Can I foreclose on Days Inn?

Question

I am new. To everything Real Estate. I'm almost done with the BRRRR's book, listened to over 100 hours of Podcasts and 40 or so hours on YouTube videos dealing with Real Estate Investments. I started by looking up any properties that owe back taxes so I may be able to find a motivated seller. Here in Cochise County, AZ... I fell in the rabbit hole.

I have been searching the entire county, looking at various properties that will go to auction Feb 19th. As I'm looking, I see Days Inn owes $73,770.28 in back taxes. This same property is for sale on Loop Net for $2,200,000. From my limited understanding of purchasing Tax Liens in AZ, my process would be to bid against everyone or anyone else interested in the property with interest rates starting at 16%.

So in this fictitious scenario, I win the bid, pay the back taxes to the County, get a Real Property Lien that must be paid off with interest (hopefully 16%) within 3 years. If I don't get paid plus interest I foreclose on Days Inn.

Am I following this correctly? I can potential pickup a 2.2 MIL property for under 100k? I am not too clear on what happens to the mortgage if there was one. I have read that Real Property Liens jump the line over mortgage liens, and easements never go away until paid off, and the only lien that has a higher priority of Real Property is Income Tax or Federal Tax lien.

I live in Sierra Vista, AZ, so not much to pick from. Can anyone help? I am new, but I go full-bore when I think I am ready and am chomping at the bit. I refuse to be a bad statistic in investing, so I want to make informed decisions at every step.

Kyle W. · Answer

I appreciate the responses so far. I continued to study AZ Title 42 and 33. Some Title 48. Very complicated stuff but I do feel like my time in this has built my knowledge worth more than my "hourly rate".

Some Pros are

1.) Purchasing these tax liens in this particular county (Cochise) requires in person bidding. So that means less out-of-state competition.

2.) APR starts at 16% and gets bid down to lowest APR bidder, potentially giving high rates.

Some Cons are

1.) However, for me to stay at the top of the tax lien priority list, I would need to purchase every subsequent delinquent tax lien or risk another investor jumping the line. Potentially bidding the APR down to 1-2%. Even the awful idea of 0% just to stay the only lien holder.

2.) AZ requires three years from lien purchase before foreclosing so that would require $22,000 every year for the next three years if they are delinquent. Plus guaranteed tax rate increases each additional year for funsies. This $66,000+ and the initial $74,000 seems like too much liquid assets to be tied into a single property that probably won't give me much ROI.

3.) $4,000 or so to complete foreclosure, 30-120 days.

4.) During foreclosure sale, some other investor with deeper pockets could bid higher than what I would be owed ($140,000 all in 4 years from now) and they would keep the $2.2MIL property. Unless I open my deep pockets some more.

So in conclusion, the statistics for the previous tax lien sales have approximately 50-70 people doing the bidding, but purchasing 70M+ in tax liens. These are not just fellow beginners, these individuals are representatives of major players. The sold liens also have an average of 4-8% to the investor. So that means the county gets the back taxes paid up front and whatever the difference is between the lowest bidder and max APR of 16% (Good on gov't). Again, this doesn't seem like a good start with my light wallet.

I hope this has helped someone that has thought about tax lien sales in Cochise County Arizona. Or in some other capacity in general. I am going to look at Tax Deeds in Travis County Texas now. There seems to be a great deal Feb 4th, but that is also on the door steps auction. Even more research now.

James Wise · Answer

The probability of you picking up this $2.2 Million property for under $100k is about zero. If it's worth $2.2 Million why wouldn't they just sell it for $2.2, or $2.1 or $2, or $1.5 etc......Catch my drift?

Don Konipol · Answer

@Kyle W. Tax liens in AZ typically get bid down to 2-6%, the lower interest rate amount for properties that investors think they have a chance for ownership. As with most flags, Days Inn is a franchise operation. If the owner has a high cost of capital, paying the tax late might actually result in a lower cost of capital, though probably a violation of his deed of trust, assuming the property is not owned free and clear.

The only properties not redeemed are raw land in rural areas. Or toxic waste dumps.

The only properties not redeemed are raw land in rural areas.  Or toxic waste dumps.

Eli Lederman · Answer

Absolutely. FYI - they are usually franchised out.

I would male this my top priority if I had such a opportunity !

Bjorik Mutize · Answer

Great insight. @Timothy Lewis @James Wise @Don Konipol new subject on my end so interesting to hear feedback for OP.

John Lenhart · Answer

I would be cautious on something like this. As Timothy pointed out, if there is value the lender will likely bid it up to protect their position. Also, if this were an apartment building, I think the strategy would be better, but the hotel being an operating business, if you take it to foreclosure, chances are that the business (Hotel) will be closed and out of business which diminishes the value of that asset. I am not sure how easy it would be to restart operations after such event but it is also something worth considering.

Timothy Lewis · Answer

@Kyle W. sounds like a very interesting prospect. I'm not a tax lien expert, but your order of seniority (RE taxes trump mortgage) seems correct. The case you describe does appear to be a way to take down the property, but you may want to get insight on the status of the title. In a case like this, if there is a mortgage, bet your firstborn the lender will bid to get the tax lien (potentially up to the market value or the mortgage amount) to secure first lien position. In the case you win the bid, you'd have to check on AZ's rules about the right of redemption to determine the time until foreclosure is permitted. You'd also want to learn more about the asset you'd foreclose on, if it has significant delayed CAPEX and is struggling financially and you don't have the capital or know-how to fix it, you could be inheriting more headache than wealth. Then again, if it was easy, maybe there wouldn't be a potential arbitrage opportunity. Hope this helps.

Can I foreclose on Days Inn?

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