Fort Wayne Indiana Tax Lien Sale CONFUSION!

17 Replies

Good afternoon fellow BP'ers!  I attended a tax lien sale today just to watch how things went.  It was very interesting, however, it left me confused on the tax lien process.  My understanding is that the homeowner has a 1 year redemption period where they have the right to pay their tax bill, along with a fee (around 10% I believe), and everything goes back to normal with them.  If they don't pay during the one year the purchaser of the tax lien can then follow a process to gain title and essentially foreclose on the original owners.

What I saw were properties going for well over the recorded tax delinquency.  For example, there was one that the county said was around $2,000 delinquent.  It sold for around $20,000 in the auction.  So if the one year period goes by and the property isn't redeemed the tax lien purchaser would get the house for $20,000 plus costs to get title and then foreclose.

But what if the original owner pays the back taxes?  Don't they only owe the original $2,000 plus fees?  Let's say that is $2,500 total.  If they pay the $2,500 and bring their taxes back to current what happens to the lien purchaser?  Seems like they have just put their purchase money at an extreme risk unless I am missing something else.

Help set me straight on this please!  I've read through some of these tax lien posts but I haven't found any that address what happens when the purchase price is significantly higher than the debt.  Thoughts??  Am I way off base on this???

This depends on the state and I am not sure about Indiana.  In Texas, the owner has the right to redeem but to redeem they have to pay the taxes plus any overbid plus the penalty on both.  The owner also has a right to claim the overbid if there are no lien holders that get to it first.  Thus, in the case of redemption, the tax sale buyer gets all the money they paid including the overbid and the penalty or interest.  This is not the case in every state.  You must get to know the laws for the specific state where you want to bid.

Hi Pete-  I participate in the tax lien sale yearly.  I will explain what happens in summary form.  Please remember that the specific ligistics of how each county tax sale works is unique to each county in Indiana as well as state to state rules are different thru out the country. You must do your due diligence before hand on both the properties and the county processes.

This is the essence of how the Allen Co, Indiana tax lien sale works. The property becomes available for the tax lien sale when the property taxes have not been paid for 3 consecutive installment periods.  Property taxes are due in Indiana on May 10th and November 10th of each year.  In Indiana, property taxes are paid in arrears, meaning that the property taxes due in 2017 are the property taxes from 2016.  So essentially, the property taxes have not been paid for a 1 1/2 years on the properties that are in the tax lien sale.  

You are bidding on the debt that is placed as a lien on the property.  You have no legal rights to the property until after the redemption period has passed and you receive the tax deed. The owner of the property has 1 year in which to redeem the property by paying the back taxes, penalty fees, administration fees and interest on the overages.  If the owner redeems the property, the tax lien holder will receive his principal back (winning bid amount back) plus interest that is established by the state.  The interest rate has changed a little bit lately.  It used to be a flat 10% on the overage amount.  I believe it is now 5% if the property is redeemed in the first 6 months of the redemption period and moves up to 10% from 6 months to a the end of the redemption period.  Don't hold me to that though as I have not reviewed this lately. 

There were a lot of different strategies being played at the sale. You need to be aware of who the players are and what their strategies are.  There are typically hedge funds and private equity groups bidding on the really good properties because they want the interest they receive backed by a hard asset like real estate. They are more interested in the interest than gaining the property.  Others are bidding to hopefully gain the property at the end of the redemption period at as low a price as possible.  If the property gets redeemed, they still make some money, but the bigger spread and exit strategy is to receive the property at a significant discount to the retail market and hold on to it as a rental or fix and sell out on contract or even wholesale to other investors. Then you have what I call the mom & pop people that are interested in hopefully getting a property that is next to theirs or an adjacent lot to their property.  You also have land buyers that hope to get a lot that can be built on.  The bottom line is that their are a lot of different players bidding.  

If you are going to be successful in this arena, you must do your due diligence on the property before hand.  There were a number of people that paid way too much for the condition of the properties they purchased.  If they have not done their due diligence and only looked at the pictures on the assessor's site or google maps, they will be very disappointed as those pictures are usually 2-4 yrs old.  You need to physically drive buy the property to determine the condition. It is truly a buyer beware situation. 

