Thoughts on buying equity in high-equity tax delinquent homes?

Question

Looking for an evaluation of my proposed strategy.

- Identify tax delinquent properties. Figure out which of them are owned free & clear or have low mortgage balances.

- Make an offer to their owners like this. e.g. Property worth $200k, they owe $15k. I say, I'll give you $50k today, you pay off your tax debt, and you give me 25% of what you eventually sell the property for plus $3000 or an additional 1.5% of the eventual sale price per year. Homeowner wins because their debt is paid, and they have the option of making no payments. The holder of the tax debt - whether the county or an investor - wins because they get paid. And I win because I get income and appreciation from a property I don't manage.

Has this been tried? Where could I go wrong?

Thanks!

Don Konipol · Answer

@Nikhil Nirmel

While this can work theoretically, it’s probably a violation of the Dodd Frank Act, as well as truth in lending laws. You’d need a large war chest to pay legal fees to sue (or defend suits) from people who seek legal advise after the fact and have “buyer remorse”.

Bruce Lynn · Answer

My guess is this is way easier thought about than put into practice and pretty risky. Looks great on paper, but my guess in most places is that #1 there are very few of these target properties, #2 even less people in this situation would understand or agree to the play and #3 if someone is delinquent $15,000 and you want to give them $50,000 that sounds like throwing good money after bad.

I think it would be easier doing the participation share model on upfront lending. Probably a lot bigger market for that.

Don Konipol · Answer

@Nikhil Nirmel

Looks like you’re experienced with building platforms. I’m sure you’ve got it covered but you’ll need an attorney familiar with various consumer protection laws especially as they apply to real estate. A general business attorney or a securities attorney would not necessarily have the experience or experience to be able to render a qualified, reliable opinion about matters in the gray area of these laws.

If you can navigate the minefield of Dodd Frank and the CFPB successfully, you may have a profitable niche. I emphasize niche because I don’t see how giving up 25% appreciation or equity for current tax payments is a good solution for the homeowner, in most cases. But hell, I don’t like most life insurance either, and life insurance companies have done pretty well.

Jay Hinrichs · Answer

yes I recall reading about those companies another form of I buyers.. the issue come with those in distress or default.

Chris Seveney · Answer

I talked to my attorney about something similar whereby I owner finance a property to an Owner occupant and have property on land lease or retain partial ownership.
I was told based on Dodd frank both were illegal. It is either a loan or co-ownership and you would need to share in payments, costs, expenses and as such couldn’t force someone to sell...

Sounds very similar

Nikhil Nirmel · Answer

@Chris Seveney @Don Konipol @Jay Hinrichs Thanks for the points.

We would specify that the owner must sell the property or buy us out within 10 years. We'd record a trust deed and option memorandum. If there is property neglect, we'd add the amount of devaluation to the value used to calculate our share.

Point.com and Unison.com do something similar, so it's not totally unprecedented.

In actuality, I'm building a two-sided marketplace around this concept (see my profile), and I do have a lawyer. But your points about ensuring that this is not in violation of TiLA/D-F/etc. are well taken, and I need to do more research there.

Jay Hinrichs · Answer

Great point.

And WA like OR and CA most definitely have predatory acts to protect folks. Positive on anyone in mortgage foreclosure.. Tax foreclosure not sure on.. WE have done some of this over the years.. based on my experience 2 out of 3 of these you will be hiring an attorney as the land/homeowner gets a big dose of seller remorse.. Bare land would be easier but owner occ again very touchy..

Chris Seveney · Answer

@Nikhil Nirmel

What happens if they do not sell for 30 years and they let the house get rundown?

How are you going to protect your interest from them running up another $15k tax bill?

In most of these instances the county would work with the borrower to put them on a payment plan, and if not the borrower would typically file bankruptcy to protect their interest in the property.

You would also have to check state laws as in some states approaching borrowers who are delinquent on mortgages (and property taxes) can be considered predatory.

In real estate the name of the game is control and in this instance it does not appear that you have any control unless I am misinterpreting this.

Thoughts on buying equity in high-equity tax delinquent homes?

Thoughts on buying equity in high-equity tax delinquent homes?

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