First Wholesale Deal! Back Taxes??

20 Replies

Hello BP,

I have my first wholesale deal under contract in South Jersey for 19k. Repairs are in the 35-45k range. ARV estimate is in the 110-125k range. The issue is that the current owner of the property has 13k in back taxes on the property. I guess you could say I am a believer in the "ready, fire, aim" philosophy but was quite excited to come across what looks my first qualified lead. The property was inherited, owned free and clear, but current owner is unable to pay the back taxes on the property.

How should I address the back taxes issue?  Is title unable to transfer until back taxes are paid up?  or should I have calculated the back taxes into my 19k offer price presuming that back taxes would be paid up by the end buyer?  

Also, when should i open up title search on this?  before or after i have an end buyer?

Nick

hey Nick, for starters let me at that I am a newbie and I commend you on your taking action. I'm getting there! With that being said this is just my opinion and with my little experience in the industry I could be wrong so plz don't quote me. The taxes will have to get paid before the sale, not to mention I don't think your end buyer will want the headache of back taxes. So more than likely you will have to add that 13k to the 19k asking price which will most likely cut into your profit. Here are the numbers I figured 13k + 19k = 32k ( your asking price) if you go with your maximum estimate for repairs of 45k and add that to "your" asking price your end buyer will have invested 77k into this property which is exactly 70% of the minimum ARV of 110k which is what your end buyer will see. My newbie advice would say see if you can lock in a lower asking price than 19k. Because the seller doesn't have to many options. Either he sells to you or he loses it at a tax sale. Hope this helped a little. But I'll be tuning in to see what the seasoned guys say. Good luck Nick! Oh and definitely open up title search before finding an end buyer to avoid wasting anyone's time if there's something else wrong with the property.

@Nick Mazzarese  great job on getting your first deal under contract. sounds like it could be a homerun after you figure out what to do with the taxes, ill be keeping my eye out to see what the experienced investors have to say. Btw, how did you find your deal? and how was your negotiation process, did you have to do much negotiating?

@Nick Mazzarese   What does your contract say???????

This is a big misconception, you probably don't have to pay a penny extra. A well written contract will usually say the seller is providing "Free and clear marketable title" or other similar language. This means he has to pay the taxes in order to sell it to you.

He does not pay the taxes in advance of selling it to you. The title company will take the money needed for taxes out of the sellers proceeds. Instead of getting $19K he will only get $6K. 

If the price was only $10K he would be legally obligated to bring $3K to the settlement table to sell it to you. Of course many deals fall apart for this kind of thing because it is not worth fighting if the seller doesn't have the money to do it.

So g back to your contract and see what it says. Most likely you are fine. 

Because of the back tax issue, yes have the title company start work. There may be other issues that come up, like judgements against the seller. The sooner you know about these the better.

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

@Ned Carey  thank you Ned for the very helpful feedback.  there is no language in the contract stating the seller will provide a free and clear title.  Even if there was, the seller would be unable to pay the 13k as this is one of the primary reasons they are a motivated seller. 

My initial thought was to go back a re-negotiate a 6k contract price with the seller and the end buyer would take care of the back taxes once they purchase the property however it sounds like the title company will ensure these taxes get paid.  Or in other words, a property cannot transfer title unless back taxes are settled.  Is that correct? 

The contract may not need to say free and clear title because it is natural that would be assumed. Who wrote the offer? Contract law says that if a contract is unclear, the part that is unclear will be ruled in favor of the party that did not write the contract.  You are definitely talking about an attorney getting involved here. The title company  should be able to explain this. 

Even if there was, the seller would be unable to pay the 13k as this is one of the primary reasons they are a motivated seller. 

Yes the Seller CAN afford it. If you are paying $19K and the taxes are only $13K the money for the taxes comes out of the $19K and the seller only gets $6K

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

I see.  Will the title company still ensure the back taxes are paid out of the 19k without this language in the contract? 

