By Harvey S. Jacobs October 13, 2010
With residential foreclosure moratoriums leading the news, one special type of foreclosure is going full speed ahead: D.C. tax-sale foreclosures. The District of Columbia and neighboring jurisdictions hold annual tax-sale auctions in order to collect delinquent real property taxes.
The underlying rationale for these auctions is often overlooked by excited buyers, investors , speculators and distressed property owners. Despite what many participants believe, the auctions are not designed to be lucrative real estate investments or public humiliations for dilatory taxpayers. They are designed to collect taxes, nothing more and nothing less. The concept of caveat emptor (let the buyer beware) prevails.
The District’s auction was held the third week of September. By its conclusion, the District had collected more than $11.2 million in tax revenue; 1,248 District property owners were on their way to losing title to their properties; and 66 successful bidders were beginning their odyssey through the D.C. tax-sale foreclosure process.
There are several myths that surround this process that I will try to debunk:
Myth 1: A bidder can walk into the auction, bid a few thousand dollars and walk out the owner of his or her dream home.
Fact: Historically, 95 percent of all properties sold at these auctions are redeemed by the owner or abandoned by the bidder before a tax-sale deed is issued. It is not uncommon for tax-sale foreclosure cases to drag on for two or three years after the auction and to cost many thousands of dollars in legal fees, court filing fees, process-serving and publication fees and other costs. The most attractive properties are purchased by professional investors with millions of dollars to invest who have researched every viable piece of property on the auction block. Thus, the odds of picking up a livable home on the cheap are not very good.
Myth 2: Successful bidders earn 18 percent interest a year on their investments.
Fact: Although it is true that if the property is redeemed by the owner, the investor receives 18 percent interest per year, that amount applies only to the tax portion of the successful bid. However, for the vast majority of properties auctioned, the successful bidder must bid a substantial surplus above the delinquent tax amount in order to be the winning bidder. Bidders receive no interest on that surplus. In effect, this represents an interest-free loan to the District. This year, the District collected a total surplus exceeding $2.1 million.
It is typical for bidders to bid more than the delinquent tax amount. So, for example, if the underlying delinquent tax is $800 (the smallest amount auctioned off) and the bidder bid a surplus of $4,000, the annual yield on the $4,800 investment is not 18 percent, but a mere 3 percent. This yield is further reduced in practice because the District takes six to eight weeks to mail out the redemption amount.
Myth 3: Once a property is sold at the tax-sale auction, the owner has lost it.
Fact: If property owners fail to redeem their properties in strict compliance with the redemption regulations, they can lose their properties. However, there are many opportunities over a period of many months, even years, for owners to redeem their properties after the auction.
There is no hard-and-fast deadline for redemption. The property can be redeemed at any time until the D.C. Superior Court issues an order of foreclosure in a tax-sale foreclosure lawsuit. To redeem the property, the owner must pay the District all outstanding taxes, penalties, interest, assessments, fees, costs and expenses, which may include real property tax bills, special assessments, nuisance tax bills, water and sewer bills and any other bill or statement issued by any taxing agency. The redeeming owner must also reimburse the tax- sale certificate holder for all statutorily recoverable fees and costs, which may include reasonable attorney’s fees. Once these payments have been made, the property owner should ask the District for a certificate of redemption, which should then be recorded in the Recorder of Deeds office.
Myth 4: If I am a successful bidder at the tax-sale auction and I received my tax-sale certificate from the District, I own the property.
Fact: Before you can convert a tax-sale certificate into a tax-sale deed from the District, you must successfully prosecute a tax-sale foreclosure lawsuit, which requires that you comply with all manner of due-process protections. Without a deed, you cannot enter the property or take any action as owner, such as collecting rent from existing tenants. As part of the foreclosure lawsuit, you must sue the owner of record and all parties having any legal or equitable rights in the property, including lenders, trustees, the mayor and the District of Columbia. To sue these parties, you must have all of them personally served with the lawsuit paperwork unless the court authorizes some other type of service of process. You must also mail a copy of the lawsuit to anyone else who might have an interest in the property. You must have the lawsuit paperwork physically posted at the property and provide the court with clear photographic evidence in addition to the sworn affidavit of the person posting the paperwork. You must file suit from six to 12 months after the auction.
Assuming that this thicket of due-process protections does not result in the owner showing up and redeeming the property, you can obtain a judgment foreclosing all parties’ rights of redemption. You must serve this order on the District Office of Tax and Revenue and request and pay a tax-sale bill for all outstanding taxes and request a tax-sale deed.
The final step in this odyssey is obtaining the tax-sale deed and recording it with the Recorder of Deeds. Once recorded, then and only then, can you move into your “home sweet home.”
As you can see, the tax-sale auction process is not for the faint-of-heart or the impatient.
Harvey S. Jacobs is a real estate lawyer with Jacobs & Associates Attorneys at Law in Rockville. He is an active real estate investor, developer, landlord, settlement attorney, lender and Realtor. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. Contact Jacobs at (301) 417-4144, firstname.lastname@example.org or email@example.com.