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We will start at 5:30 pm Pacific, 6:30 pm Mountain, 7:30 pm Central and 8:30 pm Eastern For Audio: You can listen through your computer speakers and if you have a headset you can ask questions. Or you can choose the telephone option, but you must enter the “audio” pin you are given while making this choice. The manuals are available now To download manuals or to view videos go to: sign in, and click on “my webinar” on the gray menu bar at the right top of the page next to “my account”. If you have any questions, call or
Day One Tax Sale Basics Day Two Where to go and Why Computer Tools and how to use them Day Three Due Diligence Using the computer for Due Diligence Day Four Bidding the sale, Post Sale and Servicing Day Five Redemption, Getting the Property Finding Money Day Six Over Bid Refund Agenda
Pure chance – a fellow board member asked me to look at a partnership he was involved in. Liked what I found out and took the idea to Kidder Peabody – at that time the largest investor in real estate related investments in the world. Set up the operation and staffing for Kidder Peabody We ended up buying 77,000 tax liens, over $172 million dollars worth. Average return on investment, non-leveraged, was just over 18%. Leveraged it was over 80%. Tax Sale History
Blacks Legal Dictionary defines a lien as: “A claim, encumbrance, or charge on property for payment of some debt, obligation or duty”. It goes on to define a Tax Lien as “A lien on real estate in favor of a state or local government which may be foreclosed for nonpayment of taxes”. For our purposes a tax lien can be imposed by the state, county, city or town, water district, school district, port authority or district, park district, sewer district, hospital district or any other entity of government authorized by statute to levy taxes or special assessments. WHAT IS A TAX LIEN?
Again, going back to English common law, the unique thing about a tax lien is that it is ahead of all other liens. What does this mean? It means that the tax lien is ahead of a mortgage (either first or second or third), it is ahead of a mechanic’s lien (a lien placed on property for work done on the property), and in most jurisdictions it is ahead of all other liens with the possible exception of some special assessment liens or Internal Revenue Service liens. WHAT IS UNIQUE ABOUT A TAX LIEN?
This varies by jurisdiction, but in a number of states they hold a sale, often called a “Tax Lien Sale”, “Tax Sale”, “Tax Auction”, “Tax Certificate Sale” or any of a number of other names. The taxing authorities in these states hold a sale, usually once a year, and sell their interest in the lien to third party investors. By doing this, the taxing jurisdiction is able to collect the outstanding delinquent taxes much more quickly than just waiting for payment from the delinquent property owner. These sales are usually held in an auction format, open to the public, and, depending on the auction method used, the properties are sold to the highest bidder. HOW DOES THE TAXING AUTHORITY COLLECT THE TAXES WHEN THEY PLACE A LIEN ON THE PROPERTY?
First and foremost, they are not buying the real estate! The lien buyer is buying the taxing authorities rights, meaning the lien buyer now has the right to receive the delinquent taxes and any interests and/or penalties that accrue. The delinquent taxpayer is given a period of time, usually called a redemption period, to pay the lien buyer. Only if this redemption period goes by and the delinquent taxpayer does not pay the lien buyer does the lien buyer acquire a right to get the property. WHAT IS THE BUYER AT THE TAX LIEN SALE BUYING?
Courts are very reluctant to take somebody’s real estate without good cause so they require tax lien buyers to strictly adhere to the requirements of the law before they will give the lien buyer the real estate. We recommend that a lien buyer retain knowledgeable legal counsel, at least for the first transactions in a jurisdiction so that no mistakes are made. IT IS EXTREMELY IMPORTANT THAT YOU UNDERSTAND EXACTLY WHAT IS REQUIRED AND THAT YOU FOLLOW THE REQUIREMENTS PERFECTLY
In the normal situation, liens are paid off in the order they are recorded, the first lien recorded is the first to be paid, and then the second lien and so on. A tax lien, since it is senior to all other liens, goes to the front of the line and becomes “senior” to other liens, this means that the property owner will have great difficulty selling the property or borrowing on the property without the tax lien being paid first. No prudent lender is going to loan money on property and take a position behind the tax lien, since, as we said above, the lien buyer can extinguish the lender’s position. The lien attaches to the real estate and not to the owner of the real estate, which means the property owner can convey their interest in the property to someone else, but the lien remains in force. Because of this, the lien buyer is usually the first to be paid. This is one of the reason’s that a tax lien on a good piece of real estate is a very secure investment. Please keep in mind that we said “a good piece of real estate” – we will discuss that in detail later. WHAT IS THE EFFECT OF THE TAX LIEN ON THE PROPERTY?
In those states that sell tax liens, the liens are sold with specific rights that the delinquent property owner has. Those rights vary state to state, but in almost all cases the delinquent property owner has the right to stay in the property and the lien buyer has no right to go on the property or to bother the delinquent property owner. In all tax lien states the delinquent property owner is given a period of time, called a redemption period, to pay the delinquent taxes, penalties, interest and costs. This redemption period varies in length by jurisdiction but the shortest I am aware of is six months and the longest I am aware of is four years. WHAT ARE THE RIGHTS OF THE DELINQUENT PROPERTY OWNER
In most states there are a number of requirements that the lien buyer must meet. The primary responsibility is usually one of notifying everyone who has “an interest in the property”. This will usually require that the lien buyer do a title search so they can identify all parties who have an interest in the property. These parties usually have to be notified by certified mail and the form of the notice is often set by statute. It is absolutely essential that the lien buyer does exactly what the statute requires and that it is done exactly when required by the statute. Failure to do so can invalidate the lien and cause a complete loss of the lien buyer’s investment. WHAT ARE THE RESPONSIBILITES OF THE LIEN BUYER?
In most cases the delinquent property owner will redeem the lien prior to the expiration of the redemption period. The estimate of redemption rates are all over the place and few statistical studies have actually been done. We, in the mid 90’s, did redemption studies on fourteen states and found redemption rates that varied from 97% to 98% on the high end to 60% to 65% on the low end. There is a definite tendency for liens on single family residential property to have a much higher redemption rate that commercial property or vacant land. THE REDEMPTION PERIOD HAS EXPIRED, WHAT NOW?
If the lien has not redeemed the lien buyer will have to do one of the following, again depending on the jurisdiction. In some jurisdictions the lien buyer will apply for a tax deed and, depending on the jurisdiction, this will be all they have to do other than provide evidence that they have notified all parties of interest. In other jurisdictions the application for tax deed includes a number of other requirements that the lien buyer must complete as part of the process. Again, it is the lien buyer’s responsibility to know the requirements and we suggest that knowledgeable counsel be retained for this process. IF THE LIEN HAS NOT REDEEMED
It is our suggestion that in those cases where foreclosure is required that the lien buyer always retain knowledgeable counsel for this process. GET AN ATTORNEY
The title conveyed by the taxing jurisdiction is usually considered good title but it will not necessarily be “marketable” title. What this means is that it is unlikely that you can get title insurance on the property immediately. There are a number of ways to solve this problem. The easiest is to do a “Quiet Title” action, whereby you notify everyone with an interest in the property and require them to establish their claim to the property or to be forever estopped from asserting it. WHAT DO YOU GET?
