One of the best things when you invest in tax liens in the District of Columbia is that the certificates earn 1.5% per month or 18% annually. They can include unpaid property taxes, water and sewer bills and special assessments that are delinquent from the previous year. However, there is a component of the sale which could lower your returns--DC has an overbid that does not earn interest.
What is an overbid?
In order to separate bidders competitively in an auction, jurisdictions such as Washington DC add an overbid component to their auctions. This overbid does not earn interest and lowers your overall yield. The amount is held by the district (think--interest free loan to DC) until the property redeems and the overbid is then returned to the tax lien holder along with his investment (and interest earned on that investment).
During the auction, the starting bid begins with the amount of the delinquent taxes. Bidders then raise the dollar bid until a the winner with the highest dollar bid is left. The difference between the initial bid and the final bid is your overbid.
Remember, this overbid does not earn interest! Back when the market was very competitive, the overbid could by 50%, 60% or more of the value of the underlying property. Thus, you may only earn a very nominal amount on your invested dollar.
Why Would Anyone Bid Over the Amount Due In Taxes?
Large overbids can and do get bid at the DC tax auction. This often happens because the investor now gets the right to buy subsequent taxes in the next few months and onward at a rate of 18%. Taxes in DC become due twice a year in March and September giving the tax lien investor more opportunities to add to their investment and this time at 18% fully.
Furthermore, if the property is not redeemed by the taxpayer or interested party, the amount of the overbid is used to pay any outstanding taxes, liens and assessments. This can be good and bad--good because you won't have many out-of-pocket costs after you get the deed and bad because you have no control of what municipal liens and fines are put on the property before it goes to deed.
How do I get a deed to a DC property by buying tax liens?
The District of Columbia is a strict foreclosure jurisdiction. This means that you need to take your tax lien through the courts just as you would a mortgage foreclosure.
The tax sale investor can start foreclosure six months from the day of the DC delinquent tax auction. You'll need to hire a DC tax lien attorney to help you. Although the DC tax attorney may charge you an upfront cost, his or her expenses must be paid by the taxpayer when they redeem the lien so long as the charges are within reason.
The only way you won't be paid is if your lien goes to judgment and you receive the deed. One caveat to this is that you won't be reimbursed for any legal expenses (including title work) within four months of the tax auction.
How long does it take to foreclose on my tax lien in D.C.?
The DC court system and its judges are in no rush to see their taxpayers lose their property to a tax lien investor. If you're lucky, no one will contest your case and there will be no bankruptcies, probate or other delays. In the perfect world, the entire process should only take nine months or less after you file. However, if anyone comes forward to contest the case or throw it into bankruptcy, it could take years.
Jon is an avid real estate investor and tax lien investing guru. You can find him on his expert website about Tax Lien Investing or find his best articles on his "best of" page about how to invest in tax liens.
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