A record number of people turned out this week to bid for real estate being sold for back taxes at a District government auction, but officials said less than 5 percent of these people will actually become owners of the properties they pay for.
The current owners of the 3,800 properties being auctioned still have two years to pay their back taxes, said Jeffrey Humber, acting director of the D.C. department of finance and revenue. He said more than 95 percent of these people, who get to keep their properties for the two-year span, will pay their taxes before their time is up. The percentage for owner-occupied real estate is even higher -- more than 99 percent, he said.
Despite these high percentages, the more than 200 people who turned up at Wednesday's opening session -- the auction ran through yesterday at the District's Municipal Building at 300 Indiana Ave. NW -- said it's worth the risk for a chance to get prime real estate at a bargain basement price.
Finding out what prime parcels are available was a lot easier this year because the list published by the city used street addresses rather than the traditional lot and square numbers.
D.C. officials attributed the record turnout to this plain-language advertising.
Some real estate brokers, however, charged the move drew a crowd of novice investors who do not really understand the financial ramifications of bidding on the properties.
Humber said the District auctions a property at a starting price that equals the amount of taxes owed for last year on that property. Whatever amount is bid over that starting price is called "surplus" by the D.C. government and subject to different payback rules.
The successful bidder receives a certificate and, after two years, has the right to go to court and be named legal owner of the property.
In that two-year interim, however, the current owner retains the deed to the real estate and can continue to live there, work there or rent it out. If the current owner pays the back taxes on the real estate before the two years are up, the bidder receives a refund of the purchase price plus 1 percent interest per month. But the bidder does not receive interest payments on the "surplus" paid, although the money is refunded.
Humber also said it takes months for bidders to receive their refunds because of bureaucratic snags in the issuing of checks and said the government does not pay interest during those months of red tape.
"It's hard to say if it's worth it to come to bid," he said. "For those who strike it lucky, the savings can be considerable with today's real estate prices."
Downstairs in Room 3016, that is just what the bidders were counting on. Clutching lists of properties and their bidding cards, they sat on the edges of their seats while auctioneers reeled off a litany of addresses and prices.
Barbara Francis bid successfully on a Georgetown house, paying $1,542 in back taxes and $350 in surplus. It was her first real estate auction but she said she consulted a lawyer before deciding to take the plunge.
"I think it's worth the chance," she said. "We consider it an investment at 12 percent interest" -- 1 percent a month.
Behind her, Arlington resident John Kennedy was not so sure. Kennedy, 34, said he has successfully bid for hundreds of properties in previous auctions but has managed to actually become the owner of only a handful.
"It wasn't really worth the effort," he said. "You don't realize the court costs, the accumulation of years of back taxes, the time, the hassles.
"I've never seen this many people at an auction," said the self-described veteran. "And I have a feeling that most of the people here really don't have any idea what they're getting into."
Humber said the legal technicalities of the auction were explained in writing to each bidder and in an oral presentation before the start of the auction.
"I don't know if this is a violation of truth in advertising," said real estate broker and author R. J. Turner. "But there are a lot of little prople out there this year thinking they're going to walk away with prime real estate and they've got another think coming. They saw that nice house down the street listed in the auction notice and they think they're going to buy it for a few thousand dollars."
Turner said the D.C. government listed properties by addresses in an effort to get a larger turnout at the auction.
Humber does not deny the charge. "We wanted to give everybody a crack," he said.
Turner also said many are bidding on real estate owned by people who are purposely not paying their taxes this year but intend to pay them within the next two years. He said the penalties for late taxes imposed by the District government average 15 percent a year, below the rate at which many people are able to borrow money these days.
"They would rather invest their tax money and use it like a loan from the D.C. government at 15 percent interest," said Turner, who said he has purposely not paid taxes on several Capitol Hill properties he owns.
Again, Humber agreed this is a common practice. "I don't think it's particularly widespread but it is a problem every government faces when the prime rate is high," he said. "We've never thought of changing our penalties because interest rates fluctuate to widely."
Back in Room 3016, the auctioning went to 4 p.m. in a tense atmosphere punctuated by confusion.
"What happened to the Dean Avenue property? I was bidding on that," shouted a woman from the back of the room, interrupting the auctioneer.
"It went to number 61. Does your [bidding] card say 61?" he asked.
"Then you got it," he told her, as the room errupted in laughter.