The starting lien bid that is published covers the back taxes, penalties and an administration fee.  It is only a starting point and has no bearing on the purchase price of the lien.  In those situations where you saw the pricing go way up, those were very good homes in good areas and in very good condition.  The likely hood of those getting redeemed are very good.  So those investors are bidding up to receive the interest guaranteed by the state on the overage above the minimum bid.  They are receiving roughly 8-10% guaranteed on their money, not bad for this low interest environment that we are currently in.  If they happen to receive the property and gain the tax deed, they can then sell the property to get their money back.  So the key in this situation becomes bidding up the property, but not to high that you can't get your money out of the property to cover what you have invested.  Most of these players were bidding up to about 50-60% of the estimated value of the property.  If they get the property back, they could still do some fix up on the home and sell out at retail price and be able to cover their initial investment and still make a profit.  

There are many other strategies employed.  This is just a quick over view to help you understand why certain properties were bid way above the tax lien listing price.  The bottom line is that the county gets to use your money for a year while it is earning interest. The interest on the overage above the minimum bid is paid by the property owner if he redeems the property.  If not, you receive the deed to the property at the end of the year. 

Hope that helps.

Wow, thank you @Jay Redding for taking the time to answer this!  So it sounds like in the example I gave the existing homeowner would have to pay the original amount owed for delinquent taxes of $2000, and then penalties and fees on the $20,000 that was bid.  If we use 5% that would be $1,000 in fees.  So the homeowner would pay $2000 plus $1000 in fees (roughly) and Allen County would give back the $18000 overbid??  Certainly the homeowner doesn't have to pay back the $20,000 bid plus fees on top of that. 

I was working so I could only stay for about an hour during the auction but in was interesting to watch.  I could see several different strategies at work and quite a diverse collection of people.  I had checked out a few of the properties just to see what they were like but unfortunately I didn't get to see them go through the auction so I don't know what they ended up going for.  Do they publish a public list with the results of the auctions?  That would be interesting to look through as well.

I might set aside some money to see if I can grab a property at the next one and see what happened with it.  Once again, thanks for all of the info!  This is what makes Bigger Pockets such a great site to learn from.

Pete- You have the general idea. In your situation, if the owner redeems in month 6-12, the winning bidder would receive 5% interest on the overage for the first 6 months, then 10% pro-rated to redemption date for months 6-12.  If they don't pay at all, you then would receive the Tax Deed.  However, to receive the tax deed, you must pay the current year taxes  plus pay for any weed liens, neighborhood code violations etc. that have been placed on the property during the year of redemption.  This is the little surprise that many people don't know about or forget.  I typically allow an extra 1-2 K set aside to handle this.  However, you have the general idea of how it works. 

wow! What a great Thread! @Jay Redding what a great description. But am I missing something? After reading you post I LOVE THIS STRATEGY! I never thought about it before. Basically, you need to do you homework on the offerings, establish you highest bid based on your strategy (mine would be for buy and hold), and then just bid as long as it is under your number. You will either earn interest or get home. both work for me! My goal is to build wealth. The only bad sides are you could potentially analyze the property wrong and not have the returns if you get it, get the property and not account for some unknown liens (how would you check for these by the way? they all need to be filed right? County office?), or you money is tied for a while and have some opportunity cost. 

Am I missing something?

Again great thread and great details!

Jorge

Very good thread, I have picked up 3 tax sales and now have 5 doors from doing this and am in the middle of my 4th tax sale deed on a hotel which I will rehab after rehab it will give me 40+ units. Definitely have to know how this works or you could get yourself in a big bind most properties will have a federal and IRS lean and maybe a mortgage but there are ways of releasing this dept from yourself and walk away with a clean deed

You are correct, there could be other types of liens on the property such as a mortgage, IRS lien etc.  For our county, the IRS actually provides a blanket waiver that the Auditor's office provides in the detailed information on the logistics of the tax lien sale.  There is usually at least 30 days from the end of the redemption period until the tax deed is filed for the county judge to sign off on.  During that time, I usually have one of my title companies that I use do a title search on the property to see what liens are on the property.  You can then decide what strategy to use to clear the title.  Sometimes you may need to do a quiet title to make sure the deed is clean.  Depending what liens are on the property, the title companies will ensure over the top of the liens. If there was a mortgage on the property, and the lending institution really wanted to protect their interest, they would have paid the tax lien off before the tax sale or possibly even during the redemption period.  All parties that have an interest in the property are required to be officially notified by state law.  Their must be proof provided for this.  I have  had situations where the title company has insured over the old mortgage and even provided a warranty deed to the seller.   The key thing is to do a title search after the redemption period has completed to see what liens are on the property.  Then your title company can provide you guidance on who to talk to and what needs to be done to clean the title.  You will need to have a good attorney that does quiet titles on your team.  

