Pennsylvania--Liens, foreclosure, and tax sale--deal possible?

10 Replies

I've been in contact with the owner of an expired listing.  I will keep the story as brief as I can.  The property was scheduled for the Upset Tax Sale in September.  The results say it didn't sell.  Before the sale, I spoke with the owner, and this is where he stands:

Lender has a judgement for $55,000

Back property taxes and fees amount to $16,000

The kicker:  There is  a lien of  $90,000 plus from the Dept of Labor due to a business he previously owned that folded, due to unpaid in employment compensation.

That's over $150,000 owed.  The property is not scheduled for either the current month or next month's sheriff sale.  It was not sold at the Upset sale.

My question is multiple parts.  The first is what happens next?  Who will attempt to collect what they are owed, who will most likely bid to protect their interests, and how much would they bid?  The second question deals with the Dept of Labor  lien.  Is there anyway for me to purchase the property, cover the amount owed the lender and property taxes only.  The deal works at $80,000-90,000, but that Dept of Labor lien makes it impossible.  Also, if it is sold at Sheriff's sale, then what happens to the $90,000 Labor lien?  Wiped out? Attach to it?

Any clarity would be appreciated.

It depends on the type of sale that you are at.  If you are at judicial sale then the property should be sold free and clear of all other liens.  To make this super easy, call the sheriff's dept and ask them how the property is being sold. My guess is that you will still own the gov debt, and nobody will buy this property as is.  

@Josh Caldwell

That's what I thought would happen if I bought it outside of a sheriff's sale or a judicial free and clear tax sale.  I guess I was hoping to find a way to structure it so that the Dept of Labor lien stayed with him after the sale.  The title company I work with can run a present owner search for like $25.  Maybe I will do that and ask her if she has any ideas.

@Jason Krick not sure about dept of labor, but from what I understand other gov liens like IRS do not stick to the property if it goes through a judicial sale and they are listed as parties during the foreclosure sale.

Check with an attorney.

You can get it under contact and then talk to the Dept of Labor and explain that you are buying the house, and see if they will release the lien against the property.  If they say yes, then the game has changed. The IRS will do this, I have never tried with DOL? 

@Chuck Brooking

Thanks.  I have verified on that site, and the parcel search that he is still the owner.

@Jason Krick  

If the property is not sold at the upset sale, the tax claim bureau will take steps to sell the property at a judicial sale (also called Free-and-Clear Sale). As a general rule, the judicial sale will wipe out all other liens on the property if the bureau properly notified all the lien holders.

Note that if the property is "worth it," the mortgagee will pay off the realty taxes before the judicial sale. In some cases, the mortgagee may decide to buy the property at the judicial sale instead of paying off the taxes. The mortgagee will typically pick the second option if it is confident that the judicial sale will wipe out all the liens as well. This unfortunately can sometimes back fire for the mortgagee—especially when the IRS is involved.

As for the Department of Labor ("DOL") lien, the judicial sale will divest their lien if the DOL received proper notice. The sheriff's sale may divest the DOL lien as well if the lien came after the mortgage. 

Depending on the size of the mortgagee, you may be able to talk to someone at the mortgagee's office (I assume it's a bank) or its counsel. If you have the connections, it might make sense to see if you can talk to them to see what the mortgagee intends to do. In your scenario, I don't think the owner really has any power to influence the ultimate outcome of the property (except maybe declaring for bankruptcy).

And as always, I strongly recommend talking to your lawyer to make sure you have your ducks in a row. 

@Chris K. Thanks.  Counsel representing the bank is actually in the same firm as the attorney I ised when negotiating a deal that fell through.  So, I have a connection through him.

Everyone else--This deal is a bit convoluted with many moving parts.  I'm confident that I can get them all aligned, except for the DOL lien.  I will try to be brief, so bear with me.  The building is over 10,000 sq ft  with a huge barn in the back with 4 oversized garage bays.  The original building is very old (like historic).  Over the years, different additions were put on with small hallways, turns, steps, etc. This makes the building impractical to use as-is.  However, it would be relatively easy to walk off a hallway here and there to turn it into apartments.  I counted the possibility of 9-11 units, and also I have a thought to put in a commercial laundromat.  

The current owner had similar plans, but he did not follow through with the township's requirements for zoning.  So, the township zoned it residential.  The owner basically ran an illegal boarding house, as he rented rooms that shared a kitchen upstairs, while he lived downstairs in a 3,000 sq ft owner's suite.  I already own a property 0.25 miles up the road.  I went through the township supervisors and zoning board to convert a house into a duplex.  I have a good relationship with them and they think highly of me.  They've already told me that they want to see it performing again and to just ask if I need anything.  So, zoning won't be an issue.  I walked the property twice with my contractor and commercial lender.  Both agree that it is a huge project, but relatively straight forward.  In talking with the lender, I could purchase it, and get a loan based on an appraisal, similar to what I did with my conversion.  The township "unofficially" indicated that they'd let me temporarily run it as a boarding house, as it was, while sections are being done.  So, now the property would be performing for the bank.  Due to the way it is sectioned off, the contractor will get the other units rent ready.  When tenants are placed, the lender will confirm completion and value will be calculated based on the new income, which would allow funds to be used to renovate another part.  We'd keep that cycle going until it is done.

The final value would make it possible to cover the DOL lien, but not initially.  The first appraisal comes back on the as/is value.  So the loan won't cover that lien until construction is complete.  Plus, I don't want to pay it regardless.

So, that's the reason I need to pick this property up at a low entry point.  

@Jason Krick  

The DOL Lien might be a red herring. Depending on the timing of the lien, either the judicial sale or the sheriff's sale could divest it. In other words, just because it's a lien on the property doesn't mean that you have to pay for it. 

One possible idea is for you to negotiate a deal with the lender holding the judgment---I am assuming that this is a foreclosure judgment---to see if they would sell it to you at discount before the sheriff's sale. You would then foreclose on the property yourself to get a clean title. This option obviously carries risk and I would strongly recommend that you use an attorney to handle it. 

One note about zoning --- even if you have a good relationship with the township folks, in some situations you may need to deal with objections from other people (e.g. residents near this property). Some of these cases end up to the appellate courts levels and could drag on for a long time. So when you look into this property, I would factor in the possibility that there could be a zoning issue. 

@Chris K.

Excellent point about negotiating with the lender.  Yes, it is a foreclosure judgement from the mortgagee.

As for the zoning, the property always had rentals in it, and it is located on the zoning map where apartments is a use by right.  While they issued a residential zoning due to his non-compliance, there is, in my belief, very unlikely.  Thanks for pointing it out, as I hadn't thought of that possibility, but it is a risk I am comfortable taking.

My best bet, I think is to have my title company run a present owner search, and see exactly what is attached and how much.  Depending on what is attached, I will solicit advice from her, and an attorney to see how/if I can get clean title.

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