The other type of tax sale is what we will call a deed sale. This is a sale where you are bidding to buy the property outright rather than looking to make an interest rate on your investment. The tax deed sale states are quite numerous and include the following. Arkansas, Alaska, California, Florida (also a lien state), Idaho, Kansas, Maine, Michigan, Minnesota, Nevada (also a lien state), New Mexico, New York (also a lien state), North Carolina, Ohio (also a lien state), Oregon, Pennsylvania, Utah, Virginia, Washington, and Wisconsin. DEED SALE
There are two different systems that exist in tax deed sale states. In one system, the taxing jurisdiction sells the property for a minimum bid that includes taxes, penalties, interests and costs, in the other system, the taxing jurisdiction sells the property for a minimum bid that relates to a percentage of market value of the property. DEED SALE SYSTEMS
Usually, if the sale is a foreclosure sale for taxes, the minimum bid will be for taxes, penalties, interest and costs. If the taxing jurisdiction has already foreclosed and now owns the property the minimum bid is often based on some percentage of market value. Which is more attractive? Well the minimum bid will usually be lower in the first type of sale, but the relevant bid is the last bid, not the opening bid, and that will really depend on the number of bidders and how they view the value of the property. DEED SALE MINIMUM BID
The major thing to keep in mind is that at a tax deed sale, unlike a tax lien sale, you are buying the real estate and I believe that the required level of due diligence becomes extremely high. I believe that the chapter on due diligence will work for both tax deed and tax lien sales, but it becomes imperative at a tax deed sale that you know what you are bidding on. The other thing you want to know at a tax deed sale is if the property is being purchased free of all other liens and encumbrances. There are a number of states where this is true and a few where it is not true. The state books will go into detail on each state. YOU OWN IT!
The critical thing to find out ahead of time is the value of the property you are contemplating bidding on. Unlike a tax lien sale, you, if successful as a bidder, are going to be the owner of this piece of land. You should spend a fair amount of time and a least a little bit of money to find out what the property is worth. WHAT IS IT WORTH?
One difference between a tax lien sale and a tax deed sale, at least some tax deed sales, is that you often times are allowed to fully inspect the property. There are a number of tax deed sales that actually have showing dates for the property. You want to always take advantage of these, if available, and I suggest that you have a real estate professional, either a knowledgeable realtor or even better, an appraiser with you when you make the inspection. You want to do anything and everything you can to help you know what the value of the property is that you are going to bid on. INSPECTIONS ARE POSSIBLE!
It is also very important that you not fall in love with a property. This is business – determine ahead of time what your maximum bid is, and stay with it. More people have lost money in auctions by deciding that “if somebody else wants to pay that much for the property, then so do I” than any other thing other than poor due diligence. You are going to have to kiss a lot of frogs before you find your prince. There are thousands of properties sold at tax deed sales in the United States every year. Don’t chase any of them, if you can’t buy them on your terms then don’t buy them at all. DON’T FALL IN LOVE
There are a number of ways to lose money in tax liens. I call them The dumb buy no 1 The dumb buy no 2 Administrative (servicing) mistakes Invalid sales and sales in error Bankruptcy RISK & REWARD
There are a hundred different ways to do this one but they all can be summed up with “I never should have bid on that parcel, let alone buy it”. You were bidding on the wrong property or you did not know what you were bidding on. THE DUMB BUY NUMBER 1
There are a number of states where, based on the rules of the auction, you can guarantee yourself a loss. I will give you two examples: 1. Colorado 2. Mississippi THE DUMB BUY NUMBER 2
As much money is lost to these errors as is lost to dumb buys. Each state has a set procedure of things you have to do to protect your interest in the property. THESE ARE NOT OPTIONAL!!. We always suggest you get a good lawyer who understands the tax sale laws, because if you make one mistake (In Indiana you have to “notice” every interested party. This noticing has to be done in a specified window of time – if you are a day early or a day late you stand a good chance of losing 100% of your investment. ADMINISTRATION OR SERVICING ERRORS
These are sales where the taxing jurisdiction screwed up. They will happen and usually you will not lose money on them, you will just lose opportunity. In most states a sale in error or an invalid sale will mean you get your money back and in some cases you get a reduced interest rate on your investment. Don’t fight it, it won’t do you any good, it is just a fact of life. SALES IN ERROR OR INVALID SALES
To my knowledge every jurisdiction will remove a parcel from the tax sale if the owner files bankruptcy prior to the sale date and the jurisdiction is aware of the filing.. What we will discuss here is if the owner files after the sale date. Assuming you have bought the lien and recorded it if needed, you will receive notice of the bankruptcy filing. DO NOT IGNORE THE NOTICE, FILE YOUR CLAIM. You are a secured creditor and if you file your claim you should get your full money, eventually. BANKRUPTCY
Everybody likes to talk about the redemption rate in tax liens – how it is 90%, 95%, 98%, I even saw one write up that said it was 99.9%. All of these numbers have been made up by people, because nobody has done a complete redemption study including all sales. We did a study in the late 90’s of 13 states and found the redemption rate overall varied from 65% to 96%, depending on state, county, etc. REDEMPTION RATES
Learn what to do about subsequent taxes. In some states if you do not buy the subsequent taxes a new lien will be sold and that lien can take away your lien. Learn the life of your lien, in almost every state the lien expires as worthless if you have not applied for deed or foreclosure within a statutory period of time. Find out if you can contact the property owner. In some states you can, in Florida you are prohibited from doing so. Doing so could cost you your lien. WHAT ABOUT SUBSEQUENT TAXES?
Find out if you have to record your lien or certificate. If you do, do it – If you don’t, you lose 100% of your investment. DO YOU HAVE TO RECORD?
It constantly amazes me to watch people bid on properties at auctions when they have no clue as to what that property is. If you bid on properties blind you will lose money. End of report – no exceptions. DON’T BID IF YOU DON’T KNOW
Don’t make payment plans with the property owner unless your attorney tells you that it is permissible under the state law. In a number of states you lose the security of the real estate lien if you do so. NICE GUYS CAN LOSE!
If you happen to discover that you have, through error, bought a piece of property that has an EPA contamination notice – do not go to deed under any circumstances unless you are qualified to evaluate the clean up cost. YOU WILL BE LIABLE TO CLEAN IT UP IF YOU GO TO DEED! THE EPA & YOU
Do not enter into bid rigging schemes. Any agreement between bidders as to how they will split up the parcels or what they will bid is illegal and your purchase can be made invalid, plus you can be prosecuted criminally. You will meet people at every auction that want you to enter into such scheme. Listen to what they say if you want, but never participate. If you listen to what they say you will know what they are doing and can plan accordingly, but do not enter in to any agreement on bid rigging. There have been a number of cases in the past five years on this issue. BIDDING AGREEMENTS = JAIL
OK, we told you about the bad and the ugly, now we will talk briefly about the rewards. First, a tax deed sale is fairly easy – you own the property and if you made a good buy, that is the reward. With a tax lien sale the reward is one of two things. You either make a nice return on your investment (in Texas it can be a 50% annualized return) or you bought the property for pennies on the dollar. The return on your money can vary greatly by state and even within a state. The lowest I am aware of is about 10% and the highest I know is 50%. In today’s interest rate environment they are both better returns that you will get on CDs or bonds. REWARDS
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WHERE TO GO AND WHY TO GO THERE
What are your objectives? Do you want real estate or interest on your money? How much do you want to invest? What are the geographic considerations ?
