TaxSaleLists.com Blog

Administrative or servicing errors

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.

I went to law school – never practiced law and felt I could read the statues and understand them but I always hired a lawyer.  Read the statute, get an attorney to explain that which you don’t understand, and follow it exactly. The taxing authority is not your friend here. They are delighted you bought the lien, but they would be just as happy if you screw up and their resident (who lives there and votes) does not lose their property. The courts are reluctant to take away the property owner’s property and will take any valid reason to deny your application for deed.

Learn what to do about subsequent taxes. In some states if you don’t 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.

Find out if you have to record your lien or certificate. If you do, do it- if you don’t you will lose 100% of your investment.

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.

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.

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 who 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.

Don’t let all this scare you away. There is a fairly simple solution. You have the attorney make up a checklist, in calendar form, of when you have to do what and make sure you do it. Even better, hire the attorney to do the work for you, the money is well spent and he has malpractice insurance if he screws up.

The Dumb Buy - Number Two Continued

Ok here is another example… I am trying to make a point to help you here.

You are bidding in Indiana, another premium state, only in Indiana you get the premium or overbid back and you get 10% interest on it.

• You have a broker price opinion on the property that is worth $400,000.000
• The property has a $250,000.00 original mortgage
• The picture of the house is beautiful. It is an English Tudor sitting on four acres and looks to be about 5,000 square feet.
• The lawns are cut, the neighborhood is great.
• The bidding quickly goes above $200,000.00 and you are determined to buy the lien.
• You finally buy the property for $240,000.00

You figure the worst case the mortgage company is going to take you out if the property owner doesn’t and if they both don’t you have a home run. Indiana has a one year redemption period. Twelve months later the property has not redeemed and you are jumping up and down for joy. You apply for the deed, and the judge gives you the property.

That is when you enter the property for the first time (remember in tax liens you can’t have access to the property before you have a deed). Much to your horror you discover that the property is a shell. There is no interior electrical, plumbing, or walls for that matter. Can it happen? YEP – I DID IT.

It turned out the property owner was lawyer who had gotten into financial trouble and could not finish the house. He realized that in Indiana the property owner gets the overbid if the property is not redeemed. He went to the mortgage company, explained the law to them and got them to agree not to redeem the property. He took the overbid, paid off the mortgage, saved his credit rating, and we got a Hollywood set house. (ouch again)

This is a rare occurrence, but I want to make the point that there is always somebody who knows more then you do.  Point I am trying to make: NEVER CHASE A PROPERTY…

The Dumb Buy Number Two

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:

Colorado and Mississippi have a bidding method (we will go into bidding systems in later posts) where they sell the lien to the highest bidder over the amount of taxes owed. This overbid, or premium, is NOT returned to the bidder. I have seen a number of bidders at the Steamboat Springs, Colorado auction bid premiums of 100% on parcels.

As an example:

• The lien amount (minimum bid) was $100.00 and the buyer ended up paying $200.00 to buy the lien.
• Let’s assume the interest rate that year (Colorado’s rate varies each year) was 15%.
• Let's assume the lien stayed outstanding (unredeemed) for a full three years
• Your interest earnings would be $100 x 15% x 3, or $45.00.
• The lien redeems the last day and you get back $100.00 plus $45.00 interest.
• You paid $200.00 for the lien and you managed to have the best possible thing happen with redemption, and that is for it to stay outstanding for three years and you still lost $65.00.

To give you an idea how important it is to keep on top of the amount of premium you bid, here is another example:

• The lien is $100.00
• The interest rate is 12%
• And you bid a $5.00 premium
• The lien redeems five days after the sale
• You get back the $100.00 plus 1% interest (12% per year or 1% for any part of a month)
• 1% interest is how much? Yep, $1.00
• So you paid $105.00 for a lien and got $101.00 back

Please go sit in the corner…

Another example coming up in next post

The Dumb Buy Number One

There are a hundred different ways to do this but they all can be summed up with “I never should have bid on that parcel, let alone buy it”. This is what Capital Assets lost money doing.

I can give you an example: Back in 95 or 96 I was bidding in Kent County, Michigan. There were about 40 of us in the room and when the parcel number was read we would each scream our bid and the treasurer would “hear who was first”.

There was a parcel number read for a $200,000 lien and one screamed out his bid. When you are the only one in the room bidding (most of the people were professionals) you know you have made a mistake! In this case, as I recall, it was a closed battery factory (had been closed for ten years) that was on the EPA watch list. (oops)

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, county, etc. All of those numbers sound ok, but let me give you another one. The redemption rate for abandoned battery plants that are on the EPA watch list is 0%. The redemption rate for abandoned anything factories is very low. The redemption rate for vacant land that is under water is near 0%.

The redemption rate for parcels that are 1 acre in size, but whose dimensions are 12 feet by 4,100 feet, are close to 0%. The redemption rate for burned out crack houses on blocks that have 12 other boarded up or burned out houses is close to 0%.

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.

Next Post The Dumb Buy - Number Two