Salvaging bad flip (defaulted loan/taxes overdue)

Salvaging bad flip (defaulted loan/taxes overdue)

King Of Prussia, PA · Member since 2013 · 38 posts · 9 votes

Seeking ADVICE / Property is in Norristown, PA

I lent money to somebody (a land trust) for a fix and flip. Unfortunately, I did not do my homework beforehand, otherwise I would have realized there are 4 other investors prior to me that were already defaulted on for their loans. The Land Trust has just been served for back taxes.

All five investors are now in touch with one another and we are trying to salvage this deal to the best outcome for all. At this point, we only want our original money back–we are not even expecting profits, although that would be nice.

One of the original investors is trying to get the property deeded over to him so that he can finish the deal, however, we just learned that if this happens, it could wipe all of us other investors out completely. Since I am the last in line on this, I am told that I am the one who should be foreclosing. Also, if the taxes are sold, then we are all out of luck.

I am willing to buy the taxes to keep it in our control, but I don't know where to go from there. We have tried to get in touch with the land trust owner and of course, he is ignoring us. He even ignored several attorneys letters sent to him in the past. At this point, my guess is that he has used our money to live on and is running scared. 

All five of us investors have legitimate contracts with paperwork that tie us to the property, so in that sense, it is not a scam. But we can no longer rely on the land trust to make this right. The investors have to band together and because we are all newbies (obviously the land trust owner knew this)–we are not sure how to handle it. 

Any advice from people who have actual knowledge in this area and not just conjecture from reading books would be wonderful. 

Thank you! Karen.

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Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
10y

So, I was able to research some more details on this property.

First, the loans.  All five had a initial principal balance totaling to $84,000.  That includes all five loans.  I'll call the borrower by his first name of Calvin; land trusts are supposed to be used allegedly to "protect privacy" - but in this case the name is in the public records anyway ...

Second, property was purchased for $28,000 by Calvin. In that area, properties at that price usually need full rehab. Looks like before Calvin bought it. it was listed on MLS in the $70K range, but the listing had expired.

Third is ARV (after repair value). This property has a few things not favorable to high ARV. It is on a busy section of state road, and directly across the road is an industrial facility and warehouse. And it is close to freight train tracks (but not near the railroad crossing where they blow the train whistle and drop the barrier across the road). it is close to the river but luckily not in the flood plain according to FEMA maps. But it is only a rowhouse (townhouse if you want to be fancy), so values will be lower for those. My guess is ARV around $140K, but could be lower if appraisers use the negatives against the property. With luck it might fetch $150K, but I wouldn't expect that or anything higher than that. It is in a desired school district.

The repairs needed are not known to me, but I would expect $40K to $50K minimum, and upwards from there.  If we have a flat fee listing, so let's use $400 for listing side commission,  and 2.5% to buyer's agent, plus transfer taxes for seller will be 1%, the math looks like this:

$140K x 96.5% - 400, or $134,700 possible to seller.  The adjustments for seller's portion of taxes and the back taxes still need to come off of that, as well as repairs.  If rehab is $50K, that puts the number at $84,700.  As you can see, there won't be any profit expected; probably best strategy will be to attempt to minimize losses at this point.

The biggest problem is this: it is facing imminent judicial tax sale (like less than two weeks away).  At tax sale, I would expect the high bid to run anywhere from like $30K to $50K based on the house and location.  So letting it go at tax sale won't get anybody paid except maybe first position; second position might get a little, but not much at the low end of tat bid range.  Karen has to figure out what approach makes sense for her, and whether she can do this within her SDIRA because otherwise it might put the SDIRA in jeopardy of being declared distributed by the IRS.

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  • King Of Prussia, PA · Member since 2013 · 38 posts · 9 votes
    10y

    Yes, my name is on the deed. I have never heard of land trusts being scams. In my area, I've always heard people recommending to set them up as land trusts but I don't remember why. Something about the laws here?

  • King Of Prussia, PA · Member since 2013 · 38 posts · 9 votes
    10y

    We have decided to let this one go to tax sale. The numbers and situation just keep looking worse. Not worth the money and effort it would take to salvage it. Hopefully, this is my "beginner's bad luck" deal and from here on out will be smoother sailing...