What you need to determine before the sale is if you want redemptions and a high rate of return or you want the property. Almost everyone tells me they want the property, but do you really? If you really want the property why aren’t you at a deed sale since the majority of tax liens redeem (notice I said majority, not 93% or 98% or any other such unrealistic redemption rate). Most of the time in a tax lien sale you will not end up with the property.
MY CRITERIA IS AS FOLLOWS: What is the rate of return? What is the bidding system? (this will be covered later) How many parcels in the sale? How many parcels appeared to be improved as opposed to vacant? Sometimes the only way you could do this is to evaluate the size of the liens. If there are 250 liens that are $57.00 you can usually be pretty sure that these are unimproved parcels. In my experience most improved parcels have liens above $ What are the payment requirements? Certified funds, wire transfer, business check, cash, etc. What is the cost to get there and back? How helpful does the court house staff appear to be.
Do you have to register before sale date? Can you have a representative go in your place? Is a deposit required prior to the sale? If so, what form of deposit is required? When is final payment required and in what form is it required? When do you get your deposit back if you didn’t spend it all? What is the procedure to “check out” at the end of the day? If there is a disagreement upon check out, how is it handled?
As you can see, you have to develop your investment plan and match the list to the plan as opposed to doing the opposite. We always looked at six to ten lists to find one or two sales we wanted to attend. This is why a subscription makes sense – you aren’t limited by economics to how many lists you take a look at.
1. Buy occupied, single family residential property in decent neighborhoods. 2. Buy properties with mortgages. 3. Buy properties with bigger liens. 4. Buy owner occupied properties 5. Buy properties that are not involved in a divorce. (Check the records to see if a divorce is currently being sought by either party) 6. Buy properties where the tax bill goes to the property. 7. Never buy vacant land. 8. Never buy industrial land. 9. Never buy single purpose commercial properties. 10. Never buy a single family residence that is unoccupied. IF YOU WANT REDEMPTION:
1. Buy vacant land. 2. Buy industrial land. 3. Buy single purpose commercial land. 4. Buy properties that are “free and clear” (no mortgages or liens) 5. Buy properties where the tax bill goes out of state or out of town. 6. Buy properties where the house is a rental (tax bill doesn’t go to the house) 7. Buy properties in lower income areas. 8. Buy houses that are boarded up. 9. Buy houses that have visible structural problems. 10. Buy houses that are obviously vacant. IF YOU WANT THE LAND:
Periodically I read comments in chat rooms by people who say they have the best bidding strategy and that 20 minutes into the auction they know who their competition is and that they then are in control. Damn, I sure wish those folks had worked for me over the seven or eight years when we bought over $100 million dollars of tax liens. In my experience, those who have magical systems are few and far between. People will play all kinds of games in auctions – not entering the bidding until late, or trying to bully the other bidders but the reality is very simple. Disconnect your emotions, ignore the other bidders. You have determined, or you should have, what you are willing to pay for a property. Enter the bidding fairly early on and quietly continue in the bidding until you either buy the lien and/or property or your level is passed. BIDDING STRATEGIES
The one tip I can give the individual investor. Look at the smaller liens. In a number of jurisdictions the taxing authority will accept partial payments on taxes. This means that there can be $200,000 houses in the auction that only owes $ in delinquent taxes, because they have already paid $800 of the tax bill. If you, during your due diligence, can determine which properties fit this bill, you will find that the institutional buyers will not be bidding on them. The institutional buyer will seldom buy a lien below $ because they have a “servicing cost” for each piece of paper they handle and a lien below $ is not worth it to them. These you should find and go after. IS THERE AN EDGE YOU CAN GET?
Having been a bond trader for about 15 years I am probably more comfortable in this area than most, but it even confuses me. What is the difference between a 10% penalty rate and a 10% interest rate? Indiana is a good place to show this. A 10% interest rate earns 27.3 cents a day on a $1,000.00, whereas a 10% penalty is $ on day one and is still a $ on day 365. A 10% penalty earned on day 30 is a 121% annual interest rate. INTEREST & PENALTIES WHAT YOU REALLY EARN
Most states state that their interest rate is x percent per month or any part thereof. What that means is that you earn the full months interest if the lien redeems on the 1 st of the month or if it redeems on the 31 st of the month. To give you an example of what this means. Assuming our $1, lien has a 1.5% monthly interest rate and the lien redeems on the 1 st of the 10 th month. The total earning would be: $15.00 X 10 or $ in 271 days (for this example I have assumed the months each have 30 days). This is an annual interest rate of 20.20% instead of the 1.5% or 18% annual rate that you might think. WHAT IS THE ACTUAL RATE?
Monarch 10 Iopus 11 Google Earth Computer Tools you should be aware of
We will start at 5:30 pm Pacific, 6:30 pm Mountain, 7:30 pm Central and 8:30 pm Eastern For Audio: You can listen through your computer speakers and if you have a headset you can ask questions. Or you can choose the telephone option, but you must enter the “audio” pin you are given while making this choice. The manuals are available now To download manuals or to view videos go to: sign in, and click on “my webinar” on the gray menu bar at the right top of the page next to “my account”.
The most important aspect of your preparation for the purchase of tax liens and/or tax deeds is the process of due diligence. DUE DILIGENCE
The list: Courthouse research: - either in person or on the internet Look at the property!! –either in person, by computer, or through someone else The final review: WHAT DOES THE DUE DILIGENCE PROCESS INCLUDE?
The parcel identification number The owner’s name The property address The property type Assessed value for land Assessed value for improvements Annual tax payment Tax owed and/or minimum bid The sale sequence number WHAT YOU WISH WAS ON THE LIST?
This is a number, called by different names in different jurisdictions (folio number, account number, tax id number, block/lot, etc) that the taxing jurisdiction uses to identify the property. It is critical that you get this number if at all possible. Some jurisdictions do not publish these numbers and you will have to get them from the assessor’s office or the treasurer’s office THE PARCEL IDENTIFICATION NUMBER
You want to try and see how much real estate the owner has in the jurisdiction. If it turns out they own 20 properties and this is the only one that is delinquent – that may be a red flag. THE OWNER’S NAME
Also known as the situs address – this is where the property can be located. You want to make sure that the address you get is the situs address and not the mailing address – quite often you will find the mailing address has been entered as the situs address in error. This may be because the property is vacant land and has no assigned address or it may be the nearest address to the property (some counties in Indiana do this as an example). THE PROPERTY ADDRESS
THE PROPERTY TYPE and/or land-use code: This is either a numeric code or an acronym assigned by the taxing jurisdiction to show what the land is used for or authorized to be used for. Examples would be: SFR for single family residential, Comm for commercial, Ind for industrial, Vac for vacant and Agri for Agricultural. You want to know what the land is currently used for and the land use code will tell you this. Property type and land use code are usually not on the published list.
