Pittsburgh, PA · Member since 2013 · 40 posts · 6 votes
I'm trying to buy this single family home through seller financing, this would be my first investment property deal. Renters are already in place, home is turnkey except for new carpet that the seller will put in. I spoke with the seller today and came to an agreement on terms. We have one issue that I can't get around though.
She owns the home free and clear but owes 10,000 to the local tax service, she is on a payment plan with them. I asked her to take out a second mortgage to pay off the taxes and that she would get the money back once I refinanced 12-24 months from closing. She can't qualify because she already got a new mortgage and is now unemployed. Her budget is so tight that she has to have the income from the renter to make the installment payment on the back taxes.
She need money now and I can't offer her much more then $1,000 down. I can't think of a way to make this work.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Yes Matt, you're correct. Your after tax interest expense would be about 1.7%, (@30%) worth more than that not need to show zero an imputed rate on your returns. The lender refinancing such a note can also assess the imputed rate to figure the equity gained, much like the rent credited on a lease purchase. Just because you can or could do something doesn't mean you should for the sake of razzel dazzle....
You don't try force something to make a deal out of every property.
The straight forward method here is for you to get a loan to pay off the tax bill, she subordinates the property for collateral for the loan, then you buy it and she finances the balance, but even that is probably too much brain damage, unless there aren't any other deals to be had. And, she needs to come down to cash flow. :)
Pittsburgh, PA · Member since 2013 · 40 posts · 6 votes
13y
Thanks Josh, I hadn't thought of HML or a private loan yet, something to consider. I wonder if she would accept $35,000 instead of $45,000 due to the $10,000 tax lien? That could be a great deal, right? I would just take over the payments to the tax service but I would get a deeply discounted rental too.
Georgetown, TX · Member since 2013 · 24 posts · 6 votes
13y
Mike, I like your idea and think that would be attractive to her if you were paying cash for the property. However, it doesn't look like you are. Hard money is not going to be cheap. Down here, the going rate is about 12% with a point or two up front. I would imagine the interest (or lack thereof) with the county is less.
Another option would be to get a $45k hard money loan to pay $35K, pay off the taxes, and refi with a mortgage. I think that would be ideal if you don't have the cash (still need 20% or more down) but I don't know your circumstances.
How long until she has the taxes paid off at the current rate? You could always let her owner finance it and she can just keep making the tax payments.
Maybe you know someone that will loan you the cash on better terms (ie family member, friend, etc). Hard money for the $10k in taxes is not a bad idea. Just make sure you can cover two payments with your rent or that you are ok making up the difference until it is paid off (as long as it isn't much).
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
13y
Mike Poulliott I would go the reduced offer route. As it stands now if you were to proceed and she stopped paying you would end up with a tax lien on your property you now have to pay effectively setting you up to pay 55K for the property.
If I was in the position it sounds like you're in I would do this.
1) Lower the offer to 35K seller financed and she is no longer responsible for the taxes. The net to her is the same either way so make sure to highlight that for her if she has any issue with it.
2) Pay the full tax amount if possible, either with cash on hand or a personal loan/401K loan.
3) If not able to pay the full amount then take over the tax payment plan to the municipality and pay as agreed.
I would not go with HML if possible, it is likely to be too low of an amount to be done, and the fees will be more expensive than a personal loan. If she has trouble paying the tax without the rent payment now, it is likely that after you taking over the property she will have even more trouble and you will be the one that has to end up taking care of it.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Matt is on the right track.
You should call the taxing authority, since they are financing the arrears, there could be ownership or tenancy requirements, might see if you can assume that schedule. From there you can adjust the price and buy it. This is also a non-owner occupied (right?) so the SAFE Act may apply.
The fact that she has a lien has no bearing on the value of the property, that's the same as saying since you have a mortgage on it I'm going to offer less. You need to wrap the lien ate the price/value is agreed to be.
She is entitled to the balance and you need to pay the taxes. If that payment is too stiff to allow it to cash flow.....
Ask the taxing authority for a balance they can take to release the lien to allow a sale. Have you looked for a private lender for a couple years? Could have the seller carry a second.
I doubt buying the tax lien could help, might as well negotiate a payoff and release.
If you can't get rid of the tax lien, you might walk away, unless the rents can cover the cost to carry it.
If you are in no position to buy it and payoff the taxes to cash flow, it's not a deal for you. :)
Real Estate Investor · Englewood, CO · Member since 2013 · 988 posts · 258 votes
13y
There are more investment opportunites out there than you have money or time.
Instead of trying to make this one work, walk away and find a better investment with no risk from the taxman.
By the way, check the county clerk and recorder filings. Sometimes, if someone cannot afford to pay local property taxes, they also cannot pay the federal income tax. In this case, the IRS will record a lien. This comes in front of all other liens or debts.
Note Investor · Carson City, NV · Member since 2009 · 4 posts · 1 vote
13y
Perhaps you can flip the deal to someone who has a bigger down payment? As long as the terms are good enough, like 0%, someone could be willing to do it. Temporarily absorbing a negative cash flow is fine for many investors if the price and terms make sense.
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
13y
It is my understanding that a 0% loan is a bad idea in most cases. You want the interest rate to be equal to at least the applicable federal rate which is currently 2.5% or so.
It could be different for an installment sale, but that is my understanding of what should be the minimum tax charged to avoid IRS tax implications.
Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
13y
Mike Poulliott, how much is the rent? How much is the house worth? It might still be a good deal if the rent is substantial enough. Also, it depends on what you can negotiate with the seller and lastly, it depends on your exit strategy also.
Of course, in all of these, you have to do your due diligence.
Let's say the rent is $1,000 a month.
Seller is asking - you pay the $10K taxes in arrears plus $35K.
So total asking price is $45K.
