Teachable moment? Austin investors: Two properties; one owner; and the BSC: Can these properties be saved?

14 Replies

How would you solve this problem?  Let me know your thoughts!

I’ve had my eye on two boarded up, deteriorating residential properties built in 1919 and 1922, next door to each other, each on approx. ¼ acre lots, nice Central Austin neighborhood, but these two have several structural and utility problems and are the blight of the neighborhood. Given the information that follows, would you pursue these properties? And if so, what would your course of action be? Demolition and rebuild? Single family, condos or multifamily? How would the fines be negotiated with the BSC?

If not worth pursuing, what is the likely outcome? The owner isn't likely to pay the fines; the city has not yet moved to demolish the properties.

My research found that these properties are owned by one individual, purchased together from the same previous owner in April, 1998. One is a single family with detached garage / outbuilding possible garage apartment; the other is listed as a triplex with detached garage/outbuilding. A common alley separates the lots through the block to the next street.

The current owner address is in the same neighborhood, is a self-employed professional, who has had past state and federal tax lien issues in the triple digits. The properties have had several code violations ultimately leading to emergency board and securing the structures as far back as 2004, including removal of tenants, and both properties have legal binding orders from the Building and Standards Commission in effect on March, 2005 and October, 2008.The owner is being assessed a fine of $500 per week on each property until resolution. If the properties are sold, the fines and liens of course transfer. The property taxes have been paid on time and are current.

Here’s a breakdown of values from property tax statements and accumulated unpaid fines assessed by the Building & Standards Commission:

Past sales within neighboring and subject properties zip code: November, 2013 – September 11, 2014:

Carolyn L.  you may want to contact the BSC and see what needs to be done to bring the buildings to code, then estimate the cost to do so first. At which point, you should be able to calculate your answer. Then it will all rest in your approach to the current owner, and your negotiations for the property.

Have you had a RE professional run some comps? I wouldn't trust Redfin, look at the estimated taxes vs, actual paid taxes. They are high by 20%, so I would think comps would be similar.

My next question; is the owner being charged interest on the fines? That could easily turn the $325,000 into $400,000 plus.

@Richard D.  

Thanks so much for your response and advice.  I haven't had a RE pro run comps yet, as I was looking for a quick rough estimate, which is why the estimated taxes are off.  Point well taken.

I have been in contact with Austin Code department's assistant division manager (legal) to request additional info on the properties and any repair estimates they may have. They've been very helpful so far, but I am awaiting a call back from my contact - the gentleman I spoke with is new in his position and asked for a few days to research the answers for me.  I do have copies of the orders for each property, and neither document mentions interest on the fine, but worth asking.  Perhaps a direct call to BSC is in order.

In your experience with the county tax assessors office, have you seen cases like this?  I'm curious to know why the owner would hang on to these properties in this condition and keep the taxes current while fines are accruing.  Also - once they become an ongoing case and they are clearly uninhabitable, are they reassessed for value?

Thanks again Richard!  Your feedback is so helpful.

Carolyn

This does happen from time to time for various reasons. Often the owners have some sort of emotional attachment to the property and don't want to lose it to taxes. Yet they don't have the money to keep the property in code to continue renting. 

I have seen it where the owners just want to get as much as they can without doing any work as well. Eventually, once the property is no longer producing enough income, they just basically walk away, and don't reply to anyone about the property, as though they never had anything to do with it.

I might have missed it in the conversation, but have you even approached the owner to see if he is willing to sell? That would be my first step if I were in your shoes. Feel free to give me a call if you have any local Austin questions. I also have access to the MLS.

@Brian Whitten  

Thanks for weighing in!  You didn't miss it - I have not approached the owner yet, but I suppose that might be a logical thing to do!  After reviewing all the legal documents and history of these properties, my guess is the owner would happily give them away, along with the fines associated. :)

I would think that the city would be willing to negotiate with an investor to make this go away and improve the neighborhood and tax base, knowing that neither the owner nor a buyer will pay the balance of fines.  Do you have any experience with this?

I'd be happy to discuss if you have time. 

@Richard D.  

From what I can tell, this owner has acknowledged all legal orders, and could not have had a rental income since 2005 and 2008 when the orders went into effect, so I don't see a benefit to him there.  I'm not a tax expert, so I don't know if there is a tax advantage with the property tax payments where there is no mortgage.

I'm sure I'm missing something here! Thanks again for your feedback and advice.  Truly appreciate it!

I'd check to see if the owner will even sell.    Then just plan on knocking them down if they are in that bad a shape.   Now take into consideration the hassle factor of dealing with the city first on demolition and then on re-building.  I don't know where the city is at now on approving projects, but I know it was in the 1-2 year range in the not so distant past.  

No company avatar mediumBrian Mathews, Brian's Heating and Cooling | [email protected] | 512‑350‑8704 | http://www.brianac.com

@Brian Mathews  

 Thanks for the feedback, Brian!  I am assuming they will be a total demolition based on the shape they were in when boarded up, and today they look like they're ready to fall over.

I consider this a very valuable lesson in negotiating with the owner and the city for a win/win/win, so any experience, creative ideas and feedback all very welcome and appreciated! 

Carolyn L. 

I do not have experience in exactly what you are doing, but in the past year I have had much of the same issues.  Tally Two was debating on whether or not to purchase a distressed property out in Bastrop.  Schedule C on the title search was about as long as a toilet paper roll and included all sorts of liens including a dreadful IRS lien.  

There was no time to try and negotiate liens or even pay them off for that matter (Foreclosure pending), so we did the unthinkable.... we bought the property subject to all the liens, yuck!  However, this did give us time to go out an try to negotiate the liens with the lienholders.  We were able to get some of them removed completely.  The IRS lien would not budge, and in fact was incredibly difficult to even pay.  The IRS just couldn't wrap it through their heads that we owned the property with the lien attached.  They just kept saying that the sale was illegal and they initially WOULDN'T EVEN TAKE OUR MONEY to pay the lien.  

On top of the lien drama, we had a squatter move into one of our houses and played the system.  That is another drama story that I don't have time to post, but if you want to read about squatters and how hard it is to get them evicted out of your house, we posted a page about it on our website to help out other investors going through the same situation.  http://www.tallytwoinvestmentgroup.com/eviction/

The final straw that made this deal nerve racking was the fact that in order to profit on it, we had to be able to divide up the 5 acres into 3 separate parcels.  No other investor would take this on...  

To sum up my point, the only reason this deal made sense was because we had to do several things out-of-the-box that a new investor (or even experienced investor) would not feel comfortable taking on because of the risks. We ended up tackling this project and it has become VERY PROFITABLE from a money standpoint, but also VERY TIME CONSUMING. However, the lessons we learned have been invaluable for any future projects that aren't your typical (70% ARV - repairs) that investors drool for.

@Brian Whitten  

Thanks for sharing your story - what a nightmare project!  Why doesn't the IRS issue surprise me? :)  I agree - the lessons learned in this type of situation are invaluable and others reading this will benefit from your experience as well.  I've never dealt with that level of complexity, but going through our own home renovation with a crooked GC gave us heartburn for quite a while with all the hoops we had to jump through! Not to mention legal fees to manage the process! Ugh.  But we lived to talk about it, and a little bit wiser for the experience.

And - thank you for sharing the squatter article and offer to access MLS!

@Lynn Currie  

Thanks for chiming in!  So glad to have your expertise here.  Love the video and worksheet - you really are an Excel geek!

I'm having a hard time attaching a PDF or Excel file to this reply or PM for some reason.  And there is no full moon!  I'll send over via email at Magpie.

Thanks!