    Thanks for everyone's input.

  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
    10y

    @Karen Polis

    All the note holders are going to let this go or just you ?

    If everyone is willing to let this go why don't you make an offer the superior note holder(As he will probably be the only one paid) and $500 a piece to the others and pay the back taxes and move forward? Or at least have an agreement in place and then pay for a title search before paying the back taxes ?

  • King Of Prussia, PA · Member since 2013 · 38 posts · 9 votes
    10y

    That's some creative thinking I had not considered. We are all of us letting it go. I suppose at this point, even using this strategy I don't want to hold onto it. I would still need to hire a lawyer to draw up deed transfer papers and then get the borrower to transfer the deed, which I'm guessing he won't do without compensation (even though he basically stole from all of us). The sale is this Thursday. I have no experience with any of this, so trying to do anything last minute on my own is very stressful to even think about. I think I'm better off just moving forward with fresh deals that aren't soured by deceit.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Karen Polis  no offense.. but don't chalk it up to begineers luck or lack thereof. .based on this thread you simply do not have the knowledge to protect yourself..

    rehab lending is highly risky. and when you have no clue to what your doing yoru subject to scam artist like this guy.. stroke or not.

  • King Of Prussia, PA · Member since 2013 · 38 posts · 9 votes
    10y

    yup - agreed. And I learned a whole lot from this, so at the least, I won't make these mistakes again.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Karen Polis  you should come to J . martins HUGE BP meet up in Oakland this weekend.

    20 great BP presenters and about 300 like minded BP members a lot of them very experienced. Will be a great event.

    I am speaking on private lending  :)  And over view and the nuacnces and basics.

  • Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    10y

    You also need to learn the rules of investing with your retirement plan, Karen. You cannot invest in a property using your SD-IRA, even as a lender, and then personally participate in its rehab. As the account owner of the IRA, you are considered a "disqualified person" and cannot personally gain from or contribute (even your time as project manager) to the investment.

    Title searches, lending, land trusts, IRA rules, and tax liens, are all specialties within themselves and it's clear you bit off more than you could chew here, Karen, though I know that wasn't your intent. I can't tell how you got sucked into this initially, but the first lesson I see is that you did not get (or seek?) good independent advice from the start.

    Hopefully, you got nothing more than a bloody nose from the experience and a lot of lessons learned.

  • King Of Prussia, PA · Member since 2013 · 38 posts · 9 votes
    10y

    @Jay Hinrichs Good luck on your presentation. I'm near Philly.

    @Jeff S. I knew the rule about rehabbing through an IRA before getting into this. I did not do or plan to do any of my own work on the house, other than to contact contractors to do that work. I kept sending people to talk to the borrower (Calvin 'Skip' Lucas - no sense keeping his ID secret anymore as others should know to stay far away from him) and he gave every excuse in the book why he wouldn't use them. He actually DID do some work on the house himself, so he is in violation with that. (At least there is something he can be legally called out on here.)

    I agree with you that I did not learn enough before getting involved with this, but there's no sense letting it stop me from ever trying again. I have learned A LOT - the hard way - and hope to see much better results in the future.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Karen Polis suggestion: align your self with a good local HML and do some deals with them .. get a few more in your experience bucket before you venture out on your own.

    there is a lot to this.. seems like there is not. but its simply not that cut and dry

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    10y
    Originally posted by @Karen Polis:

    @Jay Hinrichs ...

    @Jeff S. I knew the rule about rehabbing through an IRA before getting into this. I did not do or plan to do any of my own work on the house, other than to contact contractors to do that work. I kept sending people to talk to the borrower (Calvin 'Skip' Lucas - no sense keeping his ID secret anymore as others should know to stay far away from him) and he gave every excuse in the book why he wouldn't use them. He actually DID do some work on the house himself, so he is in violation with that. (At least there is something he can be legally called out on here.)

    ...

    Calvin would be allowed to do work, as long as he obtained permits from the township for any work where the township requires a permit (not all work requires a permit); Calvin is not using funds from his IRA - if he had done so, that IRA would then be at risk of the IRS declaring it to be distributed.

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    10y

    FYI - the tax sale of the property in question has been postponed until December 2016 ...

