First Trust Deed Headed towards Tax Lien Auction

21 Replies

I own a first trust deed that I paid very little for-under $15,000.  It is a duplex renting out at $800/month and has a zillow value of just under $50,000 in Cleveland, OH.  Recently in doing some research, I noticed that the property taxes are not being paid.  I contacted the county who told me that it would be eligible for a tax lien auction as early as this July.  When I contacted the gentleman who was the previous owner of the note and who is carrying back a second, he informed me not to worry and that if this happens, the purchaser of the tax lien is required to notify the lien holder at which time I would have the option to buy the tax lien from the purchaser for the price they paid plus whatever interest rate that county pays for their tax lien certificates. (Redeem it)

I have a couple of questions related to this.  If this happens, do they notify ALL the lien holders of the tax lien sale and do all of the lien holders have a equal opportunity to redeem?  In other words, if the second mortgage holder is also notified and he redeems before I have a chance to is the property his free and clear and do I totally lose out?

I realize that I can just pay all or part of the taxes to avoid this going to sale.  Recently, this borrower has been a spotty payer because I have since learned that the property has been sold subject to my first lien.  Since this was a very low dollar note, I am sure there was no due on sale clause but I can certainly start the foreclosure process because the borrower is behind on payments.  I am wondering if in the end it is cheaper and faster to let the note go to tax lien sale and redeem it vs going through the cost and time of the foreclosure process?

Any insight would be appreciated.

Sandy

Tax liens as you get farther out east are more complicated than West coast tax liens that are fairly easy to understand and cut and dry.

my sense of this is you have the right to pay the tax's and add it to your note balance.. just like if they did not pay insurance..

I suspect you do have a Alienation clause in your mortgage as its pretty standard verbiage in most.

but you have multiple events of default going on here.. so you can start at anytime I would think

lastly I think at least in many east coast states or counties to clear title they need a court action.. and at that time you would also be notified and be able as the lender to cure..  And of course mortgage foreclosures are more expensive and take longer in mortgage states compared to deed of trust states..

If you have equity and it sounds like you do.. if your in first at 15k on a duplex in Cleveland even one in the hoody is worth 50k.. Might be time to learn the foreclosure process as a bene...  any fee's you pay to foreclose are also added to your note.. and if someone took it sub too those folks generally wont have the ability to cure.. but maybe.. a lot of sub too in lower value assets is get in title for very little money then rip the rents.. knowing they will have one to two years in the foreclosure process so they get 800 a month for a few years.. do not pay anything on the property and walk away.. Seen this play many times.. and why I am pretty anti sub too from the sellers side of the table.  And its why the banks have alienation clause in the first place for these events of default.

@Sandy Uhlmann
First get a value for the property as Zillow means zilch. I have a zestimate on a property of $208,000 but property is worth$30k. So they are close

With the tax lien- you can either pay it and have it added to your corporate advances which you can get back in foreclosure. If you do not pay it then it gets paid first in foreclosure. Any lienholder can pay the tax lien but it does not wipe the property out

My recommendation is confirm Value on property.

@Jay Hinrichs @Chris Seveney Thanks for the input.  I think I had a misunderstanding of the Ohio tax lien/tax deed process and was thinking that it was more like the process in Florida where the county essentially does most of the work for you and you don't have to go through the entire foreclosure process at all.  Even if I was to purchase the tax lien at the tax lien sale or redeem the tax lien that a third party purchases, I would still need to file for a foreclosure action anyway so I might as well either keep it out of the tax sale and pay all or part of the taxes and add that on as a corporate expense/advance on my note.  I suppose I can also have a field chase done at the same time as I confirm the value of the property.  At least I might be able to find out if the property is occupied with renters and what they are paying for rent.

Thanks again!

Sandy

This is from the Cuyohoga County Treasury site:

Taxpayer Information
The Cuyahoga County Treasury is not selling the property, only the delinquent taxes. The tax lien certificate purchaser pays the County the entire amount of the delinquency. They then hold the first priority lien.

What happens if your tax lien is sold?
A tax lien certificate is placed on the property. The lien is recorded with the County Fiscal Office, Transfer and Conveyance Department.

If the lien is not redeemed within twelve months, the tax lien certificate purchaser may file a foreclosure action.

Under ORC Section 5721.38, the property owner has the right to enter into a "Redemption Payment Plan" beginning on the date the tax certificate is sold under ORC Section 5721.33 and ending on the date the decree is rendered through foreclosure proceedings (ORC Section 5721.37 (F)).

The property owner may redeem the tax lien certificate anytime prior to confirmation of the Foreclosure Sale in terms of “cash equivalent funds” plus payment of additional charges and costs if applicable.