@Jay Redding , thank you for the insightful responses.

If I understood correctly, a property that is on the 2018 list has already missed two payments and has until May 10th to pay. Would that mean that if you are interested in purchasing something *before* it goes to a tax sale, the beginning of May would be a good time to approach the owner, or are most banking on getting things together before that year is up?

@Constancia R. You could buy the property out right any time up to the actual tax sale.  There are literally people coming in and paying their back taxes even minutes before they go up to auction. The tax sale list will be posted sometime in late summer for the sale in September/October for Allen County.  Every county is a little different, so you need to check with the county that you are investing in. You would certainly like to get it tied down before it would be published to the world.  Hope that helps.

I think I need to clarify my pondering, @Jay Redding . The owners are wanting to sell the property, but will not budge on price. I was hoping that they might soften a bit, come May. I am going to try, anyway!

Thank you.

@Constancia R. sadly just because someone should be motivated does not mean they are motivated. I have found many people wait until a tax lien foreclosure case is finished. They don't get really motivated until evicted. it is time to be evicted.

Originally posted by @Jay Redding :

Pete- You have the general idea. In your situation, if the owner redeems in month 6-12, the winning bidder would receive 5% interest on the overage for the first 6 months, then 10% pro-rated to redemption date for months 6-12.  If they don't pay at all, you then would receive the Tax Deed.  However, to receive the tax deed, you must pay the current year taxes  plus pay for any weed liens, neighborhood code violations etc. that have been placed on the property during the year of redemption.  This is the little surprise that many people don't know about or forget.  I typically allow an extra 1-2 K set aside to handle this.  However, you have the general idea of how it works. 

 
Hello Everyone,  
I invest heavily in Indiana tax sales.  Let me help clear some confusion.

The minimum bid (opening bid) earns a 10% penalty if redeemed in the first 6months, and a 15% penalty for the rest of the redemption period (6 months).  The surplus (overbid) earns 5% PER ANNUM.   THAT'S WHENEVER THE REDEMPTION OCCURS = 5% ON OVERBID.  The difference is a penalty is a straight return whereas the per annum is what it says.   

The overbid USED to earn 10% per annum about 3 years ago, but now it is 5%.   Lobbyists got that reduced.

As for the surplus (overbid), which I believe is the topic of discussion,  that amount is held in a separate fund at the county and is paid out when a redemption occurs.  If a redemption does not occur, the county considers that money as part of the payment for the property.  Now, if the previous owner lays claim to the property after the redemption period has ended (during petition for tax deed), that owner may be entitled to collect some or all of the surplus.  Furthermore, if the property houses the owners, and they destroy the property on their exit, the tax sale purchaser may also submit a claim to that surplus for repairs.  Interesting right?

While I do not invest the Fort Wayne area, I do invest in about 20-25 counties per year.  The state statute is the same in every county

Also, you do not necessarily have to pay Spring taxes and liens during the redemption period.  I would highly recommend it, however I have seen many of my competitors wait to pay it after the redemption period.  Its a county by county basis, some judges prefer it.  Also, the Spring taxes earn 5% per annum just as the overbid, and adds weight to the redemption amount, so do it!

Hope this helps,
Joe Donohue

@Joe Donohue .  Do you have any documentation or actual experience in making a claim for damages as a tax sale buyer?  I have been doing this for years and have never heard of that.  Also how can one possibly make a claim, if you have not actually been in the house to assess the value of it.  This really would be nice due to the fact (as I am sure you know) that tax lien holders have no insurable interest in the property.

Originally posted by @Greg Carrier :

@Joe Donohue.  Do you have any documentation or actual experience in making a claim for damages as a tax sale buyer?  I have been doing this for years and have never heard of that.  Also how can one possibly make a claim, if you have not actually been in the house to assess the value of it.  This really would be nice due to the fact (as I am sure you know) that tax lien holders have no insurable interest in the property.

 I have never needed to make a claim but I can show plenty of documentation.  Its public information if you know where/how to look, but I prefer not to post it on a public thread and put them in the spotlight.  Contact me privately and I can walk you through everything.  
As for making a claim, I am not sure how they prove it wasn't already broken.  If they were able to walk inside the house the moment they got the deed and then time passes before an eviction is filed and they decided to destroy things on their exit, obviously you would know.  But if people were living in a house one day and you walk into the house the next and all toilets are ripped out you can assume they did it on departure.

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