Transcript:
Hey Guys and welcome to the Tax Sale Investing Podcast, where Tax Sale Investing is made easy.
I’m of course, your host, Casey Denman. I’m a veteran tax sale investor, tax sale trainer and founder of the Tax Sale Academy where our trainings have been learned by thousands of students.
As always, at the end of today’s podcast, if you’d like advanced training or if you’re ready to get started towards tax sale success, please head to taxsaleacademy.com.
Today, we’ll be comparing bank foreclosure to tax foreclosures.
There are many misinformed people that assume these are the same thing. This is pretty far from the truth.
Just to be completely transparent here, I have experience with both. I’ve purchased bank owned homes and I’ve obviously purchased many tax sale properties. I’ve also worked with many others who have done both.
So, what’s the difference? The primary difference is that in a bank foreclosure, the property owner owes the bank money through a delinquent mortgage. In a tax foreclosure, the property owner owes the county money by way of their property taxes.
Let’s discuss bank foreclosures first. It starts when a borrower borrows money against a parcel of real estate. This could be a purchase, refinance, home equity line or credit, that kind of thing. Under the terms of that mortgage, certain conditions must be met. Most notably, the borrow must repay the borrowed funds according to those terms. This is typically going to be by paying back monthly payments.
To begin the process towards foreclosure, the borrower fails to make the payments according to the terms therein.
Also written in that mortgage, are the results of becoming delinquent in your mortgage payments. Typically, the mortgage will allow a foreclosure action to commence. From there, state law will dictate what must happen to a degree. They can’t simply knock on your day, say “you haven’t paid in 60 days” and then take title to the property after kicking you out. It just doesn’t work like that.
What usually happens is a series of legal actions. They’ll begin with a lis pendens, or notice of legal action. This will inform you and the public that the mortgage holder is seeking to foreclose the mortgage against you.
From there, a document will be drafting and filed in the court system that lays out the legal action. In short, it references the terms in the mortgage, references the payment history of the borrower, the amount due and what the mortgage company is seeking, which is foreclosure.
This has to be filed and served upon the borrower.
There are quite a few other legal steps that must be fulfilled, but from there, the process will eventually end up with what is known as a judgement. This is the document that the judge signs that grants the foreclosure action as finalized.
From there, in most states, the property enters what is known as a foreclosure sale. This is where the property is sold at the courthouse to the highest bidder. However, this is not a no reserve auction or anything like that. The mortgage company has the ability to add a reserve onto the property up through the amount they’re owed. This includes not only the remaining principle mortgage balance, but also the interest, late fees, court costs and attorney’s fees. So it’s very possible the property is underwater. In other words, the property might be worth $100,000. And the balance on the mortgage might be $95,000, but after all the fees, they judgement could be for $105,000.
The bank could set a reserve or bid on their on behalf up to $105,000 for this property which means it is a losing investnet. And this happens frequently in many areas.
Likewise, you can’t see the inside of the property, you can’t inspect the property and there might be other liens that still exist if they weren’t properly foreclosed out or if they were senior to the mortgage being foreclosed.
Once the property goes through the auction and if no one bids, the property is in the hands of the bank. It could be put on the market with a realtor, sold off the market in a portfolio, or transferred any other way the bank wants it. In short, the bank makes the rules.
Now, when it comes to a tax foreclosure, the state makes the rules. In fact, they make all the rules and these rules must be followed to a tee.
Of course, the process starts when a property owner is delinquent on their taxes. From there, it goes through a number of different processes that we’ve discussed in previous episodes. But for simplicity purposes, we’ll use the tax deed process.
The owner will get served a notice, the county will foreclose on the property and it works it’s way to the tax sale auction. The opening bid will be determined as required by state law. Not an amount that is owed to bank, attorneys, or anyone else. It will typically be set by the amount owed to the county, which will be the back due taxes, interest and fees. The property gets auctioned to the highest bidder and if no one bids, the property is often sold OTC or through other methods as described in the state statutes. It’s that simple.
When you look at a bank foreclosure, not only can the property be underwater, and they frequently, are, but the bank makes most of the rules. This is only fair of course, since it’s their money, but they can stop the action any time, the can dispose of the property how they want, they make the rules to protect their investment.
When it comes to tax foreclosures, the rules are simple… You must follow the law. And state law, in nearly every state, is very clear and direct on the process that must be followed. The county doesn’t just get to do things the way they want. They are mandated to follow the required system.
For this reason alone, the tax foreclosure process is so much more desirable.
With that said, we’ll go through a quick comparison regardless.
First off, price. Bank foreclosures, whether purchased at an auction or through a realtor after the fact are typically much more expensive than tax foreclosures. The bank is trying to recoup as much of their lost investment, that is the mortgage that is owed, as possible. And they want to squeeze every dime out.
Now let’s talk the process. With tax sales, you have a set, easy to understand process. With bank forelcosures, it can be an absolute nightmare. Not only can the auction process at the courthouse be difficult, but if it doesn’t sell at the courthouse since the reserve might and is often too high, then the property could go to a realtor. If you’ve ever tried to purchase a bank owned property from a realtor, you probably know you use special contracts, do things a special way, and do what the banks says. And even then, you still don’t know what you’ll pay. A friend of mine offered $120,000 for a house priced at $90,000 just last month and the bank declined it saying it way too low!
When it comes to property types, you’ll usually have many more homes as bank foreclosure than at tax sales. This could be good or bad depending on your objectives.
The most important metric, as we’ve already discussed briefly, however, is potential profit. Which methods allows you to make the most money? That’s the question right?
Overall, tax sale properties will generally provide the best return. Not in every situation of course, but you must remember that every bank owned property has been financed. And many, many of these properties that is bank foreclosed had a high loan to value ratio. That’s the amount owed compared to what the property is worth.
When it comes to tax foreclosures, the amount owed, the taxes and fees, compared to the property value is going to be a far far lower percentage than bank foreclosures.
In the end, which is best? Tax foreclosures or bank foreclosures? Well, the answer should be no surprise. Tax foreclosures far exceed bank foreclosures as an investment vehicle in my book.
Of course, I’m the tax sale guy . . . hopefully my answer didn’t surprise you.
That’s it for today’s podcast guys. I hope you enjoyed learning about the differences between bank foreclosres and tax foreclosures.
To continue you’re learning about tax foreclosures, head to tax sale academy.com.
Again, that’s taxsaleacademy.com where you can get a copy of my free book, Tax Sale Playbook.
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As always, take care folks, and make it a success week.
Bye bye.