Thank you Ned 

Geeze, was the seller expecting to have to pay the taxes out of the $19k, or is he expecting $19k, and You handle the taxes, which is it?  I assume you had this discussion since you said "he can't afford to pay the taxes".  We have no idea what your contract says, or what understandings (or lack thereof) you had with the seller.

the seller fully understands their 13k in back taxes is going to come out of the 19k netting them 6k.  My confusion stemmed from the "free and clear" language Ned was referring to. 

Check the back taxes yourself. I recently almost bought one, assuming the letter from the County covered all back taxes. It didn't. I did my own research and found $31,000 additional back taxes that had to be paid. That killed the deal. 

Do your own research. Also, call the municipalities to see if there are unrecorded liens.

@Michael Walker  and @Ned Carey  made excellent points. 

I think $19K is way too high. In my wholesale deals, I generally offer the property to my buyer for not much over 50% of "retail". This deal may not fly. It wouldn't for me.

One thing I like about you? You are out there doing something. So many just say, "I want to do that", but they never do. Congratulations on taking action!

Originally posted by @Nick Mazzarese :

I see.  Will the title company still ensure the back taxes are paid out of the 19k without this language in the contract? 

Thank you Ned 

If that was the intent of the contract and you both agree that is the intent, yes that is how the title company will handle it. The contract probably has some language that says that is how it is to be handled but it it doesn't, it really doesn't matter if you both agree.

If the contract isn't clear you can write an addendum that you both sign.

Since you need to go to a title company anyway why don't you show them the contract and have them clarify things for you. None of us know what the contract says.

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

@Joseph Ball  

Thanks for the pointers Joseph. Yes I actually checked the back taxes already with the tax asessors office  .  

Do you mean to say your standard Max allowable offers on wholesale deals are (ARV x .5) - repairs - wholesale fee? I would love to offer up deals to my buyers at 50% retail but you are right this deal is not quite there. Are you seeing the standard 70-65% of retail not selling anymore as a wholesaler?

I don't sell at "standard 70-65% of retail". I sell for less. However, I see this 70% rule quoted everywhere, so it must be working for others. Perhaps this might be a good forum question. "What sells?" I just know if I tried to sell at 70%, I would lose my buyer base. Perhaps it may be how you initially set your business up.

It might also be the nature of your buyers. If your buyers are end users, they will probably pay more. But if they are investors, they need "meat on the bone". Purely my opinion.

makes sense.  I will let everyone know how this one pans out.  Can't thank everyone enough for the timely feedback. 

Nick

Originally posted by @Joseph Ball :

I don't sell at "standard 70-65% of retail". I sell for less. However, I see this 70% rule quoted everywhere, so it must be working for others. Perhaps this might be a good forum question. "What sells?" I just know if I tried to sell at 70%, I would lose my buyer base. Perhaps it may be how you initially set your business up.

It might also be the nature of your buyers. If your buyers are end users, they will probably pay more. But if they are investors, they need "meat on the bone". Purely my opinion.

What buyers are willing to pay is all about supply and demand for the deals. If you were in California buyers would be willing to pay well above 70% because there is just so much competition among the buyers. It also changes things when the average home price is so much higher because if the rehabber makes a lower percentage profit the dollar amount can still work out. If a home has an ARV of $30k and needs $5k in repairs it's going to need to be discounted more than 70% because after closing costs there's no meat left. On a $500k house it's a whole different story.

Where are you wholesaling, in the Clermont area?  

I have buyers all over the world. I buy all over Florida.

You?

Originally posted by @Joseph Ball :

I have buyers all over the world. I buy all over Florida.

You?

 I'm an investor/rehabber in the Tampa Bay market.  I've driven through Groveland a few times lately on 50 and other than the new subdivisions in Clermont it looked pretty rural around there so I was curious if you were wholesaling locally.  

No. Not particularly. I buy in 19 counties. Not much in Groveland

hey guys just wanted to say thank you again for all your help.  I recently closed this deal with the help of a co-wholesaler who brought in the buyer.  We ended up selling the property for 23,500 and split our profit of $4,500 down the middle each taking home $2,250.  Not much I know but hell I was stoked.  Turns out this wholesaling thing does actually work.  

Next up is staying consistent with marketing with my initial goal of 50 yard signs per week. 

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Congrats Nick! Was this deal from bandit signs?