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Expenses and Redemptions

A number of states allow you to add expenses that are incurred to the amount the property owner has to pay for redemption.

The type of expenses that may be chargeable:

Title searches

Cost of noticing or advertisements

Legal fees.

This can be substantial and, if possible, you want to get them back. Make sure you know if that is the case in the states you are buying in and always, I repeat, always file those expenses immediately.

If you don’t the lien could redeem and you will be out the expense money.
 

NEXT POST: Going to Deed

Early versus late redemption

Which is better? There are pros and cons to both.

An early redemption

 Usually means a higher annualized return on your investment. This will always be true where the interest rate owed is stated as a penalty. If you are going to get a 12% penalty on a $1,000 investment you are going to make $120.00 if the lien redeems in the first week or last week of the year, so a quick redemption in a penalty state is a plus.

It can be a plus in a jurisdiction where you get paid a set rate each moth, if you have a place to reinvest the money right away.

Another benefit of an early redemption is that it will usually save some of the expenses of title searches or other expenses related to noticing the “interested parties” on the lien.

A late redemption

Has the benefit of making a good return on your money for a longer period of time but it usually means that you will incur additional expenses that are required to meet the noticing requirements to perfect your interest in the property.

It is not unusual for a lien to remain outstanding for the full redemption period and to redeem at the last possible moment.

You do make additional income because of the longer holding period, but often times you may incur expenses that may or may not be reimbursed because of the longer holding period and the need to prepare to go to deed.

My preference is always an early redemption with a planned place where I am going to reinvest the money in a new lien. A good example would be South Carolina, which has sales in October, November, and December. If you received an early redemption in October, you could go to the November or December sales and reinvest the funds. Indiana holds sales from August to the end of October, so it also gives you an opportunity to reinvest he proceeds of an early redemption.

NEXT POST: Expenses and Redemptions

When do they redeem?

I have found that taxpayers usually pay when it costs them the least amount of money. What does this mean? It doesn’t mean they pay at the first opportunity, what I means is that if the statute gives them a reason to pay at a certain time they will pay at that time.

As an example, Indiana has changed in the penalty rate at six months. It goes from 10% to 15% at six months and one day. Because of that you will find a large percentage of liens will redeem at five months and 20 days.

In most states you get a rate for any part of a month that the lien is outstanding. In those states there will be more redemption in the last week of the month than in the first week of the month.

One thing you want to establish prior to the auction is how the jurisdiction handles redemptions while the legal process to get the title is going on.

Another example from Indiana, prior to the law being changed last year, a number of counties would let the property owner redeem at any time until the judge granted the deed to the lien holder, even though this was often several moths after the one year redemption period had expired. You want to try and find out if this can happen in the jurisdiction you are buying in.

Unfortunately, you are only going to find out from those at the courthouse or other experienced lien buyers in the area because the statue never states that this is what will happen. You will also find that policies may change in a jurisdiction with the election on new officials who are responsible for the sale and procedures.

There is one state, Illinois that allow you, as the lien holder, to extend the redemption period. In the other states you want to avoid making deals directly with the property owner that are not covered directly by the procedures station in the statutes. The reason is that these deals can invalidate your lien and leave you wit an enforceable contract with the property owner, but no security in the form of real estate. Make sure you discuss these issues with your attorney prior to making any agreement that is not specifically covered by the statutes.

Any questions about When They Redeem?

NEXT POST: Early VS Late Redemption

What do they pay to redeem?

This depends on the statute for the jurisdiction, but they have to pay you the statutory interest rate or penalty rate. In most cases the taxing jurisdiction will calculate this amount for the taxpayer and you will not be involved.  What you want to know is what the redemption amount should be, because there can be errors made and you want to know if they have been made.

Another thing to be aware of is the delay between the date of redemption and the date you get your money. There are a number of jurisdictions around the country that take weeks, and in some cases months, to get you your money. In most cases they will send you a redemption notice. You then have to send in your certificate or a quit claim deed to the jurisdiction and only then will they send you your money.

Since every day of delay reduces your return on investment it is very important to react quickly and to keep on top of the jurisdiction about getting your payment. If you ask the jurisdiction prior to going to the sale they may give you some indication on how long they take to process redemption.

Next Post: When do they redeem?

What Can I Do Now?

The first thing you can do is check your research and see who can redeem. If anybody can redeem – you go and redeem the lien.

You pay the interest and taxes owed to redeem the line. What happens is that you get back the over bid or premium, the interest on the lien that you paid to redeem the lien, and your loss is the $2,000.00 you originally paid for taxes, interest, penalties and costs.

