How Liens Work & How To Profit with Them
Buying foreclosed property with lots of encumbrances is not for the faint-hearted. Some of us here in the Twilight World of investing in Real Estate purchased from a Florida County Foreclosure Auction seek out properties that have heaps of encumbrances, some seemingly immovable, making a deal untenable, but are they? How Liens work is an important subject every serious investor needs to understand.
IRS Tax Liens
When studying how liens work, IRS liens are perhaps the most misunderstood or little understood lien encumbrance. Let’s take for example, IRS liens, buying a foreclosure property with IRS liens is akin to swimming with sharks in the ocean, you are asking to get bitten, it is considered a no, no, BUT let’s take a closer look and see the real truth.
If the IRS tax lien is before the mortgage being foreclosed, the IRS tax lien will not be foreclosed through the mortgage foreclosure sale, it will remain a lien on the property, and the amount of the lien must be paid in full before the lien will be released.
Also, although you bought it at a County Auction, selling afterward will be impossible because you will not get title insurance.
However, and this is the tricky bit, there are a couple of curveballs. First, there is a statute of limitations on a tax lien of 10 years, and in Florida, the state must stop trying to collect on a past debt after it has elapsed. Instead of running away the minute you see an IRS lien, take a look to see if it has expired or perhaps there are only six months to a year left, which you can build into your calculations.
The second “curveball” situation I have dealt with several times now, some of my peers have made a career out of this sticky situation. After you have bought the property at auction, apply to the Department of The Treasury of the Internal Revenue Service for a “Form 14135“, which is an Application for Certificate of Discharge of Property from Federal Tax Lien.
It is better if the individual with the IRS tax liens attached to their name did not live at the property you bought. You will argue that this property was just another asset of the debtor. Check this by looking at the Notice of Federal Tax Lien (Form 668 (y) & (c), which can be viewed at local County Records to see what the delinquent taxpayer has on the form, as their residence.
However, if the foreclosed property is the registered address, it’s not the end of the world, it will make the journey a little harder though.
In layman’s terms by using these forms, you are saying to the IRS: “I bought this property at a County Foreclosure Auction for a lot less than what is owed on the Federal Tax Lien. The after repair value (ARV) of the house will be a lot less than the Federal Tax Liens. You could never recover all the debt owed to you from the sale of this property, please release these liens, so I can sell the property I now own, as the tax owed to the IRS has nothing to do with me”.
In this instance, there are several things to note. Make sure that the maximum bid of the Real Estate you are trying to win at the County Foreclosure Auction is much less than the value of the Tax Liens, and the same will apply after it is repaired.
Bearing all the above in mind, when you are choosing a property to bid on at the County Foreclosure Auction, choose carefully and do the math.
IRS tax liens cover every amount imaginable, but if for instance, an individual racked up a tax bill of $1,500,000 and the house you bought at the County Foreclosure Auction was $400,000. Even if it is worth $500,000 in the same condition on the open market, there was no way the IRS was ever going to recover any of their debt from the sale of this property you successfully bid and won at the County Foreclosure Auction.
You will have to prove this, and the documentation that the Internal Revenue Service requires is tricky but definitely manageable and certainly worthwhile if you bought a house at the County Foreclosure Auction, at a great price.
Remember that the IRS always has the option to redeem the property from you within 120 days at the price you paid at the County Auction, plus all your expenses.
I don’t know of anyone or have read anywhere where this has happened in these set of circumstances. To my knowledge, the IRS has never bid at a County Foreclosure Auction on a property with their lien, to resell the property to cover all or part of their debt.
I would be interested if you know of such an event, and if you have, please leave details below in the comment box.
Additionally, the IRS would only consider foreclosing themselves if there was enough equity in the property to pay off ALL superior liens AND COVER the IRS debt. In the example I describe above, there is not, which is the key to whether you bid or not.
If the IRS tax lien is junior to the mortgage that is being foreclosed on, that means the mortgage foreclosing was registered at the County Records before the IRS Tax Lien. The IRS Tax Lien will be foreclosed through the Foreclosure Sale at the same time as the Mortgage Foreclosure. Their lien or liens over the property is extinguished after the Certificate of Title is issued.
Even in this example, the IRS will have a redemption period of 120 days after the foreclosure under the same terms as previously mentioned.
Now here is a funky set of circumstances that I witnessed December 2019 from an investor, member in Aventura, Florida.