I would negotiate with the seller to see if she will accept an all cash offer of $20K. Out of the $20K, you pay the $10K tax arrears and $10K goes to her.
Then, wholesale the deal for $30K to a landlord who would love $1K/month rent. Even at a 50% expense ratio, the landlord will make $500/mo or a 20% CCR.
You on the other hand walks away with $10K cash and you get in the deal with no money down.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Yes Matt, you're correct. Your after tax interest expense would be about 1.7%, (@30%) worth more than that not need to show zero an imputed rate on your returns. The lender refinancing such a note can also assess the imputed rate to figure the equity gained, much like the rent credited on a lease purchase. Just because you can or could do something doesn't mean you should for the sake of razzel dazzle....
You don't try force something to make a deal out of every property.
The straight forward method here is for you to get a loan to pay off the tax bill, she subordinates the property for collateral for the loan, then you buy it and she finances the balance, but even that is probably too much brain damage, unless there aren't any other deals to be had. And, she needs to come down to cash flow. :)
Accountant · Thornton, CO · Member since 2011 · 170 posts · 33 votes
13y
" I wonder if she would accept $35,000 instead of $45,000 due to the $10,000 tax lien? "
How can someone end up owning $10K in prop taxes on a $45K property? Around here, taxes are 1.25 to 1.5% of value max. Even in a higher tax state at say 4% of value (I think only the no income tax states like NH and Texas approach 6%), she would have had to skip her taxes completely for at least 5 or 6 years to owe that much.
Orlando, FL · Member since 2013 · 165 posts · 62 votes
13y
Don't pass this one up. This is too simple unless there is more to the story than you are telling us.
If the owner owns the property free and clear as you stated. Write your contract with you giving her $10,000 down payment. Don't pro rate the taxes. The $10,000 taxes will show up as a credit to you and a debit to the seller on the closing statement. Your down payment will show up as a debit to you on the closing statement. It will be off set by the taxes (credit to you) You will own the house with a mortgage balance of $10,000 less than you originally planned. You will owe $10,000 in taxes instead of the old seller owing ten thousand in taxes.
You will own the house. If the numbers don't work, lower the price by the $10,000 surprise (taxes). If the numbers don't work for you , they will not work for the next guy either.
I am not familiar with Pennsylvania. In Florida, you can owe taxes up to seven years. The taxes are superior to the sellers mortgage. After you own the property, you could take out a mortgage to pay the taxes and ask the seller (mortgagee) to suborndinate so you could get a first mortgage. Why would you want to?
Do not pass on this deal. You can make this work. Ask the seller to hold the mortgage with no payments and no interest for the first year while you pay off the taxes. You have a motivated seller.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Ron, he doesn't have 10K to put down. Putting dollars in the left pocket from the right pocket doesn't change the price and we don't know if he can even assume the tax payments arranged. :)
Residential Real Estate Agent · Mc Keesport, PA · Member since 2012 · 449 posts · 154 votes
13y
Mike Poulliott I might be interested in this one. Care to pass the lead on? I would pay you a referral fee if it turns into a deal for me. Let me know. Thanks!
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
13y
In PA, a few years back I picked up a house once with over $30K in back taxes ... many years worth. That is because PA is a tax deed state, so no annual tax lien sales. And the gov't tax collectors will have payment arrangements.
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
13y
What is the balance owed on the first mortgage? That will determine whether a deal exists or not, as well as what is the FMV of the property, and FMR (fair market rent). The back taxes would be handled basically as Ron Climer outlined, but you DO want to pro-rate the taxes for the current tax year, so you decrease the net to seller. The back taxes due would come off the seller's side of the HUD, also reducing the seller's net. The payment plan for the back taxes might not be passed along to a buyer, since the tax collector would expect to be paid, but you don't know until you ask.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
I picked up a house (paid 41k) that had a till bill of $4,277 and appealled it down to $853 per year. Add up two years plus interest and fees and yes easily 10k in back taxes.
Interested shouldn't be lower than 3%. just to justify it to the IRS. Any lower and they could impute the Prime rate.
Pittsburgh, PA · Member since 2013 · 40 posts · 6 votes
13y
I called the owner today and offered her $20K, 12K for the back muni taxes and 8K for herself... she accepted! I told I'd meet her tomorrow to get my contract signed.
So right then she tells me that her ex-husband had an IRS tax lien that she thinks might be attached to the property. Just my luck. The law office charges $135 to do the search and it takes 2 weeks. Is it possible to do an online search for tax liens? I know we have a website here in Allegheny county for searching deeds but you have to pay to get on it.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Get your contract signed, have her show that she has good title in the contract requiring her to provide a title search at her expense and you pay for the title insurance, such can be agreed to. Then have a title search done for insurance.
The IRS has released liens for sale before when there was not enough to pay the lien, the closing agent can usually get this accomplished. Otherwise it comes out of her proceeds to provide good title.
This way you won't have the expense. Good luck... :)
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
13y
You don't want a deed search in PA to identify IRS liens; you want to do a search with the county Prothonotary. Now, Allegheny County rolled that title into some other job, but that is still the common name used in PA.
Pittsburgh, PA · Member since 2013 · 40 posts · 6 votes
13y
I was denied a pre-approval and am looking for a partner on this deal. The seller will give it to me at 25K so she can pay off her muni tax lien of 12K and satisfy some of her 10K IRS lien. The IRS lien will stay with her, not the property once it's sold. She is lowering the listing price from $47,500 to 30K. If I can find a partner to sign for the mortgage she will sell for 25K.
The Deal:
2 bedroom 1 bath SFH
Assessed in 2013 at 51K
Rents in the area average $750-$850 for a 2/1
Taxes - $1900
No structural or mechanical issues
Needs carpet and maybe paint.