To avoid the sale of a tax lien certificate on your property, you must pay your taxes in full or enter into a payment plan with the Cuyahoga County Treasury . You may also be responsible for additional fees and costs associated with the tax lien certificate sale.

I agree. Get a better value on the property, it's only $100 for a drive by BPO. If it's worth at least $30k, i would pay the taxes and foreclose. What's your exit strategy for the note? Did you want to hold onto a re-performing note?

Originally posted by @Sandy Uhlmann :

@Jay Hinrichs@Chris Seveney Thanks for the input.  I think I had a misunderstanding of the Ohio tax lien/tax deed process and was thinking that it was more like the process in Florida where the county essentially does most of the work for you and you don't have to go through the entire foreclosure process at all.  Even if I was to purchase the tax lien at the tax lien sale or redeem the tax lien that a third party purchases, I would still need to file for a foreclosure action anyway so I might as well either keep it out of the tax sale and pay all or part of the taxes and add that on as a corporate expense/advance on my note.  I suppose I can also have a field chase done at the same time as I confirm the value of the property.  At least I might be able to find out if the property is occupied with renters and what they are paying for rent.

Thanks again!

Sandy

This is from the Cuyohoga County Treasury site:

Taxpayer Information
The Cuyahoga County Treasury is not selling the property, only the delinquent taxes. The tax lien certificate purchaser pays the County the entire amount of the delinquency. They then hold the first priority lien.

What happens if your tax lien is sold?
A tax lien certificate is placed on the property. The lien is recorded with the County Fiscal Office, Transfer and Conveyance Department.

If the lien is not redeemed within twelve months, the tax lien certificate purchaser may file a foreclosure action.

Under ORC Section 5721.38, the property owner has the right to enter into a "Redemption Payment Plan" beginning on the date the tax certificate is sold under ORC Section 5721.33 and ending on the date the decree is rendered through foreclosure proceedings (ORC Section 5721.37 (F)).

The property owner may redeem the tax lien certificate anytime prior to confirmation of the Foreclosure Sale in terms of “cash equivalent funds” plus payment of additional charges and costs if applicable.

To avoid the sale of a tax lien certificate on your property, you must pay your taxes in full or enter into a payment plan with the Cuyahoga County Treasury . You may also be responsible for additional fees and costs associated with the tax lien certificate sale.

if you buy the tax lien then foreclose it out your just wiping yourself out.. just foreclose on the mortgage and be done with it. ( if you have suffiecnet equity and its worth doing. 

@Sandy Uhlmann You don't need to worry about who redeems the lien, as long as it is redeemed by someone.  Keep in mind that redemption of a tax lien is simply a paying of the tax debt and removal of the lien from the property.  If it is the owner who redeems, that's great because the taxes are paid and the lien is gone.  If it is a mortgage lien holder, they get to add the amount paid as an advance to the loan, and that's all.  So if the 2nd lien holder redeems, it's good for you because you have preserved your current equity position (not increased the debt via advance), removed the lien from the property, and the taxes have been paid.  

With tax liens, the scenario to be concerned about is when they get to be a couple of years old.  In the tax lien counties I have dealt with, the holder of the tax lien has the right to foreclose after some period of time, and I think 2 years is common.  If that happens your loan could be wiped out in the process.  My policy is to bring the taxes current prior to tax lien sale, and if I buy something with a tax lien I redeem it right away.  These things carry high interest and that can add up quickly as a senior encumbrance on the property if not dealt with.

Originally posted by @Chris Seveney :

@Jay Hinrichs I believe in Ohio tax liens must be bought in bulk, I do not believe they sell them as one-offs.

really ??? that's interesting..  have to check that out..

Well Sandy has gotten some top level advice on a pretty common occurrence as a mortgage or trust deed investor 

the purchaser of the tax lien is required to notify the lien holder at which time I would have the option to buy the tax lien from the purchaser for the price they paid plus whatever interest rate that county pays for their tax lien certificates. (Redeem it)

@Sandy Uhlmann i can't respond specifically to OH law but typically in most tax lien state, the above is not exactly true. In order for your interest to be wiped out you must be notified. However you do not "Buy the tax Lien" from the lien holder. You pay the tax lien holder off (redeem) and the lien is extinguished.  

In Maryland if you wait until you are notified of the foreclosure, you will have to pay $750 in legal fees in addition to the taxes. This is for the cost of sending the notices.

Now it is theoretically possible to buy the lien from the lien holder. You might want to do this if a tax lien foreclosure is cheaper or faster than a mortgage foreclosure. Yes as Jay said foreclosing on your own tax lien just wipes out your own mortgage. Mortgage foreclosure or tax foreclosure, either way you wind up with the property. You have to understand the specifics of the situation and OH law to figure which is likely to work out best for you. 

