Transcript:
Welcome to the Tax Sale Podcast, where tax sale investing is made easy.
I’m Casey Denman, a tax sale veteran, expert, and trainer, author of the tax sale playbook, founder of the tax sale academy and your host here on the tax sale podcast.
Thanks for joining me on today’s podcast, and as always, at the conclusion of this podcast, if you’re looking to learn more about investing in tax defaulted real estate head to taxsaleacademy.com. That’s taxsaleacademy.com.
Today we’re talking about tax sales and outstanding liens. Now, before I get into this I want you to completely understand that you must know your state’s statutes and laws. If you don’t understand them, then don’t invest. They are what controls YOUR investment. Knowing your laws in this business is everything. So know your laws.
With that said, what we’re about to discuss will apply for the overwhelming majority of all states.
Ok . . . when a property owner fails to pay their delinquent taxes, a priority or senior lien is placed against the property. This lien could be resold in tax lien states or might just be held by the county in tax deeds states.
This lien is called a senior or priority lien. This means that is has priority over most other types of liens.
We can compare it to a first mortgage and a second mortgage. A first mortgage is more secure, usually for more money and has the priority over the second mortgage.
Regardless of what other liens exist, when a tax lien is placed on a property it becomes a priority lien with a few rare exceptions we’ll discuss later. So, if bank of America has a mortgage against the property, joe the plumber has a mechanic’s lien and whomever else has a lien against the property, whenever that tax lien is filed it automatically becomes senior or more important than the rest of those liens. So what this means is that once the tax lien is foreclosed, not only does it foreclose out the owner’s interest in the property, but it ALSO forecloses out the interest of every other lien holder.
So when you buy a tax foreclosed property, as long as the lienholders were properly notified, you become the owner of that property without any mortgages or liens attached to it. With that said, if there is enough equity in the property and those lien holders have a big enough interest in the property then they have the right to step in and pay the taxes so they do lose their interest. In other words, the can stop the tax lien process by paying the taxes, which stops anyone from foreclosing out their interest.
So, you buy that tax sale property and the liens get wiped out. Now as a side note, don’t confuse this as meaning the title is clean or insurable. That’s an entirely different topic and I urge you to find the episode about that.
Ok, so the liens get wiped . . . but we need to take it a step farther and add a little clarification here. I should say the PRIVATE liens get erased. And the private liens only.
The best way to remember this is that the government will remove private parties liens, regardless how big or small the private party is – doesn’t matter is its joes plumbing or Wells Fargo. It’s gone. But they will not remove their own liens. So private liens are wiped out and government liens stay.
Now, let’s look into it a little further. The more powerful government, the higher the priority of those liens. So for example, a federal lien plays by it’s own rules – things like IRS liens. A state lien then comes next, which is controlled by the state obviously. Followed by a local lien.
On a federal level, I get a lot of questions about IRS liens. The IRS has a 120 day right of redemption for all tax sale properties. This means that for 120 days, you can’t do anything with that property while you wait for the IRS to decide if they want to take that property. So they have 120 days to come in and take the property. If they do this, they’ll reimburse you your money w/o interest and you’ll move on. It’s important to look at it with common sense though. If you have a $1500 lot and the taxpayer owes the IRS $250,000, the IRS’ expenses acquiring and selling that property will be much more than it’s worth. So just because they hold a lien does NOT mean they’ll exercise that lien. In fact, they usually don’t when it comes to tax sales. The other option of course, is to just pay off the IRS lien for the benefit of not having to worry about it and helping someone else out. Probably not the best idea unless you’re REALLY nice, but yes, that’s the only alternative to waiting.
Beyond the feds, you’ve got a number of state and local liens. The most common liens I see are for code enforcement issues. These are liens against the property for things like weed violations, dilapidated home violations, demolition costs and that kind of stuff. If these liens exist, it’s not the end of the world, but it will certainly require some effort and negotiation on your part.
In many cases you can actually get these liens reduced substantially by up to 90 or 95% or perhaps even more. This is completely at the discretion of the department that handles these types of things in your specific area. You usually face two issues: (1) the ability to negotiate will likely be limited by the county’s hard costs. If you’re talking interest on fines, daily fines, the kind of thing that doesn’t cost them anything then that’s one thing. If you’re talking about a situation where they had to bring one of their tractors to a jobsite, demolish it and haul it away, where hardcosts are involved, then your ability to negotiate will be greatly reduced since they’ve spent money on the property. The second point is that it will depend on the people you meet with, what they think of you, the property and truthfully, their moods that day. I’ll likely do a video on negotiating liens another time.
So, when you buy a tax sale property, private liens are removed and government liens stay. And depending on what these government liens are for and how saavy you are, then you might have a shot at getting these liens reduced.
Again, guys, I can’t emphasize this enough, with all of this said everything in this episode is a generalization of everything that covers most states. Read and know the specific laws to your state.
That’s it for today’s episode. I hope you’ve found it helpful. There is certainly quite a bit involved with tax sale investing and outstanding liens are a popular topic.
To learn more about all the details involved with tax sale investing, to review our state guide and to get a copy of The Tax Sale Playbook, head to TaxSaleAcademy.com. Again that’s taxsaleacademy.com.
And as always guys, if you found this episode helpful it will mean so much to us if you take a few second to leave positive feedback.
Take care guys and make it a successful day.
See ya!