Investigation Reveals Flaws in D.C. Tax Lien Sales

Washington DC’s tax lien sale program – which allows private investors to buy home debt so that the city can recoup unpaid tax dollars – has lead to the foreclosure of nearly 200 homes since 2005, with as many as 1,200 homes still on the chopping block.

In addition, the DC tax office created more problems by mistakenly selling approximately 1,900 liens since 2007, even after owners paid their taxes. Of the nearly 200 homeowners who lost their properties in recent years, one in three had liens of less than $1,000.

For decades, DC placed liens on property tax bills when homeowners failed to pay their bills, and then sold those liens at public auctions. Buyers could charge owners interest on top of the tax debt until the money was repaid. But a three-part Washington Post investigation found that debt collection companies have literally bought into the program and began charging and collecting from consumers.

Tax lien buyers argue that most people who buy liens are local investors just trying to earn interest, and that the law gives owners six months to repay their debts before a foreclosure case can be filed. In fact, a lien isn’t usually sold until a year after a homeowner fails to pay his or her tax bill, and homeowners receive several warnings before their liens are put up for auction. Generally, the lien is sold for the same amount as the debt.

Washington isn’t the first city to enact a tax lien sale program, nor is it the first to allow private companies at auction. Other cities and states have taken steps to prevent abuse in the system. For example, New York City won’t allow tax liens to be sold on homes owned by low-income seniors, veterans and people with disabilities. Some Michigan counties have abandoned tax lien sales altogether. Maryland limits the legal fees in these cases to $1,500.