This is the value the assessor has placed on the property. Please be aware that this value may be arrived through some sort of formula. You need to find out from the assessor how the number is arrived at. Most states require this number to have some relationship to market value, but not all do. This is critical to know. If the value has some relationship to market value and you have the formula you can arrive at a hypothetical market value. This will seldom correlate very accurately to a true market value, but it should give you a basis for comparative value between two properties. Assessed values are on some lists but not on most. ASSESSED VALUE FOR LAND
This is the value the assessor has placed on the improvements (usually the buildings) on the property. Again, you need to know the formula used and want to arrive at a hypothetical market value. Assessed values are on some lists but not on most. ASSESSED VALUE FOR IMPROVEMENTS:
This is what the property tax for the current year are supposed to be. Usually not on the published list. This can tell you if you are bidding on several years taxes or just a portion of a year. ANNUAL TAX PAYMENT:
This is the amount that the taxing authority wants to receive (at a minimum) for the lien and/or deed. Depending on the method of auction this may be the total amount you will have to pay or the starting bid. This is usually on the published list, but not all of them. TAX OWED AND/OR MINIMUM BID:
Most sales publish their list in the order they will be sold, but some do not. You must find out from the taxing jurisdiction what order the properties will be sold in and then, if the taxing jurisdiction has not assigned a sequence number, you should assign a sequence number to each parcel so you can keep them in auction order. THE SALE SEQUENCE NUMBER:
If you are lucky it will include a parcel number, owner’s name, amount owed and maybe an address, but not necessarily the property address. The least I have seen is the owner’s name and amount owed. WHAT WILL ACTUALLY BE ON THE LIST
If we have a data enhanced list – you get it from us. If not, you have to go to the court house and get the information or go to another data service and see if they have it. This would be the first of two trips to the court house and I would just get the parcel number, property type, assessed values for land and improvements, and – if available – the last sale price for the property. HOW DO YOU GET THE INFORMATION THAT ISN’T ON THE LIST?
The reason we got the information above is so we can eliminate properties from our consideration. Most lien sales will have far more properties on the list than you can buy or have time to evaluate. Your first job in the due diligence process is to reduce the list to a group of properties that have what you are looking for. In deed sales the problem of reducing the list is not as critical as the lists are usually much smaller. SORT YOUR LIST BASED ON YOUR CRITERIA:
You should have your investment plan in mind already. This is where you start to implement that plan. We are going to assume here that your plan is to go after single family residential property, and that we have $10,000 to invest. HOW DO I ELIMINATE PROPERTIES?
If you have determined you are only interested in single family residential or, perhaps, vacant land, you can now sort your list based on land use code and eliminate all the properties from consideration that are not of the type you are looking for. Copy those properties that you want to look at to a new spreadsheet, but don’t throw away the main list. SORT AND ELIMINATE:
Taking the new spreadsheet sort the properties in minimum bid order (the tax amount the jurisdiction has published). You want to do some examination of this group and determine if there are any things that stand out as different. LOOK FOR ABERRATIONS:
One of the things I do is to divide the minimum bid by the total assessed value (the combined value of assessed value for land and improvements). This will give you a percentage of hypothetical market value. Often this number will be between 1.5% and 6.0% of market value. The actual ratio is not as important as is noting those properties that vary a great deal from the average. Those properties could be either very good deals or very bad deals. ABERRATIONS – NO. 2
If the average minimum bid is 2% of total assessed value and there are some properties that are 15% of total assessed value – you want to flag those to be checked very carefully. Conversely, if the average minimum bid is 2% of total assessed value and there are some properties that are 1/10 th of 1% - you want to flag these to be checked also. ABERRATIONS – NO. 3
The second thing we want to look for are properties that are out of line as to assessed value for improvements. What you are looking for is property where the assessment for improvements is quite small or smaller than the assessment for land. It is possible, if the assessment for improvements is quite small, that these properties are not really single family residential – or the structure has problems that have reduced it’s value. Flag them. ASSESSMENTS FOR IMPROVEMENTS:
The third thing we want to do is to eliminate those properties that are out of our budget. It is usually better to buy 20 $ liens than 1 $10, lien. If you can buy 20 liens that meet your criteria as to property type and lien to value ratios you have the benefit of some portfolio diversification, which is usually a good thing. BUDGET CONSIDERATIONS:
You have now pared down the list. Hopefully you have narrowed the list down to a manageable number. Sort your list in parcel number order, print it out, and you are now ready to spend some more time in the court house. READY FOR THE COURT HOUSE?
In almost all cases you are going to want to go to the assessor’s office. Before you leave to go there, you want to check on the internet and see if the assessor has a web site that allows you to look up information on properties. More and more counties and cities now have such sites – it is a lot more comfortable to do the work at home. Call first and find out where the land records are located and what hours they are available. Depending on what the taxing authority included on the published list, this may be the first of two or three trips. If you don’t have all the information we want on our list, our first task is to get the missing information. COURTHOUSE RESEARCH:
We want all the information on our list above and we would like to get as many of the items listed below as possible. Some taxing authorities won’t have any of it and others will have all of it. 1. Last sale price: If possible we would like to know how much the property sold for the last time it sold. 2. Last sale date: The information above will have less meaning if the property last sold in WHAT OTHER INFORMATION DO WE WANT?
3. Mortgage holder: Is there a mortgage on the property? If so, who has it and what is their address (if you buy the lien you are going to need this information). Remember that mortgage companies will want to redeem the property. 4. Mortgage amount: Another possible indication of value and what the mortgage company’s exposure is. 5. Square footage of structure: Tells us more about the property. 6. Type of construction: Tells us more about the property. 7. Year it was built: Tells us more about the property. 8. Number of bedrooms: Tells us more about the property.
9. Number of bathrooms: Tells us more about the property. 10. Lot size: Tells us more about the property. 11. Any other information you find: Tells us more about the property. 12. Other liens on the property: See if you can find out if there are other liens on the property – they could be IRS liens, Mechanics Liens, Second or Third mortgages.
When you get back from the courthouse you want to update your list, adding all the information you now have. You now do a final review and determine if any of the properties on the list do not meet your criteria. Eliminate those and copy your spreadsheet to your final drive by inspection list. This list should have about 20 to 40 times as many properties on it as you could buy – you aren’t going to get all the properties you want. AFTER THE COURTHOUSE
We believe that it is critical that you look at each property you are considering. This is an absolute in a deed sale and we feel it is an absolute in a lien sale also. The nicest property on paper could be a burned out crack house in reality. People will tell you that 95% of tax liens redeem – what they don’t tell you is that about ½ of those that don’t redeem are never taken to deed. The reason they aren’t taken to deed is that they shouldn’t have been bought in the first place. LOOK AT THE PROPERTY
We advise that you get a mapping program so you can map the properties before you go out to inspect them. You can get good mapping software for under $ and it will save you hours in the field. The one thing to remember when mapping is that you will sometimes find the same address exists in two different places in the taxing jurisdiction. You can resolve these by calling the assessor’s office or checking by zip code or parcel number so you make sure you are looking at the correct property. MAPPING THE PROPERTY
We suggest you map everything before you get in the car. Take some time to study your maps so you have a feel about how you are going to do the job. This will save you a lot of time in the field. We have had over 200 field workers do property inspections for us and I can tell you those who took an hour or so to layout their plan were much more effective than those who didn’t. MAPPING THE PROPERTY, CONTINUED
You need some idea so you know how much time to allow. My best people consistently did more than 120 a day. The record was 335 in one day. Since you are new to it, plan on 50 to 70 a day. If you can get someone to ride with you, you can increase that number by 20 percent. HOW MANY CAN YOU LOOK AT IN A DAY?
The biggest cause of losses is that people do not correctly identify the property. Some of the causes can be “nearest property as an address”, failure to match property types with property you are looking at, and failure to allow for address problems. Caution!!! Most money that is lost is lost because it is not the right property!!!
