February 3, 2011 at 1:00 am

Detroit area investor gains from others' real estate mistakes

Man thought he had clear title to home, but loses it to Kelly

Derrick Johnson, pictured at right, spent his life savings renovating this house he bought in 2003. He later found out Michael G. Kelly owned an interest in the property, and Kelly sued to gain control. (Max Ortiz / The Detroit News)

Detroit —Derrick Johnson poured his life savings, $40,000, into rehabbing a bungalow on the east side. When he was done, most everything inside was renovated or new.

Seven years later, Johnson can't bear to look at the now burned-out house. And he blames Michael G. Kelly.

Johnson thought he bought the house for $5,000 in June 2003, but eight months later Kelly sued and gained title to the house. Kelly's advantage: He bought an interest in the house in 2001 by paying off $144 in delinquent taxes.

By the time Johnson realized he had bought only a limited ownership in the house, it was too late.

"It just made me sick when I go and drive by," said Johnson, who did not have title insurance. "I put all my money in the world into that house."

It's just one of hundreds of lawsuits involving Kelly and his companies. One company affiliated with the Grosse Pointe Woods investor, Detroit Leasing, was a party in more than 200 since the early 1990s.

Most were filed by Kelly or his companies to gain control of properties that he bought interest in at tax auctions.

He's battled heavy hitters — including the owners of the Packard Plant, Perfecting Church and a prominent strip mall developer — as well as folks like Johnson.

Some have alleged Kelly's firms acquired their land after it was erroneously put up for sale by the county. Others accused Kelly of taking advantage of laws that didn't require owners of tax liens to file them with the county.

At least three suits allege that property owners and their mortgage companies were never aware Kelly had an interest in their properties until he moved to foreclose on them — and in two cases they claim he never properly notified them that he had begun proceedings.

"We cannot take property," Kelly said. "We buy property at the tax auction, which follows a long, statutory process. If anyone has a complaint, they need to lodge it with the Michigan Legislature and then with the county — these are the people who can change the system."

Johnson said he immediately started fixing up the property after the purchase and hoped to start his own rehab business. Johnson said he believed he had clear title to the house when he filed his quit claim deed about nine months later with Wayne County.

That's a far longer wait than real-estate experts recommend, and the novice investor didn't know that a quit claim deed is no guarantee of ownership. Nor did Johnson have a clue that Kelly had a stake in the house until the investor showed up in the backyard and said he wanted to "survey his property."

Kelly said he followed the law, a judge agreed and that Johnson turned down Kelly's attempts to sell the house back to him. Kelly said he made attempts to notify anyone with an interest in the house.

"Nobody likes to see anybody thrown out of their house," Kelly said. "We are tagged as the mean people, the bad people."

Johnson petitioned to reopen the case in 2005 — he lost. Three years later, the county foreclosed on the house for unpaid taxes after Kelly's company sold it to a new owner, according to county records. Kelly chose not to keep the house because its taxes were higher than its worth, according to his attorney, Nicholas LeFevre.

Sometime during those three years, the house caught fire and is now a burned-out shell.

It wasn't the only time Kelly bought property through buying old taxes.

Much of his portfolio was built up that way because of a law that allowed investors to acquire interests in properties by paying unpaid taxes.

The Legislature phased out tax lien sales in 2002, in part because it caused confusion.

Kelly also has been in court after buying parcels that were accidentally sold at Wayne County's tax foreclosure auction. Often, the errors involve properties that comprise several parcels.

Through paperwork errors by the treasurer's office, one parcel is separated, prompting separate tax bills that can get overlooked until foreclosure begins.

That's what happened when Perfecting Church sued to recover part of its parking lot that Kelly and his partner Matt Tatarian bought at a tax sale.

The case went to the Michigan Supreme Court and the court in 2007 ruled in the church's favor . It was a similar story with Djelosh Juncaj, who had to fight Kelly's company to recover several parcels on East Warren near Conner that Juncaj has owned since 1984.

The county treasurer accidently sold it at the auction for unpaid taxes, and Juncaj had to go to the Michigan Court of Appeals to get them back.

"He knew what he was buying," said Juncaj, a strip mall developer. "Everybody is after the mighty buck."

LeFevre said Juncaj's "battle is not really against us, good-faith buyers at the tax auction, but against the county for errors it allegedly made."

Treasury officials acknowledged errors are made at the annual sale but said they're working to fix them.

"When there is a mistake, we step up and try to do what we can to correct it," said Terrance Keith, who served as Wayne County's deputy treasurer until Dec. 31.

In 2008, Wayne County foreclosed on the house, which had been sold to ... (Max Ortiz / The Detroit News)