How Municipal Fines Will Ruin Your Tax Deed Profits

How Municipal Fines Will Ruin Your Tax Deed Profits

 

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.

 

 

 

 

 

Letter from a New Tax Lien Investor

Letter from a New Tax Lien Investor

I receive quite a number of emails every month from new tax lien investors expressing disappointment with the auctions they attended.  At best, they spent hours and hours researching how the sale works, reviewing properties and attending the auction only to be left with no liens to purchase at a reasonable rate.

At worse, they spend thousands of dollars on a ‘hyped up’ training program or seminar and then buy a bunch of nearly worthless liens

I received an email from a new investor in Colorado.  He gave me his permission to share it with you as I think it reflects the experiences of many new investors in the current market.

Here’s his email (my emphasis added):

As a newbie to Tax Lien Auctions I wanted to share my experience with you that I had today at auction.

I live in Arapahoe County, Co and we had our electronic auction today and I spent a couple months preparing myself for today.

I wanted to invest $10k so I deposited $1,000 with the auction site. I did my homework and reviewed the liens I wanted to purchase. I knew that in order to make money I should pay the smallest premium possible so on liens like $3-5k I entered a premium of $21 in advance. If it was small liens like $400 I would bid by proxy $5-$8. I knew that if a certificate was redeemed within a month you wouldn’t make much interest on a 10% interest rate.

By the time auction had opened I had about 77 bids totaling $33k. I wanted to go way over in case I didn’t win most of my bids.

Boy was I in for an awakening when I checked out Batch1 in which I had no positions.

After Batch 1 closed I checked on the winning bids and I was shocked to see that most bidders were bidding very high for a Lien.

Here is a snapshot of some of the bids. In checking a sampling of them I can see that the average percentage of the Premium to the Tax lien was around 6-7%. Even IF the lien was not redeemed for a year that would leave the purchaser/bidder with a return of 3-4%.

I went into Batch 2 which would close an hour after Batch 1 and started adding a lot more bids. I didn’t have time to research but I knew that if I wanted to win some liens I would have to enter more bids.

One thing I didn’t want to do was do what everyone else was doing by bidding high. I knew that if I did that I would more than likely not see a return at all or if so it would be very small and I should have kept it in a 1% interest bearing savings account.

Well, I didn’t win anything in Batch2. I bid even more on Batch 3 and I did add like $5-$10 per bid over what I thought I should pay.

This didn’t help.

On Batch 3 I did win 3 bids for a total of $140 with a $15 premium. I doubt I will get back 100% of my money. Luckily these 3 liens are vacant land so maybe, just maybe I’ll end up with a treasury deed but I doubt it.

When all was said and done after 5 batches I had bid on a total of $330k in tax liens. I won only $140 worth of that.

Will I do this again next year? I doubt it.

I put well over 40 hours into this in the past 6 weeks and I have nothing to show for it but experience. At least I wasn’t foolish thinking I could get someone’s expensive properties for pennies on the dollar. I was just looking for a good way to earn 8-9% return on my money with little risk.  I think most of these bidders are in for a rude awakening when they look at their outlays vs. what their returns will be.

State of the Tax Lien Certificate Market

State of the Tax Lien Certificate Market

For most tax lien certificate buyers, 2013 has been a frustrating year.  In fact, many of my readers and newsletter subscribers have put of their hands and walked away from buying tax liens altogether.  For institutional investors (those funds who purchase thousands of tax liens a year), the experience this year has been even worse as they’ve raised $100s of millions of dollars with few places to invest profitably.

What’s the cause of this?

Simply, over the past two years, one or two large funds have been buying almost all of the publicly auctioned tax lien certificates and at incredibly (and some would say, unwisely) low rates.  Moreover, these funds have been buying very broadly including buying tax liens on lower quality properties that most investors stay away from.

As an example, earlier in the year at the 2013 Maricopa County, AZ tax certificate auction, one company purchased over 20% of the available liens–most at below seven percent.  Across the whole auction, the average coupon rate sold decreased from nearly 10% in 2012 to 7.5% in 2013.  These large firms knocked out most individual buyers simply because they were OK with rates of 5, 6 or 7%.

The past year’s Florida auctions were slightly better for some of the other institutional players, but the individual buyer had no chance to get into the market. This was because those institutional funds were able to flood the auction with thousands of “virtual” bidders effectively blocking out the smaller tax lien buyer (to understand how the Florida tax lien auction works checkout my article on Buying Florida Tax Certificates).

Are there alternatives for the individual tax lien investor?