We used an inspection form that was adopted by a number of the institutional buyers. It had several things you wanted to note – and we used a 1 to 5 ranking scale, 1 being worst and 5 best. We ranked three things: The structure, the neighborhood (actually the block) and our “confidence” ranking, which 1 to 3. WHAT ARE YOU LOOKING FOR?
WHAT YOU NEED TO NOTE Note any plus items: Well maintained, new paint, etc. Write down the photo number and write down some things you see in the picture so you have a secondary check in case the numbers get screwed up. The type of thing our people wrote: White house, brown trim, large tree left side, blue car. If possible, pull down the street a little so you aren’t making your notes in front of the house. If you are approached by someone asking what you are doing, show them your drive by inspection sheet and tell them you’ve been hired to do a survey or something similar. At the first sign of any problem, drive off. It is rare that problems occur but we have had people who were chased – best thing to do there is go to the nearest police station.
Structure Ranking Rank from 1 to 5 – 5 being best. Things you want to consider. 1.Any obvious structural problems? 2.Is maintenance needed? I.E, painting, roof, etc. 3.Is there anything that might be an obvious EPA problem? I.E. 50 gallon drums in the side yard or it used to be (or still is) a gas station 4.How is the yard maintained? Fairly good hint as to owned or rented. This is subjective ranking, but you want to have a feel for the structure and ranking it is the only way you can do that.
Neighborhood Ranking Things you want to consider. 1.How are the yards maintained? 2.Are there vacant lots from demos? 3.Are there “board ups” in the neighborhood? 4.Is there pride of ownership evident? This is subjective ranking, but you want to have a feel for that area and ranking it is the only way you can do that.
Confidence Ranking How sure are you that you have the correct property? 1.Does the property type match what it should be? SFR and SFR 2.If there is no posted address, does this one seem to fit what it should be? 3.How about assessed values versus what you are looking at? We used a 1 to 3 ranking and never bought a 1 confidence ranking. You want to know you are buying the correct property.
When you get home again you want to “marry” your photos to your list. You can paste the photos into your spreadsheet – make sure that you put the correct photo with the proper property.
You now have all your information from the assessor’s office, you have photographs of the properties. You now want to go down the list and eliminate any from consideration that are obvious problems. Try to remember when doing this, don’t use your own preconceived ideas to color your judgment. Most tax lien and tax deed properties are in lower income areas. Your judgment should be based on the condition of the house, the condition of the neighborhood, not if you would live there or if you like the style of architecture. If you end up with the property can you sell it for a profit – that is the question. THE FINAL REVIEW:
Usually you will find that about 75% of the properties you have reviewed are legitimate targets at the auction. If you have done your work properly you should have a fair number of parcels you want to bid on. Remember, you want to have between 20 and 40 times as many prospects as you have money to spend.
First you must determine which company is running the auction. There are now six firms doing online auctions: 1.Bid for Assets –www.bid4assets.com 2.Real Auctions –www.realauction.com 3.Grant Street Group –www.grantstreetgroup.com 4.SRI –www.sri-sale.info 5.Update –www.tax-sale.info 6.D&T Ventures –www.dtventures.net Online Auctions and Due Diligence
1.We provide weekly list of online auctions in our update . 2.Contact the county and get full details and name of auction firm. 3.Contact auction firm and get web site for sale (different site for each county) 4.Get a list of properties from us, county, or auction company. 5.Sort the list using methods shown this evening. 6.Get information on property using private data sources (FARES, Lexus- Nexus, DataQuick or the county assessor’s information if online. 7.Each auction firm has training sessions before the sale – ATTEND them. 8.Place your bids. If you do not have web based data available then use the methods we described earlier using policemen, firemen, etc. Preparation for Online Auctions
We will start at 5:30 pm Pacific, 6:30 pm Mountain, 7:30 pm Central and 8:30 pm Eastern For Audio: You can listen through your computer speakers and if you have a headset you can ask questions. Or you can choose the telephone option, but you must enter the “audio” pin you are given while making this choice. To download manuals go to: taxsalelists.com/webinarmaterials.html To view the videos go to : taxsalelists.com/webworkshoparea.html
BIDDING THE SALE
A number of different jurisdictions use “round robin” bidding. What this means is fairly simple. They go around the room in a fixed order and each person is given the opportunity to buy a lien. ROUND ROBIN BIDDING
There are a fair number of jurisdictions where they have a lottery sale. The difference between a lottery sale and a round robin is that a round robin guarantees you at least a shot at a number of liens, whereas a lottery depends on how lucky you are. Statistically, a fairly run lottery should give you the same chances as a round robin, but it never will. LOTTERY SALES
The way this system works is that bidding starts at a statutory rate (18% in NJ, IL and FL, 16% in AZ), and the interested buyers bid a progressively lower interest rate until nobody is willing to go lower. The lowest bidder is the winner. Another thing to remember about “bid down” states. There are a number of reasons why the rate may be bid down to levels you find silly. If you see this being done extensively – there is a reason. BID DOWN THE INTEREST RATE
What happens is that the property is sold to the bidder who is willing to take the smallest portion of ownership in the property. This means if you bid below 100% you become a tenant in common with the delinquent taxpayer. This raises a number of issues, most of which you will find are solved by what actually happens in the auctions. BID DOWN THE PERCENTAGE OF OWNERSHIP
Because you get the rate you bid (1/4 of 1%) or a 5% penalty, whichever is greater. A 5% penalty on $1,000 is $50 dollars, even if the lien redeems the first day. If the lien redeems in 90 days you would be making the equivalent of 20% on your money WHY BID ¼ OF 1%?
Both Colorado and Mississippi use this system which is an interesting one. This creates a situation where you can buy a lien, have it redeem, and lose money. Fairly hard to do in most jurisdictions, but easy in these two. The lien is sold to the bidder who is willing to pay the taxes, interest, penalties and costs and will bid the most money above that amount. The catch is that the premium you bid above the minimum bid is gone forever. The county keeps it. PREMIUM BID - PREMIUM LOST
If you pay a premium for the lien that exceeds one month’s interest on the lien (that is all you are guaranteed to receive), then you could actually have a loss if the lien redeem fairly quickly. If what you paid exceeds the interest you earn then you have a loss. LOST PREMIUMS CAN = LOSS
This system occurs in a number of states and has certain characteristics of the system above – the major difference is that in this system if you buy a lien and it redeems you will make a profit – it just might not be a big one. PREMIUM BID - PREMIUM BACK BUT NO INTEREST ON THE PREMIUM
If you earn no interest on the premium you bid it means that the rate you earn will be reduced from the “statutory” rate since you will be earning the money on a larger investment.