  • King Of Prussia, PA · Member since 2013 · 38 posts · 9 votes
    10y

    @Steve Babiak - whoa - really? 

    I wonder what's going on there...

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    9y

    For those following along, this property was sold at tax sale on December 8, 2016 for $26,000 (pretty much around what I predicted - and I did not bid on it); shortly thereafter a "For Rent" sign appeared in front of it. It will be March or April at earliest before I will be able to see the new deed to identify the buyer.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Steve Babiak  another junior lender or gap funder has learned first hand how dangerous those types of transactgions are for the lender

  • King Of Prussia, PA · Member since 2013 · 38 posts · 9 votes
    9y

    @Jay Hinrichs - Yup!

    @Steve Babiak - were you at the sale? I was there. I couldn't believe this thing sold for 26K. I don't know how they can get it in RENT condition that quickly. Unless they put the sign up with the intention of renting in about 2 months and planning to do the work in that time. The thing that baffles me, is that somebody started paying the taxes of BEFORE the sale, and yet, it still went through. I'm glad though. Good riddance, I say, and moving on to better and brighter deals...

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Karen Polis  you work in this industry long enough and you will take a loss its happens to all of us.. I know I have taken my lumps over the years...

  • King Of Prussia, PA · Member since 2013 · 38 posts · 9 votes
    9y

    So, maybe I got mine out of the way early? :)
    I never really intended to do fix n flips anyway. I thought I would learn something from it - boy, did I!

    I'm moving on to tax lien certificates and tax deeds. 

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Karen Polis  I would really get with @Steve Babiak REIA group before going into those.

    I had the pleasure of a dinner with Steve when I was in Pa a year or so ago.. and he started to talk to me about Tax sales etc in that state and boy are they complicated .. even for someone like me who has been doing it for decades.. I would not go into this until I was very very versed by an expert in this field.

    Out our way west coast we are tax deeds and its really straight forward.. but man there in PA stuff is quite a bit more complicated.

  • King Of Prussia, PA · Member since 2013 · 38 posts · 9 votes
    9y

    @Jay Hinrichs Thank you. Other than the fact that there's an Upset Sale first, could you explain a little more about why PA is so complicated? I did a lot of research prior to this last sale and it didn't seem too bad to me, but I'm a newbie, so maybe I missed something.

    @Steve Babiak Where can I find your REIA group? Is it on Meetups? Do you specialize in Tax Sales?

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Karen Polis  I am no expert.  ergo my suggestion to talk those that are.. and Steve for sure is.

    it had to do with each county being different how other liens were handled etc etc.. just need to be up to speed before you start investing.. is all I am saying..

    out our way you simply buy a tax deed and you own the property... there is no upset there is no redemption... every lien gets wiped off etc etc...

  • King Of Prussia, PA · Member since 2013 · 38 posts · 9 votes
    9y

    Wow- is that in Oregon? Maybe I should try there.
    So far, I've only researched one county, but I know they all differ. I've really enjoyed doing all the research and everything. I'm looking forward to learning about tax sales in PA and DE. And certs in NJ. 
    And this last experience with Coates street has taught me to do a ton of research first. So, ultimately, I suppose it served it's purpose.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Karen Polis  actually Oregon to my knowledge is the only state that does not sell tax defaulted properties to the public and its not a tax cert ... state.. properties lost for tax's escheat to the state who will then after a matter of some time sell the property off generally by just listing them and selling them on the open market..  VERY few properties are lost to tax's in Oregon  and I mean VERY FEW

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    9y
    Originally posted by @Karen Polis:

    @Jay Hinrichs ...


    @Steve Babiak Where can I find your REIA group? Is it on Meetups? Do you specialize in Tax Sales?

    I did not attend this particular tax sale and do not specialize in tax sales, just try to acquire one every now and then when it suits.

    DIG website: http://digonline.org/

    DIG also has a page on meetup.com.

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    9y
    Originally posted by @Jay Hinrichs:

    @Karen Polis  I would really get with @Steve Babiak REIA group before going into those.

    ...

    Jay, I have invited Karen to an educational meeting sponsored by the REIA DIG where I am a member. The topic will be on private lending so she will be getting onto the right track soon ...

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