering Grand Rapids, uses a different auction platform and timeline than Wayne or Oakland. Kent County's surplus distribution process runs efficiently, but the county has faced several challenges from former owners disputing the calculation of surplus amounts — arguing that auction fees were improperly deducted before distributing remaining funds.

The Dollar-Amount Scenario: What Happened in Macomb County

An investor purchased a property at the September 2022 Macomb County tax foreclosure auction for $89,000. The minimum bid was $12,340, representing accumulated taxes, interest, and fees. The investor planned to renovate and flip the property, budgeting $35,000 in repairs.

Six months after the auction, the former owner — who had inherited the property and hadn't updated the address on file — filed a surplus claim for $76,660. The county began processing the claim. But the former owner also retained counsel, who filed a motion in Macomb County Circuit Court to set aside the foreclosure judgment, arguing that the county's notice to the inherited owner was constitutionally deficient.

The motion wasn't frivolous. The former owner produced evidence that the notice was mailed to the deceased original owner at an address that had been vacant for two years. She had filed the inheritance paperwork with the county, but the tax records hadn't been updated.

The litigation took 14 months to resolve. The court ultimately denied the motion to set aside, holding that the county's notice efforts were reasonable under the circumstances. But during those 14 months, the investor couldn't sell the property — no title company would insure it with pending litigation challenging the foreclosure.

The investor's total carrying costs during the dispute: $23,400 in taxes, insurance, and lost opportunity cost. The renovation sat half-completed because the investor stopped work pending resolution.

This scenario illustrates the new reality of Michigan tax foreclosure investing. The title you receive is nominally clear, but former owners have a constitutional right to surplus proceeds — and an aggressive claimant may challenge the foreclosure itself as a vehicle for recovering those funds.

Mechanics' Liens, Mortgages, and Other Encumbrances: What Survives?

The Rafaeli decision addressed surplus proceeds, not lien priority. Under MCL 211.78k, a tax deed still conveys title free and clear of most prior encumbrances. This includes:

• Mortgages (first, second, and subordinate)
• Mechanics' liens under MCL 570.1101 et seq.
• Judgment liens
• HOA liens (with some exceptions discussed below)
• Most easements by implication

What survives a Michigan tax foreclosure:

• Recorded easements for utilities and access (MCL 211.78k(5))
• Restrictions and covenants that run with the land
• Certain environmental liens under federal law (e.g., EPA Superfund liens)
• Interests of the federal government, including IRS liens (which have their own redemption period under 26 U.S.C. § 7425)

The IRS lien issue is particularly important. If the IRS has a recorded lien on the property, the federal government has 120 days from the tax sale to redeem. During that period, the investor's title is defeasible. Post-Rafaeli, this hasn't changed — but investors sometimes conflate surplus rights with lien survival rights, leading to confusion.

What TitlePin Would Have Shown

A TitlePin report run before the Macomb County auction would have flagged several issues that standard auction due diligence missed:

Ownership Chain Anomaly: TitlePin's title analysis would have identified that the property's recorded owner was deceased, with probate records indicating a successor heir. This immediately signals a notice risk — counties often mail foreclosure notices to the last recorded owner, not the heir.

Prior Litigation Flag: TitlePin monitors county court records for proceedings involving specific parcels. In this case, there was no prior litigation, but similar Wayne County properties have shown probate disputes that directly impacted foreclosure validity.

Federal Lien Search: TitlePin includes federal lien searches as standard. While this Macomb property had no IRS liens, a 2021 Oakland County property TitlePin analyzed had an unreleased federal tax lien that would have given the IRS redemption rights — something the county auction listing didn't disclose.

Surplus Exposure Estimate: TitlePin's valuation module cross-references sale price against assessed value and comparable sales. A report would have shown that the $89,000 purchase price significantly exceeded the minimum bid, flagging potential surplus claim exposure and associated litigation risk.

The point isn't that TitlePin would have prevented the investor from bidding. The point is that TitlePin would have identified the specific risks — deceased owner, likely notice complications, high surplus exposure — allowing the investor to price in the litigation risk or walk away.

