Tax Foreclosures - The Undiscovered Gold Mine in Real Estate Investing
By Brian Payton
President and CEO of ATW Investments, Inc.
With the current climate surrounding the real estate world, the number of foreclosures
is skyrocketing across the board. The most common are Bank Foreclosures (when the
lender seizes a property from the party unable to satisfy the mortgage owed) and
Tax Foreclosures (when the Government seizes a property from the party unable to
satisfy the property tax owed). The key component to consider as an investor is,
"What kind of foreclosure do I want to work with?" My answer to that question is
the answer to all great real estate deals...
WHO IS THE MOTIVATED SELLER?
That, my friend, is the million-dollar question and will be addressed further down.
I often encounter investors who work on bank foreclosures. Investors will spend
ample amount of time attempting to make these deals work, when in reality they're
fighting an uphill battle from the beginning. There are often hidden costs associated
with acquiring this type of property that the investor doesn't think to consider.
Commonly, bank foreclosure deals entail a substantial sum in attorney fees, filing
fees, and late payment fees to the lender; this is in ON TOP of the principal amount
owed. These hidden fees must be satisfied in order to close the deal and add to
the expense of the transaction, making it much less lucrative than you originally
Now at this point, you're probably thinking that a few extra hundred or even a few
extra thousand dollars in unexpected costs isn't enough to deter you from proceeding
with a bank foreclosure because it's still a great deal. Well, therein lies the
secret to why tax foreclosures are such a better deal to work with. In my experience,
at least 70-80% of the time you do a transaction that involves a Bank REO, you're
dealing with a buyer who is behind on their taxes anyway. So the government is already
involved in the deal, regardless of the fact that you are working a bank foreclosure.
Lenders have a huge amount of holding costs on foreclosures. They place so many
barriers in the way to getting a deal done that it becomes very difficult. My point
in going over all of this is to point out to you the battle you're facing when you're
placing the bank as first in the negotiation process. So, to answer the "million-dollar
question"--in general, lenders are not motivated to sell to investors. They are
less likely to negotiate, in an attempt to recoup their expenses, which they have
a right to. Homeowners, however, ARE motivated to sell to investors. A homeowner
facing a tax foreclosure is much more likely to negotiate with an investor because
it may be the only opportunity they'll have to make any type of profit.
By implementing the following priority of whom you're working with, you'll be closing
deals in no time:
- Uncle Sam
This formula works because we use the natural progression of the deal against the
bank to force their hand in working with us.
The bottom line is that what is owed to Uncle Sam is, for the most part, the one
debt that cannot be changed out of all the debts you will see in a foreclosure deal.
The government is ALWAYS the first lien holder on transactions. They tell you what
you owe and give you a deadline. If you don't get the funds by that time, you lose
the property. For the banks this would be devastating because what would then happen
to their lien? Even though on paper they are in the first position (this means they
have a greater right to take back the home), in reality the Government is always
in 1st position. So the banks will actually lose their note if the government seizes
- What is the principal amount owed to the bank?
- What is the total amount of taxes owed to Uncle Sam?
- Is there rehab work needed to the house?
Once I have this basic information I find out these important pieces to the deal:
- How much money will I need to spend to perform the rehab work to the home?
- What can I sell the house for Retail?
- What can I rent the house for?
Once I have this information I'm ready to start negotiating the deal.
Does this work every time? NO! But once you get the swing of it down, it can work
in your favor. You can work this formula in about two days time instead of working
through the red tape of the Banking and Realtor systems. Even if your offer is rejected,
you get it quickly so you can move onto the next deal.