I ended up being the high bidder on an auction.com property. Prior to bidding, I had a title company pull an investor search of the title and found that it was recently purchased for 290k by the bank at as a foreclosure at a trustee sale on Aug 21 and property taxes were all paid to be current. The auction.com auction ended on Sep 11. I ended up being the high bidder at 238k and the market value of it was 310k. After I submitted the earnest money, the title company found an IRS tax lien for 85k which was junior to the mortgage that foreclosed. The preliminary title report showed that it will sunset in 120 days (December 19). After researching many IRS manuals and BiggerPockets forums, the IRS lien should be discharged after a non judicial foreclosure and the IRS has 120 days to redeem the property (IRM 220.127.116.11). There many other requirements such as giving notice to the IRS 25 days prior to the foreclosure sale which all did happen by the foreclosing attorney.
According to the purchase agreement, we are set to close on Oct 11. I consulted with an attorney and his "recommendation" is to not purchase it until the title company is able to give me a clean title. If we delay closing (with the permission of the seller) then we incur a $100/day fee ($7,900). Is there anyway we can avoid this fee?
It is obvious I should not close until we can get the property free and clear, but say we ended up closing. Will the lien drop off as it would normally in a non-judicial foreclosure? If the lien does drop off and during the 120 day redemption period, the IRS decided to redeem, does the IRS redeem and pay me or the seller (the original foreclosure purchaser)? The attorney said the IRS will most likely redeem from the seller and I should have some stipulation stating the seller must pay me my purchase cost.
I know I should have done more due diligence, but that is beyond the point. I just want to know is there anything else I can do. Any help is appreciated. Thank you in advance!
I forgot to mention that the title company said they will delete the requirement for the lien to be off the property to insure the title. After 120 days redemption period on December 19, they will insure the clear title. Hopefully this makes sense. The property is in Tucson, AZ btw.
@Kao Saeteurn have you spoken with the point of contact for the bank? Due to the situation they may he willing to extend the closing and wave the fee via an addendum do to the situation. If they are unwilling or unable to do that I would follow the advice of your attorney and absolutely not close until clear title is provided.
It would not bother me at all....the chances of the irs redeeming are less than 1 in 100.....especially since the supposed price at the auction was $290k (which is likely not real) on a $310k property.
@Wayne Brooks thanks for your reply. Would you be concerned the lien will not be discharged for any reason? That’s my only concern really. I want to flip it since it’s pretty much move in ready but obviously we can’t close until the title is clean in December.
@Tylor Billings I have not but I think my title closing company will. If not, I’ll have them talk to them. Gotcha, that’s what I’m leaning towards doing.
@Kao Saeteurn Assuming the irs was or is notified, the lien no longer actually exists...only their 120 day right of redemption....that drops off by operation of law. The title will be “clear” after that.
@Wayne Brooks gotcha. Yes they were notified more than 60 days in advance. Thank you. I also talked to the title company and it sounds like they confirmed they will insure the title and disclose that there is a redemption period and after the 120 days insure the title with a clean bill.
@Kao Saeteurn The title company can obtain a letter from the IRS saying the lien is discharged. Sometimes the IRS is slow to respond and it can take a month or two to get the letter issued, but I would want it. My concern isn't the IRS trying to collect, my concern is with you being able to clear title when you flip. If you just take the title policy, you'll need to get a hold harmless letter at your closing from the current title company, which can be a pain in the butt unless you use the same title company. Releases are rarely recorded and it becomes your burden going forward to keep proving it.
I guess it's not a huge deal, but I deal with this stuff every day, and chasing old title companies for hold harmless letters is a pet peeve of mine. After time passes, no one remembers why they insured over it and they drag their feet. If you are using the seller provided title insurance that auction.com uses, I would not trust them to provide a hold harmless letter when you are selling the property down the road. Do it right and you won't have to waste time back tracking.
@Bob Floss II thank you for your reply. Can I get the letter from the IRS saying the line is discharged after I close?
What does the title company need to do to get the letter? What would I need the hold harmless letter say or do? I am not familiar with a hold harmless letter. How does it help the situation? So the process for me after I close and flip would be to provide the hold harmless letter or IRS letter stating the lien is discharged to the new buyer?
I am using my own closing company separate from the auction.com closing company. Does this help?
What do I need to do to do it right? Obtain the letter of discharge from the IRS and provide that to the buyer when I flip it?
Again, thank you for your help and apologies for all the questions.
@Kao Saeteurn If you are using your own title company to provide insurance to you and plan to use them when you sell the property, I would put the responsibility on them. The real question is, will they be fine with it showing up on title when you sell the property? Put it on them to give you something in writing so you don't get caught in the middle. I've had many times where everything was "fine" when he bought and become a "problem" that we had to fix when we sold.