Tax Lien Certificate Sales in DC
Tax lien certificate sales pose many questions and potential problems for condominium associations in the District of Columbia. They can strip an Association of all its liens on a property, or act as tool to remove a chronically delinquent owner or even net the Association a substantial profit. As such, it is in the best interest of all Associations to monitor tax lien certificate sales and be cognizant of their rights and options.
In the District of Columbia, if a home- or unit-owner fails to pay his taxes for any given year, the Office of Tax and Revenue (the OTR) may record a tax lien against their property to secure the debt for the outstanding taxes. These liens remain on the property until the owner pays off the tax liens in full. If the owner continues to fail to pay the taxes after the lien is recorded, then the Office of Tax and Revenue may initiate a process that can result in the foreclosure and sale of the property.
By law, the OTR has the authority to auction off tax liens in an effort to collect delinquent taxes. These “tax lien certificate sales” are held once a year. As with any other auction, these sales are advertised, and any interested bidder may attend the auction, bid and potentially purchase a tax lien certificate.
Once the tax lien is sold, the purchaser obtains certain rights to pursue the delinquent taxes, namely the authority to foreclose on the unit. The foreclosure process under a tax lien, though, is very different from a conventional condominium lien foreclosure. The main difference is that the purchaser of the tax lien is not foreclosing by selling the property at auction in satisfaction of the outstanding liens. Rather, they are foreclosing on the rights of all parties with an interest in the property. This means that they are attempting to extinguish all the other liens and deeds of trust secured by the property and obtain fee simple ownership, meaning they would own the property outright.
In order to foreclose on a tax lien, the purchaser must first give notice to all interested parties, including the owner, first trust holder and other parties with a lien on the property, such as an Association. The notice informs the parties that the tax lien certificate has been sold; that they have a right of redemption to pay the delinquent taxes and costs, including attorney fees; and that if they do not act on their right of redemption, a proceeding to foreclose on the property may be initiated. Often times, the first trust holder will act on the right of redemption and pay the delinquent taxes and costs to avoid losing their sizeable interest in the property.
If no party acts on the right of redemption within six months of the tax lien sale, then the tax lien purchaser will have the right to file a lawsuit to foreclose on the right of redemption. The purpose of the lawsuit would be to extinguish the rights other parties have in the property, as mentioned above, and obtain fee simple ownership of the property. In laymen’s terms, the tax lien purchaser becomes the owner of the property, the prior owner is evicted, and the deed of trust and all other liens, including the Association’s, are removed. As such, when tax liens on a property located in an Association are listed for auction by the Office of Tax and Revenue, the Association must evaluate the situation to determine whether it makes sense to bid on and buy the lien and/or act on the right of redemption to stop a tax lien foreclosure.
When to Purchase a Tax Lien at the OTR Auction
An Association should carefully weigh its options when deciding whether or not to purchase a tax lien. There are instances when it could provide great benefits, particularly when it is unlikely anyone else will exercise their right of redemption, but in other situations it may not be worth the effort. In most tax lien sales, the first trust holder will exercise the right of redemption to avoid having its substantial interest in the property, the mortgage, stripped. When this happens, the tax lien purchaser does not realize any gain from the purchase of the tax lien. Instead, they have to go through all the steps of purchasing the tax lien and even filing a lawsuit, but only break even at the end of the day. Accordingly, when a property is encumbered by a mortgage, it usually is not worth purchasing the tax lien.
However, when a property is not encumbered by a mortgage, there is a much higher likelihood that no one will exercise their right of redemption and the Association could feasibly obtain fee simple ownership of the property. This would allow the Association to then sell the property in a regular sale and net a substantial sum. It could also help remove a chronically delinquent owner and replace them with one who pays regularly.
When to Exercise the Right of Redemption After Someone Else Buys the Lien
If an Association does not purchase a tax lien certificate at auction and no other party, such as the first trust holder, exercises the right of redemption, it will have to make a determination of whether or not to exercise the right itself. There is really only one instance when exercising the right of redemption would benefit an Association, which is when there is equity in the property.
As a starting point, if there is no equity in the property, then there is no sense in exercising the right of redemption because it is unlikely that the Association’s liens are worth anything since the property is already fully encumbered by the first trust. In this situation, it is best to let the property be foreclosed upon and secure a new owner who will pay the assessments regularly.
When there is equity in the property, an Association may want to consider exercising its right of redemption. In this situation, the Association could feasibly stop the tax lien foreclosure and initiate a condominium lien foreclosure sale of its own to recognize a gain through the equity in the property. This way, the Association can use the equity in the property to satisfy its liens instead of having them stripped. It is important to note that if the Association can collect against the owner personally, then it might be easier to allow the tax lien foreclosure to take place. That way, it could file a simple collection action against the owner personally to recover the delinquency and avoid the heavy lifting of conducting a foreclosure.
At the end of the day, tax lien certificate sales can greatly affect an Association’s rights. They can strip them of all their interest in a property, but can also be a tool to remedy a situation with a chronically delinquent owner or to net the Association a substantial sum. As such, it is in every Association’s benefit to be aware of tax lien certificate auctions and foreclosures that may be taking place and to be cognizant of their rights throughout the process.