Net benefit is that you lost $2,000.00 instead of $15,000 or $25,000.00 that you two other options would have lost.

What do you do if only a “party in interest” can redeem? You find a party in interest other than the property owner and pay them to redeem the property. It can be a contractor with just a mechanics lien for $200.00 on the property; it can be the mortgage company or someone with a second mortgage. It will probably cost you a few hundred dollars more than what it would cost you if you can redeem yourself, but it will still save you thousands of dollars.

Next Post: What do they pay to redeem?

Who can redeem?

This varies greatly by jurisdiction. In some jurisdictions anybody can redeem a tax lien, in others only a person with “an interest in the property” can redeem the lien. Who are “parties in interest”? The property owner, his or her heirs, the mortgage company, anybody with a lien on the property, including, in some cases, a prior or a subsequent tax lien buyer. Why does it matter? There may be occasions when you do not want to accept the redemption if it isn’t from a party who can legally redeem the lien.  Make sure you understand who, under the applicable law, can redeem the lien.

There are a number of states where they use a bid up or high bid method of sale. If you bought a lien in these states you probably paid quite a bit more than the taxes, interest, penalties and costs for the lien.  This amount, called the over bid or premium, comes back to you upon redemption. Now let’s assume the following example exists:

            The taxes, interests, penalties and costs for the parcel were $2,000.00 and you bid $25,000.00 because you thought it was a three bedroom residential property that was worth at least $75,000.00, but you made a mistake.

            It turns out to be the vacant lot next door to the three bedroom residential property. The vacant lot is worth $5,000.00 and it isn’t going to redeem because the property owner gets the $23,000.00 over bid premium if he doesn’t redeem and the property goes to deed.

            You have a problem, if you don’t go to deed, you loose $25,000.00. If you go to deed, you lose $20,000.00 (the difference between what you bid and the value of the property).

Next Post: What do you do?

Redemption: Who, What, When and Why?

All tax lien states, with the exception of Kentucky, have a state redemption in the statutes. The redemption period is the time allowed for the property owner, or, in some cases, any “interested party” to redeem his property by paying the amounts owed on the tax lien.  This time, which varies from a few months to as long as four years, is state in the tax sale law of the jurisdiction.

To the best of my knowledge the clock usually starts to run on the day of the sale. There are a number of interesting issues involving redemption which we will discuss in detail. It is only when the redemption period has expired and the property owner has not paid you what he owes you that you have a chance to get the property.

You do this through a number of different methods, depending on the jurisdiction, but they go under the terms of “foreclosing the right of redemption” or “barring the right of redemption”. But that is a discussion for later blogs.

Next Post: Who can redeem?

Redemption & Notices

What do I do if there is redemption?

1. Make sure you know exactly what your duties are when there is redemption of a lien.
2. This will vary greatly by jurisdiction. In some jurisdictions you will be required to return the lien.
3. In others you may have to execute a quit claim deed on the property.
4. There are a few jurisdictions where you have to do nothing, but it is your duty to understand exactly what these requirements are.
5. Not fulfilling the requirements can cost you to lose your investment.

Notices

The United States Constitution has a “due process” clause and one of the interpretations is that no person shall be deprived of property without due process of law. This is where notices come into play.

1. Every state has a requirement that the delinquent taxpayer be notified that they are at risk of losing their property.
2. In most states the requirement to give this notice is the responsibility of the lien buyer. THIS HAS TO BE DONE EXACTLY RIGHT AND EXACTLY ON TIME.
3. It is, again, your responsibility to know what the noticing requirements are and when they must be done.
4. Arizona, as an example, requires that you notice the property owner no less than 30 days prior to the hearing for foreclosure of right of redemption and no more than six months prior to the hearing. This description of a window of time for noticing is not rare and if you notice 29 days before the hearing or seven months prior to the hearing you have a very high likelihood of losing your investment.

There is a term in the law “time is of essence”, this means that proper timing is absolutely necessary. And in the case of noticing time is always of essence.

Next post: How do I notice?

Reviewing your acquisitions

Before you leave the area I think it is a good idea to drive by each parcel you purchased a line on and to talk another photograph of the property for your records. First thing you want to do is check these photos again your due diligence photos of the property. I have had at least two instances where the property has been a victim of arson between the due diligence and the day after the sale.

Depending on the jurisdiction this will give you an opportunity for “a sale in error”. You probably won’t get out the sale, but you might.

Make sure you know what you purchased and make sure you have a photo of what you purchased – there are going to be a number of times before the redemption period expires either you are going to need to look at that photo.

Next Post: Financing your acquisition