My suggestion is that in sales of this type you should determine the minimum return you are willing to accept on a property (or a type of property) and calculate the maximum premium you can bid to acquire that return on each property you are going to bid on. The formula for doing this is (lien amount X statutory rate / by acceptable return on investment = maximum bid – lien amount = maximum premium bid.) Example: $ X 14.00% / 10.00% = $1, $1,000 = $ maximum premium bid. FIGURE YOUR MINIMUM RETURN
There are a number of states, Alabama, Indiana, South Carolina, Missouri, Georgia and Texas to name a few where the lien is sold to the highest bidder. In all of these states the premium or overbid (that amount above the taxes and penalties owed and the winning bid) earns interest. PREMIUM BIDDING WITH INTEREST ON THE PREMIUM
South Carolina enacted in 2000 a change to their law which you must be aware of. What this change amounts to is a cap on the interest that can be earned on the overbid. In simple language, if the total amount owed at time of sale is $1,000 then the most interest that can be earned is an Additional $1, For our standard $1, lien that means $30.00 dollars in the first 90 days, $60 dollars for the next 90 days, $90.00 for the next 90 days and $120 for the last 90 days. This means the rest of your overbid can only earn $970 in the first 90 days, $940 in the next 90 days, $910 for the next 90 days and $880 for the last 90 days. Assuming that you want a 12% return on your overbid for 12 months, your overbid on the $1,000 lien cannot exceed $7, THE SOUTH CAROLINA SYSTEM
Georgia has the toughest tax sale law in the country. The sale method is bid up the premium. That is not the problem. The penalty is 20% if it redeems in the first year and goes to 30% if it redeems after a year. The reason that it is so tough is that the delinquent property owner has to come up with all of the money and then “may” get the overbid portion back within 90 to 180 days. As an example if the taxes owed are $2,000 and the lien sells for $100,000 the owner must come up with $120,000 to redeem with in a year and $130,000 to redeem past one year. THE GEORGIA SYSTEM
There are a number of jurisdictions that sell tax liens through what is known as a bulk sale. These include New York City, several Ohio Counties and some of the towns in Connecticut, among others. A bulk sale is not something an individual buyer would be interested in unless you have a lot of money at your disposal. Bulk sales require you to bid to buy all the liens in the sale. BULK SALES
Checking out: Spend about two or three minutes per parcel purchased and make sure you know exactly what you bid on, and how much you bid. Do this before you go and make your payments. When you check out with the treasurer’s, sheriff’s, collector’s and or auditors staff, go over every purchase and make sure that what you bought is what they say you bought.
Now is the time to get the names of the various jurisdiction staff members that you will be talking to over the redemption period. Make sure you introduce yourself and if possible find out how they would like you to check on redemptions, who handles assignments, and any other procedural tasks that you are going to have between now and the time that the redemption period ends. GETTING NAMES:
This is a great time, if you haven’t done it before now, to ask if they can give you the name of a good lawyer who handles tax liens and/or real estate related transactions. The jurisdiction’s staff knows who is good in the area and if you work at it they may tell you a name or two.
Before you leave the area I think it is a good idea to drive by each parcel you purchased a lien on and to take another photograph of the property for your records. First thing you want to do is check these photos against your due diligence photos of the property. I have had at least two instances where the property had been a victim of arson between the due diligence and the day after the sale. Depending on the jurisdiction this might give you an opportunity for “a sale in error”. You probably won’t get out of the sale, but you might. Make sure you know what you purchased and make sure you have a photo of what you purchased – there are going to be a number of times before the redemption period expires where you are going to need to look at that photo. REVIEWING YOUR ACQUISITIONS:
Do not expect to get more than a 50% lending authority. But if you do manage that, your $100,000 will allow you to purchase $200,000 in liens. The effect of this leverage can be dramatic. Assuming you bought your lien portfolio at a 10% yield, with $100,000 invested you would make $10,000 per year. If you can get 50% leverage, your $200,000 invested would make $20,000 per year, and assuming you borrow at 6%, you would pay $6,000 in interest, making your net profit with leverage $14,000 – an increase of 40%. In most cases, if you do finance your acquisition, you will be required to deposit your certificates with the lender or set up a trust account with the lender or their bank. FINANCING YOUR ACQUISITION:
Servicing is the term that includes all the administrative tasks that must be completed to successfully hold a tax lien portfolio through the redemption period and, if necessary, perfect your interest in the property if there is no redemption. WHAT DOES SERVICING MEAN?
The first task when you return from the sale is to create a time schedule of when certain tasks must be performed. If you have obtained counsel they should be able to give you a list of all the tasks that need to be completed and when they need to be completed. If you haven’t then you need to make sure you understand the statute and have all requirements noted and listed.
We advise that you contact the taxing jurisdiction once a week to check on redemptions. Find out who the individual is who handles redemptions and ask them what their procedure is. Some jurisdictions will not notify you, others will. It is my suggestion that you check with the taxing jurisdiction no less than twice a month. The delay of two weeks can affect your return on investment substantially. At the time of your first contact with the jurisdiction about redemption procedures, make sure you get the names and addresses, with phone numbers, of all staff members that you will need to talk with over the next few months about your lien. Add these names, addresses, and numbers to your worksheet for the jurisdiction. CONTACTING THE JURISDICTION:
Make sure you know exactly what your duties are when there is a redemption of a lien. This will vary greatly by jurisdiction. In some jurisdictions you will be required to return the lien. In others you may have to execute a quit claim deed on the property. There are a few jurisdictions where you have to do nothing, but it is your duty to understand exactly what these requirements are. Not fulfilling the requirements can cost you to lose your investment. WHAT TO DO IF THERE IS A REDEMPTION:
The United States Constitution has a “due process” clause and one of the interpretations is that no person shall be deprived of property without due process of law. This is where notices come into play. Every state has a requirement that the delinquent taxpayer be notified that they are at risk of losing their property. In most states the requirement to give this notice is the responsibility of the lien buyer. THIS HAS TO BE DONE EXACTLY RIGHT AND EXACTLY ON TIME. NOTICES
The types of notices that are often required (sometimes more than one) are: Notice of expiration of the redemption period, Notice that a petition will be filed to foreclose the right of redemption, Notice that a petition has been filed to foreclose the right of redemption, Notice of foreclosure of the right of redemption, Notice to appear for the court hearing. Notice of an application for a tax deed, and so on. Each state will have their own requirements and we will cover them in the state books, but right now you need to understand that it is your responsibility to file these notices and that failure to do so will, more than likely, cost you 100% of your investment.
That will depend on the jurisdiction, but in most cases it will require a title search to determine who is a “party of interest”, or, in other words, who has a reason to be notified because they have an interest, in some way or another, in the real estate involved. It is my suggestion that you have a professional do the title search. You can do it yourself, but there is no allowance for errors. If you miss somebody in your noticing you can lose 100% of your investment. HOW DO YOU “NOTICE”
Each state, and possibly each jurisdiction within the state may have their own requirements as to the form of notice that is to be used. Your attorney should be able to give you the form or you can talk to the staff at the court house and they will probably be willing to give you sample forms. Remember that you are now dealing with legal documents and you are not allowed to vary from the court approved forms. FORM OF THE “NOTICE”
Arizona, as an example, requires that you notice the property owner no less than 30 days prior to the hearing for foreclosure of right of redemption and no more than six months prior to the hearing. This description of a window of time for noticing is not rare and if you notice 29 days before the hearing or seven months prior to the hearing you have a very high likelihood of losing your investment. There is a term in the law “time is of the essence”, this means that proper timing is absolutely necessary. And in the case of noticing, time is always of the essence.
The specifics of noticing vary greatly by jurisdiction, but some of the methods that may be required are: Personal service by the Sheriff, Certified letter to each party of interest, A legal advertisement run in a newspaper of general circulation in the jurisdiction for a specified period of time, or even posting of a notice on the property itself. Some jurisdictions may require all of these methods.
Again, in every jurisdiction that I am aware of you have to notice all parties who have an interest in the property. You should also determine if any of these parties meet the following descriptions: A member of the military. A person who is incapable of managing their own affairs due to physical or mental handicap. A minor child. The reason you would like to know if any of the interested parties meet these descriptions is that you may have additional duties to perform if they are. Again, you must consult your attorney about this because you cannot afford an error. WHY DO YOU NOTICE?
