A good amount of the losses I see on properties that are taken all the way to the tax deed stage from a lien or are bought as tax deeds, actually come from the government.
Local governments – towns, cities and counties – have assumed a responsibility to their citizens to ensure their neighbor’s homes and yards are in good condition and not the cause of blight. They do this by enforcing the municipal code, aka ‘code enforcement’, about standards for things like the length of grass in a yard, broken windows, trash and debris in and around properties.
The municipalities may place fines and liens against the property in the hundreds, thousands and even tens of thousands of dollars.
Unfortunately for the tax lien and deed investor, these municipal liens survive the tax deed issuance.
These fines could have been placed on the property years before you were issued the tax deed and it sticks with the property. So, not only do you have to clean and repair the property, but you’ll also have to pay the fines levied against it owed by the former owner to the city seriously cutting into your tax deed profits.
To give one example, the City of Jacksonville, FL will place fines on properties they have to board windows on or secure for a couple thousand dollars. If those issues are not cleared up after a number of years and the fines paid, then they will slap another lien on the property – this time amounting to $150 to $250 per day!
I’ve seen some properties in that city with fines and liens totaling over $100,000 where the property itself is only worth $50,000.
Cities in Connecticut, New York and other states often put $100 per day fines for uncut grass and yard debris. Some cities in Indiana have even issued arrest warrants for negligent property owners.
I’m not advocating cities stop enforcing and using municipal fines to stop blight and eyesores; however, as a potential tax deed owner, you need to know that these fines due exist and you’ll be next up to owe them.
These liens can cross-attach to other properties that you own. So, for example, you may have five tax deeds under one limited liability company and if just one of those tax deed properties is subjected to a municipal fine, you will need to pay that fine if you sell any of the five properties that you own.
There are two solutions to this issue of surviving municipal liens and keeping your tax deed profits:
First, avoid the issue altogether.
When you buy your tax lien or deed, make sure the property is in good condition – no broken windows, trash in the yard or tall grass that could raise the attention of local code enforcement.
Then, research the property by calling the city code enforcement office and asking if they have any issues with the property. Run a title report to see if any fines exist.
Second, understand whether or not you can negotiate the fines lower or even remove them altogether.
Most cities and towns just want to see their communities cleaned up and without complaints from neighbors – the fines are meant as a deterrent not a source of revenue.
If you know there are municipal fines and liens on the property, talk to the code enforcement office and ask them what it will take to remove them. They may have a policy that if the new owner takes care of the issues within a set amount of days, they will remove or substantially reduce them.
There is typically an application process where they want to see that the property is being repaired and maintained by the new tax deed owner. While it’s not a guarantee that they will remove the liens, you should get a pretty good feel if it’ll happen.
So, avoidance is usually the best route to take, but if you do your homework and find out what it takes to remove them, you may just be able to find a bargain as other investors have avoided homes with these fines.