I came across a property that is for sale at a very good price. It is steeply discounted because of back taxes owed on the property. I believe that there could be a BRRRR opportunity in this situation and wanted to see if my theory has any legs.
Purchase price: 44k
Back Taxes: 58k
My general idea is to purchase the property all cash so that there is no seasoning requirement for the refinance. I will then negotiate a payment plan with the county for the back taxes. After getting on a payment plan, I would cash out refinance the property.
Assuming that the property appraised at 120k and I refi'd at 75 ltv, I could pull out 90k, recouping my initial investment plus some.
Am I missing something in my understanding that would prevent this from being a viable option?
Am I missing any underlying assumptions?
Is the 58k property taxes, or some other kind of lien? Like an IRS lien maybe? I can't recall ever seeing a 120k property with 58k in back taxes. I would check the title report before moving much further.
Also you should get pretty familiar with the tax foreclosure rules and procedures in whatever municipality or county the property is in. Not saying it's a bad idea - but something seems out of whack with that tax amount and the value - seems like the property should have been either sold at a tax sale or repo'd by the county long before getting that far delinquent
@Blair Poelman All the listing shows is "back taxes with the county" which the borrower will assume. I'll have to check out the title report for more information.
You'll almost certainly have to pay off the lien prior to closing (as opposed to negotiating a payment plan after the fact). Also I suggest you reach out to your lender regarding seasoning requirements - most lenders in my area still requiring seasoning regardless of whether the buyer paid cash or used leverage (in fact, many lenders offer a shorter seasoning period if you are refinancing out of an existing loan, instead of doing a cash out initial mortgage).
FYI I have seen numerous situations of incredibly high back taxes on properties. Where you say how the hell could this happen? It does.
Taxes, fines, fees, code violations, failed inspections, tickets, late fees, interest.
@Jason Kaye - Most states have something called a redemption period. According to the Tax Lien Lady's state guide, CA doesn't have a "redemption period" per say, the owner can dispute the tax sale up to a year following the sale. So you can move fwd with your plan, but just know that if you the owner disputes the sale and wins, any improvements that you make to the property may be at risk. I would check the rules at your county to backup what I am saying. The CA notes from the Tax Lien Lady's state guide are below.
California is also a true deed state with no redemption period and no interest rate or penalty. However, even though there is no redemption period after the sale, the owner (or a lien holder) has 1 year to initiate proceedings to challenge the validity or irregularity of the tax sale. The county treasurer/tax collector conducts tax sales. The minimum bid price is the total amount necessary to redeem, plus the costs of sale. Properties that are not sold may be re-offered within 90 days, or at the next scheduled sale at a minimum price that the tax collector deems appropriate. A "tax deed to purchaser" that conveys title free of all encumbrances of any kind existing before the sale, with certain exceptions as stated in Section 3712 of the California Revenue and Taxation Code, is issued to the successful bidder. State Guide to Tax Lien and Tax Deed Investing Â© Copyright 2010-2016 Tax Lien Consulting, LLC. All rights reserved. 22 You must be registered in order to bid and, for some of the larger sales, you may need to register a few days ahead of time, so check with the county tax collector. It is advantageous to register early for the sale because there may be limited seating and usually the early registrants get better seats. This can be important at an auction where many people may be calling out the same number and it is up to the tax collector or auctioneer to pick the winning bidder among them. Most counties in California have their tax sales online. These sales are conducted by ************** and registration is done on their website. In order to be eligible to bid on a parcel, a deposit of 10% of the minimum bid is required. Because of California state law, the property does not revert to the next highest bidder. All sales are final and there are absolutely no refunds. Be careful bidding online, a mistake can be costly. Legal action is taken against any bidder who defaults and such bidders will be banned from future auctions. Due to the extreme competition of online auctions, these sales have become very competitive. Most of the properties that do sell at these auctions sell way above the minimum bid
@Jason Kaye the title of the post starts with BRRRR and you say the ARV ii $120. Both imply the property needs work. I don't see a deal here. You are paying just over $100, it needs work and it is only worth $120 when it is done. That is a bad deal.
@Ned Carey I believe that BARRR, (Buy-Add Value-Rent-Refinance-Repeat) would be a better term for what I'm getting at. We generally take Rehabbing to be the vehicle with which we add value and can thereby refinance, however, in this case I am looking to assume the back taxes as my value add.
"You are paying just over $100"
Notice, in my example the purchase price is 44k. The back taxes are 58k. Together, yes, the price would be over 100k, but, I am not including the back taxes in this. The listing indicates that it is possible to go on a payment plan for the back taxes. I view this essentially as a separate "loan".
At this point I have bought a 120k house for 44k and I have a separate back-tax "loan" with the county. A 75 ltv refi at this point would allow me to pull out 90k. This would leave me with a 90k loan and a 58k back-tax "loan" as well as 46k cash in hand. Yes this depends on some conditions like the terms of the back-tax "loan", but, assuming that the property cash flowed in spite of this, I would have 46k cash more than I started with plus the property.
Now my question was, would a bank allow this type of refinance? i.e Would the back-tax payment plan have any bearing on my ability to refinance? Or is there something else that I am missing in my calculations/assumptions?
RE taxes are a lien against the property... so this property isn't discounted much.
A lender would not typically get involved in a transaction like this without requiring all taxes to be paid in full and their lien insured in first position.
@Jason Kaye I agree with several posts. I don't see a deal here either. It may be worth a phone call or face to face with the treasurer & whatever county atty might agree to a tax reduction - but do that PRIOR to agreeing to buy the property.
@Joe Norman correctly says the taxes will be collected at settlement, unless you do a quit claim or direct purchase, but I don't see how you escape paying all of the amount or whatever discounted rate you might attain. I tried to do this once in CO and made zero headway. The taxes exceeded the value of the property and the municipality wouldn't budge. I walked away from the deal. So it sits unused and without taxes being paid.
You're also not likely to get title insurance until the lien is paid, so @Tom Gimer is right about loan difficulty.
You might have this talk with the homeowner and see about paying them something slightly above $58K in order to put something in their pocket. You can use the BP calculator to walk them through their situation and defend your offer, but don't count on acceptance. There are lots of deals out there, and at face value, much better than the one you're chasing now. I think it hinges on a number slightly above taxes.
@Ned Carey points out the obvious implication of the property needing rehab. You offered an ARV, but not the cost of rehab. The advice offered could be better informed if you offered the rehab number too.
Regardless, I'd really like to know how this plays out.
@Jason Kaye Either I am missing something or you are fooling yourself here. The fact that you are getting a "loan" for the back taxes doesn't change the fact you are paying over $100K
If you get a loan for $90k you are not recouping your initial investment, you are paying over $100k. You also haven't accounted for where the money comes from to do the repairs to make it worth the $120 ARV. No one (other than a friend or family) will loan you the money without the taxes being paid in full.
Having said all the above this could still be a deal if you can pull it off, if the cash flow analysis works as a rental. But the idea you are going to get all your money back is not at all likely to happen.
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