One advantage of a tax foreclosure is you can clear up a bad title. If you foreclose on your mortgage  you cannot correct any title issues that precede the recording of your mortgage.

First part; Zillow is not very accurate you may wish to get a BPO from a local real estate office. @Chris Seveney

How much are the taxes owed? Like @Mike Hartzog suggested just pay them. 

But if you decide to wait for the sale and be a participant in the tax auction, some counties have online tax sales, you can wipe not only your own mortgage but also the second and any liens that your borrower may have accumulated including but not limited to IRS liens and then move into REO by Tax Sale/Sherrif Deed.

Now if the second holder wishes to pay the taxes because he is in the greatest risk you are still safe at first. If #2 FCs then you are still safe at #1 and you still get paid. 

  So you don't get on the net or hire a proxy and it sells at the sale to another tax buyer... 

They must do a title lien search and contact everyone, #1 #2 anyone that may have an interest in the property. In most cases, the lien buyers do not want the property they want the interest and extra fees. Sooo, buy the tax sale lien from them if you missed your chance at the sale. Tell them you want to buy the "tax certificate". It will give you greater control and you are going to shell out that amount anyway if you pay the county and redeem it. It will also save you FC attorney costs if you just pay and then FC. Been there done that! 

Back to my first question "How much are the taxes?" If they are not very much then just pay them and start FC. 

Just one more thing, maybe the biggest... What is the wording in that contract you own? 

GC

You can buy tax lien positions, Tax Certificates. In some states like Indiana, they are transferable. The borrower can not buy the lien or participate in the tax auction but the lender can. 

GC

Originally posted by @Gene Chandler :

You can buy tax lien positions, Tax Certificates. In some states like Indiana, they are transferable. The borrower can not buy the lien or participate in the tax auction but the lender can. 

GC

that makes sense hate to see your borrower buy his own tax's then wipe you out.. I wonder how they police that.. I mean a borrower could have a straw man or another entity..  I suppose them a lender could have the sale overturned if they figured it out..  

The lender has already been notified and had an opportunity to redeem. 


Originally posted by @Jay Hinrichs :
Originally posted by @Gene Chandler:

You can buy tax lien positions, Tax Certificates. In some states like Indiana, they are transferable. The borrower can not buy the lien or participate in the tax auction but the lender can. 

GC

that makes sense hate to see your borrower buy his own tax's then wipe you out.. I wonder how they police that.. I mean a borrower could have a straw man or another entity..  I suppose them a lender could have the sale overturned if they figured it out..  

Originally posted by @Dennis Weber :
The lender has already been notified and had an opportunity to redeem. 


Originally posted by @Jay Hinrichs:
Originally posted by @Gene Chandler:

You can buy tax lien positions, Tax Certificates. In some states like Indiana, they are transferable. The borrower can not buy the lien or participate in the tax auction but the lender can. 

GC

that makes sense hate to see your borrower buy his own tax's then wipe you out.. I wonder how they police that.. I mean a borrower could have a straw man or another entity..  I suppose them a lender could have the sale overturned if they figured it out..  

Ok what if lender does not redeem then I suppose this can happen.. although it would take someone pretty much not on the ball to do that.. but you know how people move around and mail does not get to them especially out of state investors. 

Excellent input and advice!  Loads of info gained from this discussion.  I am trying to figure out if I should just pay all or part of the taxes to avoid the property going to a tax lien auction and simply initiate a "regular" foreclosure on the mortgage or if it would be cheaper/easier to let it go to auction, let the purchaser notify me as I am the lien holder, then redeem the tax lien and initiate a tax lien foreclosure. I was not sure if the foreclosure procedure was the same either way or if the process was different when foreclosing on a mortgage vs foreclosing on a tax lien. 

As @Chris Seveney pointed out, according to the county website, these liens are purchased in bulk, so buying the lien myself is out of the question. It also says that If the lien is not redeemed within twelve months, the tax lien certificate purchaser may file a foreclosure action. I am making the assumption that the purchaser of the lien will have to properly notify both the borrower as well as myself as the lien holder before they can go through with the foreclosure action? as @Gene Chandler pointed out, the purchaser of the tax lien most often wants the interest associated with the tax lien rather than the property.

 @Ned Carey when you say 

"it is theoretically possible to buy the lien from the lien holder. You might want to do this if a tax lien foreclosure is cheaper or faster than a mortgage foreclosure." What do you mean by "theoretically"?  As the lender, do I not have the right to redeem?  I am assuming that "buying the lien" is different/can have a different outcome than "redeeming"? If I am able to buy the lien from whoever purchased it at the auction, it seems to me that that would be the cheaper way to get the property back.  

Wouldn't the junior lien holder also have this same option?  What would be the outcome is the junior lien holder bought the lien from tax lien holder?

