Dead Body in a bathtub lottery
In yesterday's Washington Post there was the District of Columbia Notice of Real Property Tax Sale (J section). It lists the properties for which taxes or other things owed to the city have not been paid and their liens are up for auction. As you may remember the Tax auction was how Edmund A. Wilson lost his house. But he had left this earthly plane (or is it plain?) without notice and material things like houses probably meant little to him afterwards. Yes, he was the dead body, found in the bathtub, when the new owners took possession.The tax sale is from July 10 till all the tax liens have been auctioned off. Most people, particularly in this Real Estate market, like ninety someodd percent, pay their delinquent taxes or what have you. The tiny percentage of properties where the owners don't pay their taxes are up for foreclosure. The problem with foreclosure is that there might be a huge mortgage on the property or other liabilities, would would need to be paid by the foreclosurer. But sometimes, like the lottery, you win big, and you get a property.
Since more than likely one won't get a property at auction the reason to participate is the interest rate. According to what I could pull out of the tax sale rules (pdf) interest accrues at 1.5% per month. My poor math skills tell me that is 18% a year. Not bad considering my credit union is offering about 4.5% on a 6 month CD. But, that is only on the taxes owed, not the amount you bid over, or that nasty $150 auction fee added to the bidding. Because the auction room includes idiots who believe they will actually get a house with the auction (no just a lien) they tend to bid the properties above an amount that would give back a decent return in interest. But not for all properties, so it is possible to make a little money on the tax sale.
I'm debating about participating this year. I have to see what extra money I have laying around that can be tied up for 6 months. Last year I bid but didn't get anything because the bids went above a decent rate of return (is that the right term?) and I wasn't going to bid just to bid.
Update: I noticed that the DC.Gov doesn't have the list of properties up and there doesn't seem to be an electronic version of it on the Post or Times websites. There are several properties owing the tax man. 1419 and 1421 3rd St are on the list, so is 206 Bates, 1504 1st St, 142 Bates, and many more. Let's say, more than I'd rather list.
posted by Mari @ 23.6.06
10 Comments:
Ok, let's see if I'm doing the math right. I think I got this right.
Let's assume you have $1000 cash to take to the auction, so to speak. The $150 auction fee means that you can only "win" $850.
I think this is what return you'd look at:
Month Amt Rate of Return
0 $850.00 0.00%
1 $862.75 1.50%
2 $875.69 3.02%
3 $888.83 4.57%
4 $902.16 6.14%
5 $915.69 7.73%
6 $929.43 9.34%
7 $943.37 10.98%
8 $957.52 12.65%
9 $971.88 14.34%
10 $986.46 16.05%
11 $1,001.26 17.79%
12 $1,016.28 19.56%
So, in 6 mo's you'd be looking at a 9.34% return. In 12 mo's it'd be 19.56%.
The return would be the same in percentage terms, regardless of "dollars" of back taxes you purchase.
What you want to watch for is when you overbid. No point in going through all that hassle to get the same return as, or less than, a 6 month CD.
trux - you are using 850 as the divisor... a more accurate assessment would be to use 1000 since you are forgoing the 150 bucks (ie: for month one the return is 1.3%) JCH
Ow. Math makes my brain hurt.
No, the magic table I need is how much over an amount (say taxes owed is $500) will make the rate of return equal to or less than 4.5% (apr). Basically, a number to tell me when it is not worth it to keep my hand up for bidding.
There is an enjoyable value of playing the housing lottery, I mean participating in the auction, once you take away the annoyance of cell phone yapping seat hogging humanity, there is the possibly of maybe getting a property below market.
Excellent Post Mari. I have always had a hard time explaining tax sales. I will save your post. I have a couple clients who have made money buying DC Tax liens who hate when the amatures come to the sale.
As a new Shaw (400 block M st) resident I enjoy your site.
-Mike R.
mari - from my calculations, the most that you would want to bid for the $500 delinquency is $2173.56. This includes the 150 auction fee as well as the 1523.56 over the 500 delinquent amount. This will give you an annual return of 4.5% (2.15% for 6 months). One other point to take into account is the foreclosure risk. Taking into account that there is a 90 percent chance of payment and a 10 percent chance of foreclosure... and assuming that you do not recover anything from the foreclosure (ie: it is not worth the time and extra money), the max bid would then be 1956.22 which would be compensation for the foreclosure risk. JCH
Mari, forget that. DC is a nightmare, you don't want to own a tax lien here. If you really are interested in that kind of thing, there is a great book called "The 16% Percent Solution" that has the procedures, state by state, for tax liens auctions that pay 16% or more. Some have weird wrinkles that make them unattractive (like giving the owner a right to buy back the property within a year).
For a decent return, I recommended American Home Mortgage (AHM) on my Ninja Stock Picks. It's got close to a 12% dividend. (but I wouldn't recommend throwing more than, say 5%-10% of your assets in any one stock.
jch, can you explain the math to me? I'm trying to figure out the tax sale.
seems like paying roughly $2100 for a $500 tax bill at 1.5%/mo (compounded monthly) is too high. you only earn on interest on the $500 right? so, after overpaying the $500 by roughly $1600 you've earned $46.72 in interest. the $1600 isn't earning interest, so you've really earned $46.72 on $2100 in 6 mo's. that's a total return of something like 2% in 6 mo's. how is that an optimal bidding strategy? if you put the $2100 in the 6 mo CD that mari referred to, you'd have earned 4.5%.
i think i've got to be missing some detail of the auction and i, admittedly, dont understand the details of it.
Oh just show the equation and I'll have my personal economist test it out (after I bribe him with rhubarb).
The reason why I'd do the DC Tax sale is because 1)If you don't play you don't win; 2)I know the properties in my area up on the lein block; and 3)DC- better the devil you know.....
mari-- as soon as I'm sure I understand the rules/how it works, I'll make you a spreadsheet that's easy to play with. the math isn't hard, but having a sheet will let you plug in different numbers to see different returns for each tax bill and bid amount.
oh, and i just quickly calc'd the maximum bid amount for a $500 tax bill... i think you dont want to pay more than $1033 (which includes your $150 to play in the auction, so really $883) or else you should just go with your CD. and if i were to factor in all sorts of nit picky things like the time it takes to go to the auction, research properties, etc it would drop lower. i know i'm a ton of fun, aren't i?
oh, and most importantly, i applaud your courageous spirit, journeying into the beast of DC gov't bureaucracy. you're a strong willed (crazy?) woman.
actually, what jch said. i wasn't paying attention that the 6 mo CD was an annual return on 4.5%. whoops.
Post a Comment
Links to this post:
Create a Link
<< Home