Unfortunately, for the investor simply looking for a safe, high “yield” on their investment without worrying about taking the tax liens thru the foreclosure process, the options are limited.  However, if you have experience in direct real estate investing, there are a few options worth exploring (and still profitable):

  • Buying tax deeds directly – I haven’t been a huge proponent of buying deeds directly, but as the market improves, there are great opportunities for the savvy buyer.  It takes time, expense and local market knowledge but there are bargains to be found.
  • Attending ‘out of the way’ auctions – Generally, the institutional buyers shy away from smaller county and municipality sales.  It’s not worth their time to attend when they can only pickup a few liens.  By focusing your efforts in these small and rural counties, you’ll be up against less competition and be able to find higher yielding tax liens on solid real estate.
  • Buying tax liens from other investors – There are a good number of investors who bought their tax liens two or three years ago and who simply do not want to take those tax liens thru the next step and into foreclosure.  Finding these investors can be a bit of a challenge but talk to your fellow attendees at the auctions and, in some states, lookup the owners of liens you may want to buy.

My forecast for the rest of the year and 2014

Like most markets, the tax lien certificate market is cyclical.  We’re in a low rate, highly competitive cycle right now.  Back, 5 years ago, it was completely opposite of what we’re seeing.  And, in the future, we’ll see it back that way.

Presently, the flood of cheap money from the federal reserve has enable institutional hedge funds to take low cost loans for their purchases of tax liens.  They are financed by the deep pockets of banks such as Capital One and Wells Fargo willing to lend 70-80% of the purchase price of the liens.

Until the federal reserve decides to tighten interest rates and money supply to the banking system, we’re going to continue to see a tight tax lien market with low returns and few options for individual investors.  The 2014 auctions look to be much the same as this past year’s tax auctions.  However, should we see a rapid rise in rates, the institutional buyers could actually start to see sharp losses and thus quickly pull out of the market.

 

 

 

 

 

Removing IRS Liens from Tax Lien Investments – Should You Worry?

Removing IRS Liens from Tax Lien Investments – Should You Worry?

I get a lot of questions and worry about Federal and IRS liens that could be on properties that our readers are purchasing at tax lien and tax deed sales. Or, I’ll get an email from a tax certificate holder who finds out that there is a large IRS lien on a property and think they’ve lost their investment.

I’ve found that IRS tax liens do not have to be as much of a concern as we make them out to be. And, I’ll discuss why shortly.

STOP!  If you’ve found this page because you’re looking for a TAX LIEN ATTORNEY to solve an IRS issue or Federal or State Tax problem, then click here for a directory of local attorneys in your state that can help you SOLVE your IRS/Government Lien Issue.

Find a qualified local TAX LIEN ATTORNEY in your state to help you NOW!

If you’re looking to hire a tax lien attorney to help you with your investment (tax lien certificate, tax deed, quiet title), then keep reading below!



But first, let’s talk about IRS liens:

  •  If a property owner fails to pay federal taxes and the IRS finds out about it, they will place a lien against the owner. This lien automatically attaches to any properties that the owner holds in their name.
  •  How does a property owner remove an IRS lien from their real estate? Three ways: they can pay it off, they can let it expire after 10 years, or they can negotiate with the IRS (you’ve seen the late night commercials, but I’ll show you how it works below).
  •  The IRS lien remains on the property unless one of the three ways discussed above happens. If you are issued a tax deed in a non-judicial foreclosure state, you’ll still have this IRS lien on your property.
  • IRS tax liens as with most state and federal liens, have priority over tax lien certificates. They must be dealt with or will have to be paid off if you are issued a deed.

However, in practice, these liens are typically wiped out thru a judicial process.

JUDICIAL FORECLOSURE STATES

If you’re investing in a judicial foreclosure state such as DC, MD or NJ, your attorney will follow a process that will remove IRS liens entirely if your foreclosure is successful. How will your attorney make this happen?

Per federal statutes, the lien holder must notify the IRS that they are foreclosing on a lien with a federal lien on it. Specifically, your attorney will send out a notice early on in the process (called a 25-day notice since the IRS has 25 days to respond) that seeks the IRS consent to take the property free of their IRS lien(s). Then, when the foreclosure is complete, your attorney will send another notice (called a 120-day notice since, again, they have 120 days to respond) that tells the IRS the foreclosure is final and they can redeem the property (aka “pay you off”), if they choose, within 120 days.

These statutes from the IRS can be found on their website (http://www.irs.gov/irm/part5/irm_05-012-004.html)

The IRS almost never takes actions on these properties. I’ve only heard of it once or twice and that was because the lien was a very large amount and the property had lots of value. If they do respond because there are tons of equity in the property, then that property will most likely redeem anyway by the homeowner or a mortgage company.