During the period of time that you hold the lien you will be a party of interest yourself. This means that you will, more than likely, receive some notices yourself. These can be any of a number of things. Demolition notices, Notices to clear weeds, Nuisance notices, Bankruptcy notices and almost an infinite listing of other notices. There is one thing you need to know about these notices, NEVER IGNORE THEM. RESPONDING TO NOTICES:
The major disadvantage to purchasing tax liens is lack of liquidity. What does lack of liquidity mean? It means that it is not easy to sell the investment and turn it back into cash. ASSIGNMENTS:
With a tax lien you assign your interest in the tax lien to another person. This assignment is a document that needs to be recorded with the taxing jurisdiction. The problem you will have is finding an individual who wants the tax lien you purchased. I always suggest that you try to get an idea of who was bidding on the liens you purchased and get their contact information so you can approach them if you need to liquidate your portfolio.
In addition there are a number of institutional firms that might be interested in buying your liens, assuming you can give them an adequate due diligence package. If you have followed our suggested due diligence methods and kept your information, you should be able to prepare an adequate due diligence package for prospective buyers.
If you are attempting to sell your tax liens you must expect to sell them at a discount. This does not necessarily mean you will take a loss, that will depend on how long you have held the liens, but you will more than likely have to sell them at a discount of some sort. Why is this? Simple – the prospective buyer is going to incur a substantial expense in verifying your due diligence and they are going to want to get that expense back in some sort of discount. In addition, they may have more stringent criteria as to what they will purchase and they may well feel that your portfolio has more risk than they will accept at the return that you purchased the portfolio for. So expect some sort of discount.
The actual document for assignment should be done by competent counsel or the approved form should be acquired from the taxing jurisdiction, if they have a form available. THE FORM OF THE ASSIGNMENT:
Be aware that some jurisdictions have quite high fees for assignments. Polk County, Iowa is one such jurisdiction. I do not know what the current cost for an assignment in Polk County, but at one time it was $ per lien. COST OF THE ASSIGNMENT:
The term “subsequent taxes”, or “subs” will be a term you will be come quite familiar with. The subsequent taxes are the taxes that become due and payable subsequent, or after, the tax sale is held. That in itself is not the significance of subsequent taxes. What is significant is the effect that subsequent taxes have on your position as a lien holder. SUBSEQUENT TAXES:
There are a number of jurisdictions where your failure to pay the subsequent taxes can put your position as a lien holder in jeopardy, at least as far as getting the property if it does not redeem. Arizona is an example of where failure to pay the subsequent taxes can hurt your position. If you fail to pay the subs a new lien will be sold and the buyer of the new lien will have the right to redeem you out, meaning they can redeem your lien and take away your chance to get the property if the lien doesn’t redeem.
The simple fact of the matter is that you want to pay the “subs” unless you think you made a mistake in buying the original lien. Why?, because you are going to have to pay them before you can get the property. Unless you can make a higher return on your capital elsewhere and failure to pay “subs” doesn’t threaten your position in any way, you should go ahead and pay the “subs”.
There are also a number of jurisdictions where, by custom, not by law, the prior owner has the right to buy the subsequent lien. The benefit of this system (which to my knowledge is not codified anywhere) is that you have the opportunity to “trade up” your return. For example, let’s assume you purchase a lien in NJ at a yield of 6% and the next year you have the prior lien and, by custom, are allowed to buy the new lien at 18%. The net effect is that you have substantially raised the yield on your investment. A similar system operates in a number of states where the bidding is for “percentage of ownership”. You buy the lien for a 1% ownership interest in year one and, because you have the “prior”, are allowed to buy the “subsequent” lien for 100% ownership interest.
It is your responsibility to be aware of what the rules on “subs” are in the jurisdiction you are buying in. There are several jurisdictions where you may be required to pay “subs” as part of the original purchase – you need to know if this is the case. There are a number of jurisdictions where the “subs” may pay a different rate than the original lien purchase – you need to know this also.
Final comment on “subs” – if you are buying a tax lien that is $2, of back taxes for 1 year and the redemption period is three years, you will have invested around $8, by the time the redemption period ends and you go to deed. I realize it is obvious, but I will say it anyway – make sure you plan on it so you have the money. I have seen liens lost because they “forgot” about subsequent taxes.
First thing I will say is “Don’t lose your certificates!” Besides the obvious reasons, there are a number of other reasons why you don’t want to lose your certificates. One of the main reasons is that a tax lien certificate is a negotiable instrument and is subject to all the risks that a negotiable instrument has. It could be forged or sold and redeemed. LOST CERTIFICATES:
In a number of jurisdictions it isn’t a really major hassle if you lose your certificates, it is only a minor hassle, but in all jurisdictions it will cost you money to get a replacement and in some jurisdictions you will have to go to court to get it replaced and, unless it is a fairly large certificate, the expense of going to court to get it replaced will wipe out any return you might make. In some other jurisdictions you will be required to post a bond to get a duplicate certificate. There are some very progressive jurisdictions that have gone to a “book entry” system and there are no certificates to lose, maybe someday they will all go this way, but in the meantime make sure you know where they are, make sure they are secure, and DON’T LOSE THEM!!
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All tax lien states, with the exception of Kentucky, have a stated redemption period in the statutes. The redemption period is the time allowed for the property owner, or, in some cases, any “interested party” to redeem his property by paying the amounts owed on the tax lien. This time, which varies from a few months to as long as four years, is stated in the tax sale law of the jurisdiction.
This varies greatly by jurisdiction. In some jurisdictions anybody can redeem a tax lien, in others only a person with “an interest in the property” can redeem the lien. Who are “parties in interest”? The property owner, his or her heirs, the mortgage company, anybody with a lien on the property, including, in some cases, a prior or a subsequent tax lien buyer. Why does it matter? There may be occasions when you do not want to accept the redemption if it isn’t from a party who can legally redeem the lien. Make sure you understand who, under the applicable law, can redeem the lien. WHO CAN REDEEM?
The taxes, interest, penalties and costs for the parcel were $2, and you bid $25, because you thought it was a three bedroom residential property that was worth at least $75,000.00, but you made a mistake. It turns out to be the vacant lot next door to the three bedroom residential property. The vacant lot is worth $5, and it isn’t going to redeem because the property owner gets the $23, over bid or premium if he doesn’t redeem and the property goes to deed. OVERBID ERRORS:
What do you do if only a “party in interest” can redeem? You find a party in interest other than the property owner and pay them to redeem the property. It can be a contractor with just a mechanics lien for $ on the property, it can be the mortgage company or someone with a second mortgage. It will probably cost you a few hundred dollars more than what it would cost you if you can redeem yourself, but it will still save you thousands of dollars.
This depends on the statute for the jurisdiction, but they have to pay you the statutory interest rate or penalty rate. In most cases the taxing jurisdiction will calculate this amount for the taxpayer and you will not be involved. What you want to know is what the redemption amount should be, because there can be errors made and you want to know if they have been made. WHAT DO THEY PAY TO REDEEM?