@Andreas Mirza I will get a BPO for sure.  I am comfortable with keeping the property as a rental or re-selling it as a owner financed note.

Thanks all for the input.  Learning so much from all of you!

Sandy

Most important thing is to see if the house really is worth considerably more than the tax lein.

What's the adress? I'll tell you what it's worth right now.

@Sandy Uhlmann   I know a great couple of attorneys ( Paul and Adam Vincent) in Ohio that might be of help here.  They are a brother team and very knowledgeable in note investing, foreclosures, and real estate.  They also care about their clients and keep things affordable for investors.  Feel free to PM me if you would like their contact information.

i wrote:

"it is theoretically possible to buy the lien from the lien holder. You might want to do this if a tax lien foreclosure is cheaper or faster than a mortgage foreclosure." 

@Sandy Uhlmann replied:

What do you mean by "theoretically"? As the lender, do I not have the right to redeem? I am assuming that "buying the lien" is different/can have a different outcome than "redeeming"? 

Wouldn't the junior lien holder also have this same option? What would be the outcome is the junior lien holder bought the lien from tax lien holder?

Yes I think you basically have it right, Yes as a lender you have the right to redeem. Redeeming is simply paying off the taxes.  When I say you can "Theoretically buy the lien"  The lien holder has to accept your payment for redemption. The lien holder does NOT have to sell you the lien. 

Think of the tax lien as just another lender in front of you.  You can pay the lender off but the lender does not have to sell you the mortgage. 

Or look at it this way, a tax lien is NOT an ownership interest in the property, It is a debt owed that is secured by the property, (just like a mortgage)  And like a mortgage the tax lien holder can foreclose and wipe you and others out, but you or any other mortgage holder will get notice of the foreclosure and have the opportunity to pay the debt off.

Yes a junior lien holder can also "theoretically buy the lien" if the lien holder agrees to sell it. that would not change anything as far as you are concerned. You still have to pay that lien off or you could lose the property to tax lien foreclosure.  You would just lose the property to a different person. 

If the junior lien holder redeems the lien, that junior lien holder just saved you some money. 

If I am able to buy the lien from whoever purchased it at the auction, it seems to me that that would be the cheaper way to get the property back.

Maybe maybe not. Tax foreclosure and mortgage foreclosure are different processes and take different amounts of time and money.  Again I don't know OH law, but in MD we bid how much we will pay for the property if we foreclose. In MD someone might bid more than the property is worth and there would be no point in buying the lien. 

So while the taxes may be a small amount it could cost a lot more money to foreclose on the lien than to foreclose on the mortgage. It depends on the specifics of your particular situation.

Excuse me if this has already been brought up but Ohio is a hybrid state meaning they have lien and deed sales. If they are like Florida, after the lien redemption period expires it goes to a deed sale. Maybe someone familiar with Ohio tax sales will chime in. There will never be a cheaper time to pay taxes then now. 

@Sandy Uhlmann Ohio is a hybrid state but it starts with tax liens that turn into tax deeds.  When you own a tax lien and you want to foreclose you have to have a Judicial Court foreclosure process started.  Once you have a lawyer involved and you have paid the costs to start the foreclosure there will be notifications sent to everyone on title that has a recorded interest in the property.  The property owner will also receive notification that the property will be going up for Sheriff sale.  This can be a lengthy process, and can take up to a year's time.  Once this happens there will be two Sheriff sales within two weeks of each other that will take place prior to the plaintiff receiving the deed. If the property gets sold at the first sale, the property will be deeded to the winning bidder and the redemption will go to the lien holder which will include everything they have into the property plus interest.  If it does not sell at the first sale, the second sale takes place two weeks after.  The same goes for the second sale as it did for the first sale.  If after the second sale the property does not sell,  the property falls to the plaintiff.  The Sheriff sales are where you get involved with the tax deeds.  These are considered tax delinquent (deed) sales.  The opening bid will be the price of the back taxes, fees, and interest along with any other special assessment outstanding on the property.  The property will go to the highest bidder.  Foreclosures are done in a court of law and it is the magistrate that orders the sale and the Sheriff conducts it.  The foreclosure is handled with the courts thus requiring a lawyer to work with in order to take your property through the foreclosure process providing you are the lien holder and want to foreclose on a property.  The redemption period is one year and you can hold the lien for up to 6 years in Ohio as long as you have an active foreclosure open on the property.  This again requires the involvement of a lawyer or interaction at the court level.  If you participate in the tax deed auctions (the Sheriff sale) and you are the highest bidder you will acquire the deed.  If your lien holder is forcing a foreclosure on the property you hold the note to, you will have the first right of refusal when you receive notification that your property is going up for a Sheriff sale.  You will want to make sure you pay off the taxes with the interest at this point to stop the sale from happening so you can retain the property.