NON-JUDICIAL FORECLOSURE STATES

Non-judicial tax lien states (states that just issue you a deed with no legal foreclosure such as SC, AL, and FL) require an additional legal action called a quiet title action for removing IRS liens. I speak a lot about that here and here, but you’ll need to hire an attorney to file this and they will perform the same noticing.

I’ve also found that many of these liens were actually filed way in the past. Check your title work and you’ll probably find that the IRS lien was filed close or after their 10-year expiration period. You may be able to just wait it out until you reach this anniversary.

NEGOTIATING WITH THE IRS

In the rare case that the IRS lien wasn’t eliminated during your quiet title or judicial foreclosure, you can still negotiate to reduce the debt to ‘cents on the dollar’.

No, I don’t suggest you call those late night 800 numbers. You can do this just as easy yourself.

You’ll need to prove to the IRS that there is not sufficient equity in the property to payoff the lien if it is sold. The specifics can be found in IRS Code 6325 and involves filing a form found under Publication 783. Basically, you’ll need to provide a valuation of the property plus title work showing any outstanding liens superior to the IRS lien. You’ll submit the entire application to the regional IRS office who will review the details and come up with a settlement amount if it’s found that the IRS can’t be made whole.

Keep in mind, any settlement amount that the IRS gives you to discharge the debt is just the beginning of a negotiation. You can definitely argue your case to get your initial offer amount lowered. Just be able to provide facts–appraisals, real estate agent opinion of values, repair costs–that support your numbers. I’ve only been thru process once. It took about four months and I managed to get the lien discharged off the property for a number that still allowed me to make a profit on the property.

From the IRS perspective, if they don’t settle with you, they may be left with selling the property at a federal tax sale where the property will normally go for a bottom-of-the-barrel price at auction.

As alluded to earlier, IRS liens shouldn’t be a huge worry when you’re doing your due diligence before a tax auction or upon taking a tax deed. My focus is always on the property itself ensuring it is viable and I’ll get a redemption out of it as I’ve discussed elsewhere in my blog and in my e-books

What are the Five Best States for Safety on Your Tax Lien Certificates?

What are the Five Best States for Safety on Your Tax Lien Certificates?

In my last post, I discuss what I thought were the best states to consistently earn a high yield on your tax lien certificates.  Today, I want to discuss the reason why I chose tax lien investing for a majority of my investment capital.  It’s all about safety of investment.   You’ve probable seen all of the hype about “no risk investing” etc etc.  I hate that crap.  There IS risk to any investment and tax liens more than others. 

However, if you know what your doing and do your due diligence, tax lien certificates can be extremely safe.

And why not?  They are ahead of just about every lienholder.  You basically step in as the government authority and the lien-to-value ratios can be less than 1% of the value of the house.  Who’s going to lose their $200,000 home over a $1,500 tax bill?  And more so, what mortgage company in their right mind would allow this to happen.

I’m not going to go on about how you can lose money in tax lien certificates–you can read my earlier post about the risks of tax lien investing.  I want to focus on those states that you can safely put your money in and rest easy every night.  You won’t earn a huge double-digit return, but I’ll guarantee its better than putting it in the bank.

Arizona

Arizona tops my list for the safest place to buy tax lien certificates.  It’s a bid-down state meaning that you don’t have to bid more than the delinquent taxes and the millage rate is very low compared to other states.  For those new to tax lien investing, the millage rate is the percentage of the value of the property that is taxed.

So, you’re total investment should initially only be less than 2% of the actual value of the property.  Plus, Arizona has a (more…)

What are the Five Best States for Yield on your Tax Lien Certificates?

What are the Five Best States for Yield on your Tax Lien Certificates?

It’s almost June and the tax lien certificate auction season is about to finish up.  From Florida to Maryland, it’s been a busy month of buying and I hope everyone did well with their respective bidding.  If you’re new to investing in tax lien certificates, I wanted to give you a two part series on the best states for earning yield and for safety (part II).  It’s just my opinion given the current competitive environment, so I’m happy to hear your thoughts on where to find the best yields or safety in the tax lien market.

Yield in the tax lien certificate market is a function of risk and competition.  Just like any investment, the higher the risk…the higher the rates.  The tax lien auctions work the same way.  You’ll find that those properties that are less likely to redeem and/or result in a profit will go for the highest statutory rate.  In fact, counties would be better off not having a top statutory rate if they wanted to sell all of their liens.  Often times, the risk is so high, that there are no buyers even (more…)