There are a number of jurisdictions around the country that take weeks, and in some cases months, to get you your money. In most cases they will send you a redemption notice. You then have to send in your certificate or a quit claim deed to the jurisdiction and only then will they send you your money. Since every day of delay reduces your return on investment it is very important to react quickly and to keep on top of the jurisdiction about getting your payment.
I have found that taxpayers usually pay when it costs them the least amount of money. What does this mean – it doesn’t mean they pay at the first opportunity, what it means is that if the statute gives them a reason to pay at a certain time they will pay at that time WHEN DO THEY REDEEM?
As an example, Indiana has a change in the penalty rate at six months. It goes from 10% to 15% at six months and one day. Because of that you will find a large percentage of liens will redeem at five months and 20 days. In most states you get a rate for any part of a month that the lien is outstanding. In those states there will be more redemptions in the last week of the month than in the first week of the month.
There is one state, Illinois, that allows you, as the lien holder, to extend the redemption period. In the other states you want to avoid making deals directly with the property owner that are not covered directly by the procedures stated in the statutes. The reason is that these deals can invalidate your lien and leave you with an enforceable contract with the property owner, but no security in the form of real estate. Make sure you discuss these issues with your attorney prior to making any agreement that is not specifically covered by the statutes.
Which is better? There are pros and cons to both. An early redemption usually means a higher annualized return on your investment. EARLY VERSUS LATE REDEMPTION:
If you are going to get a 12% penalty on a $1, investment you are going to make $ if the lien redeems in the first week or last week of the year, so a quick redemption in a penalty state is a plus. It can be a plus in a jurisdiction where you get paid a set rate each month, if you have a place to reinvest the money right away. Another benefit of an early redemption is that it will usually save some of the expenses of title searches or other expenses related to noticing the “interested parties” on the lien.
A late redemption has the benefit of making a good return on your money for a longer period of time but it usually means that you will incur additional expenses that are required to meet the noticing requirements to perfect your interest in the property. It is not unusual for a lien to remain outstanding for the full redemption period and to redeem at the last possible moment. You do make additional income because of the longer holding period, but often times you may incur expenses that may or may not be reimbursed because of the longer holding period and the need to prepare to go to deed.
A number of states allow you to add expenses that are incurred to the amount the property owner has to pay for redemption. The type of expenses that may be chargeable are title searches, cost of noticing or advertisements, and legal fees. This can be substantial and, if possible, you want to get them back. Make sure you know if that is the case in the states you are buying in and always, I repeat, always file those expenses immediately. If you don’t the lien could redeem and you will be out the expense money. EXPENSES AND REDEMPTIONS:
GETTING THE PROPERTY
The first question you need to ask before you spend one more cent on notices or attorneys or anything else is “Do you want this property?” DO YOU WANT TO?
What are the reasons you don’t want the property? shouldn’t have bought the lien in the first place The house may have burned down the commercial property may have had an environmental incident (I love that term – they spilled 2,000 gallons of PCBs on the property and it is an “incident”) The taxing jurisdiction might have demolished the structure in the ensuing time period That cute little bungalow you bought the lien on two years ago is the local gathering place for the merchandising of “controlled substances” The local chapter of the “Hells Angels” now use the house for their headquarters (go ahead – you evict them, me – I’ll pass).
My suggestion is that you pull out your chapter on due diligence and do it all over again – at least the part about looking at the property
I would suggest spending a little money and make sure there are no environmental problems. The reason is very simple, once you become part of the “chain of title” by going to deed, you are responsible for the clean up cost.
The answer will vary by jurisdiction, but I do it before I start spending money on title searches, attorneys, or noticing. If, under the statutes you are working under, this is six months or so before the end of the redemption period, you are going to want another quick drive by before you actually file for deed. WHEN DO YOU DO ALL OF THIS?
That will depend on the jurisdiction, but the basic procedure is as follows: First you have to notify everybody who has an interest in the property (see the chapter on Notices). Secondly, you are either going to apply for a tax deed, or your are going to foreclose on the tax lien, or you are going to foreclose on the “right of redemption”. This is when you really do need a lawyer. All of these actions will take place in a court of law, or they will have to go through a court hearing, and there is zero tolerance of mistakes HOW DO YOU GO TO DEED?
There are a couple of different types of deeds (although there are probably twenty different names for them). The best is a judicial deed, where there has been a hearing and the court has directed the Treasurer or the appropriate official to deliver a deed to the lien buyer. A judicial deed will usually give you “marketable title”. TYPES OF DEEDS:
The other type of deed is often referred to an “Administrative deed”. In the case of this type of deed you will have to file a “quiet title” action. This is not a major problem, since you have already done the work needed. In a quiet title you notify the parties in interest (sound familiar?) and tell them to appear if they want to claim they have an interest in the property. Since you have already notified these folks prior to applying for the deed, you should have no trouble with a quiet title action. ADMINISTRATIVE DEED:
Please be aware that I have done a lot of transactions where I got a Treasurer’s deed and did not get quiet title and was able to sell the property using a quit claim deed. This will really depend on the sophistication of the buyer and whether they intend to resell the property in a short period of time or hold the property for a number of years. TREASURER’S DEED:
I want to take a moment or two to discuss the subject of lawyers. Much maligned in our society, they do, in fact, provide some valuable services. If you are going to be active in tax sales, especially tax lien sales, you want to have a good lawyer. LAWYERS:
How do you find a good one? When we were starting up the tax lien operation at Kidder-Peabody in the early 90s we found them from the folks at the court house who dealt with them each day.
When you meet with the lawyer – negotiate with him and try and get a flat quote per case that he will handle. If you know it is going to cost you $ per case then you can adjust your bidding accordingly. The costs vary greatly by state, and in some states you can add the legal costs to the amount owed on the lien.
The first thing you should do is insure the property. Up until this point in time you have not had an insurable interest in the property (you had what is known as an inchoate interest – meaning a future interest). Now you do, get some insurance so if something happens you don’t lose your investment. You want, if possible, to get insurance for the replacement cost – otherwise they may try to limit your recovery to what you paid for the lien, and that would not make you happy. ONCE YOU GET YOUR DEED:
If you are planning on selling the property, you need to decide what type of sale you want to do. A conventional sale where the buyer goes and gets their own mortgage is very clean, but may be more difficult with a tax lien property. Most of the properties you get in a tax sale are in lower income neighborhoods and although, red lining is not supposed to exist, you may find your buyers have difficulties getting financing because of the area or because the property has come from a tax sale.
There is a ready solution for you that you should be able to do and make a substantial additional amount of income – provide financing for the buyer yourself. Since you bought the property for probably less than 20% of market value, you can ask the buyer for a small down payment and set up a mortgage for them yourself. The benefit of this is that you can determine who you sell to and what rate you receive. The disadvantage is that you now are in the mortgage business, which may not be what you desire.
A third method is the “rent to own” program where you rent the property to someone with a portion of the rent going toward a down payment – after a period of time you have received your down payment and now you carry the paper for the buyer. You have more than gotten your money out of the property through rent and the down payment and you still have an interest in the property.
Another prospective method of disposing of the property is to donate the property. You need to talk with your accountant about this, but it would seem to me that you can probably get credit for the market value of the property when making a donation
In my experience, a very large percentage of the single family residential properties that we took deed to were rental properties. Right after you insure it you inform the tenant that the rent check will now be made out to you, and you ask them if they are interested in buying the house if the terms are right. We sold a number of houses to the tenants on “contract sales” or where we carried the paper.
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