The Retroactivity Problem: Pre-2020 Surplus Claims

The Rafaeli ruling applied retroactively, meaning former owners whose properties were foreclosed before July 2020 could file surplus claims. The Legislature, in 2020 PA 256, established a process for these historical claims, with a filing deadline that has since passed for most pre-2020 sales.

However, investors who purchased tax-foreclosed properties between 2017 and 2020 may still face litigation. Some former owners have filed federal civil rights suits under 42 U.S.C. § 1983, alleging constitutional violations in the foreclosure process. These suits don't directly attack the investor's title — they seek monetary damages from the county — but they can create discovery obligations and cloud the property's history.

In O'Connor v. Washtenaw County, a former owner sued the county for surplus proceeds taken in a 2019 sale. The investor who purchased the property wasn't named as a defendant but was subpoenaed for auction records and property condition information. The distraction and legal costs were meaningful, even though the investor's title was never directly at risk.

Current Best Practices for Michigan Tax Foreclosure Buyers

Given the post-Rafaeli landscape, investors buying at Michigan tax auctions should implement these protocols:

Verify Notice Compliance: Request the county's notice file for any property you're considering. This should include copies of certified mail receipts, affidavits of posting, and newspaper publication affidavits. If the file is thin or missing documentation, the property carries elevated challenge risk.

Research Ownership History: Don't rely on county auction listings to identify the true owner. Run your own title search or use a service like TitlePin to identify deceased owners, trust holdings, or LLCs with murky principals. Any ownership complexity increases notice failure risk.

Calculate Surplus Exposure: If you're bidding significantly above the minimum bid, recognize that you're creating a surplus that a former owner may claim — and may litigate over. The larger the surplus, the greater the incentive for a former owner to challenge the foreclosure process.

Budget for Quiet Title: Even if you receive a tax deed, consider budgeting for a quiet title action under MCL 600.2932. A court judgment confirming your title is more marketable than a tax deed alone, particularly for properties with complicated ownership histories.

Monitor Court Filings: For 24 months after your purchase, monitor the relevant circuit court for any filings naming your property or challenging the foreclosure batch that included your parcel. A challenge to one property in a batch foreclosure can sometimes create procedural issues for other properties in the same judgment.

Key Takeaways

• Rafaeli v. Oakland County (2020) held that former owners have a constitutional right to surplus proceeds from tax foreclosure sales, ending Michigan counties' practice of retaining all auction proceeds.
• The amended GPTA (MCL 211.78t) establishes a two-year claim period for former owners to seek surplus funds, but disputes over surplus distribution can spawn collateral litigation challenging the foreclosure itself.
• Tax deed title remains nominally clear under MCL 211.78k, but notice defects in the foreclosure process — particularly involving deceased owners or outdated addresses — create grounds for former owners to move to set aside the judgment.
• Investors should calculate surplus exposure before bidding and recognize that large surpluses incentivize litigation from former owners.
• County-specific practices vary significantly; Wayne County's volume creates backlogs, while Oakland County's post-Rafaeli documentation practices are more rigorous.

Sources

• Rafaeli, LLC v. Oakland County, 505 Mich. 429, 952 N.W.2d 434 (2020)
• Michigan General Property Tax Act, MCL 211.78 et seq.
• 2020 Public Act 256, amending MCL 211.78t (surplus distribution procedures)
• MCL 211.78k (effect of tax deed on prior encumbrances)
• MCL 211.78i (show cause hearing notice requirements)
• MCL 211.78g and 211.78j (redemption periods)
• 26 U.S.C. § 7425 (federal tax lien redemption rights)
• Wayne County Treasurer's Office, Tax Foreclosure Procedures (https://www.waynecounty.com/elected/treasurer/)
• Oakland County Treasurer's Office, Surplus Proceeds Information (https://www.oakgov.com/treasurer/)
• Tyler v. Hennepin County, 598 U.S. ___ (2023) (U.S. Supreme Court decision extending Rafaeli principles nationally)