(All numbers rounded up)
• Won a 3 X Bed, 2 X Bath, 2,300 SF – SFH, HOA Property at County Foreclosure Auction $2,300
• Negotiated & Cleared 1st & 2nd Mortgages (Two Separate Banks) $89,000
• Cleared Minor Liens, Mostly Mechanics & Water Utility $1,350
• Cleared Delinquent Property Taxes $7,230
• Observed & Ignored Two 12-Year-Old Tax Liens ($56,000)
• Applied Successfully to The IRS [Form 14135] to Remove Three Tax Liens ($680,000)
• Gut Job Renovation $70,000
• Holding Costs 18 Months, HOA, Property Taxes & Utilities $9,200
• Total Cost Including Holding $179,080
• Sold $480,000
• Profit $300,920
Zackery used PropertyOnion.com search to find the property, PropertyOnion.com to research the property, Propertyonion.com to get the Title Search Report, to then study his options and then use his 15 years of knowledge and experience to be able to pull off a complicated deal like this.
Zach, told me, “not one person bid against me”, he just paid the plaintiff’s opening bid, this was because most people run from messy liens. But if you want to make real money in this business, learn to love them, embrace them, and use them to your advantage.
Zack set the Gold Standard in our business, and it is a privilege to have him as a member, mentor & friend.
Finally, fighting these types of liens can be a precarious business if you do not know what you are doing. If you are not that confident, please don’t take a risk, contact a specialist property attorney, such as Jeffrey Harrington of Harrington Legal Alliance.
I love Mechanics Liens, primarily because the vast majority that you find attached to a piece of Real Estate are put there by usually (but not always) small to medium size corporations or one-man-band contractors. The reason for my affection is that you can negotiate with these types of entities much easier than a large conglomerate.
To understand how to get out of them, you have to understand what a Mechanics Liens is, and why it is deployed.
A Mechanics Liens is usually recorded at the County by a contractor, subcontractor, or supplier of materials when they haven’t received payment for improvements they made to a property.
Sometimes it’s not even the homeowner that has created the debt! Sometimes a contractor a homeowner used to do work on their home didn’t pay one or more of their subcontractors, even though the homeowner had already paid the Contractor.
Unfairly as some would claim, the homeowner who already is in a precarious financial position as demonstrated perhaps by an HOA foreclosure, has had their situation made worse.
Now you may ask, why do we have to bother with the Mechanics Liens if they are subordinate to a mortgage. Perhaps the property is in a Tax Deed Sale, wherein any event the liens are wiped out in the foreclosure process.
Let us take Zack’s example and apply a similar type of situation. An HOA lien is subordinate to the Mechanics lien, but all encumbrances are subordinate to the mortgage lien.
Zack’s play was to ‘take out’ the HOA Lien first, as this is the first of the encumbrances to a foreclosure sale, negotiating with the bank to settle their mortgage.
At this point, the Mechanics Liens are at full value. Therefore, before the auction, it is essential that you approach the Mechanics Lien holder to negotiate a reduced amount to satisfy their liens.
As they don’t know your actual game plan, you will explain that their liens will be wiped out in the mortgage foreclosure if they don’t make a deal with you.
As I mentioned, there are minimal times that you will have to negotiate with a Mechanics Lien holder. On the odd occasion that I have been involved in such a situation, I managed to negotiate these Mechanic Liens down to 10 cents on the dollar.
The plain fact of the matter is, without you, they’re going to get zilch. If the Contractor gains knowledge of your gameplan, they will become uncompromising, so this is the only time you will be able to negotiate with them, from strength!
With first mortgages, there really isn’t an effective way of negotiating a reduced payment to get it wiped off altogether. The only exception is if you can prove a “Robo signing” situation, which is another story and chapter all on its own and not relevant . Still, please feel free to Google it for your education and amusement, although it wasn’t too amusing for people that lost their homes.
I make mention of the first mortgage only if you are bidding on a second or third mortgage foreclosure, or HOA or a rare Mechanics Foreclosure. Never forget there is always a chance that the first mortgage has been paid down significantly enough for a deal to poke its head out of the ground at you.
If you like a property, but the deal’s numbers make no sense because of a second or third mortgage, don’t stop there. Check all the other mortgages besides the Plaintiff’s to estimate the payoff on each mortgage. If the Plaintiff listed in the foreclosure auction is anything other than a bank, check the other mortgages for a payoff amount.
You can estimate mortgage balances quickly by getting our amortization calculator available in REI Tools for you to download. To start, put in the origination date of the mortgage (easily found on public records) and the assumed date when they stopped making payments; usually, three months before any Lis Pendens recorded on public records (my rule of thumb). Next, apply an assumed interest rate of 5%; by doing this, you can find the mortgage payoff roughly.
Many mortgages will have the borrowers payment table in the public documents, or at least show the interest rate there if you take the time to read the entire mortgage. Having the actual interest rate will make figuring out balances with an amortization calculator much more accurate.
There are also some weird and wacky ways to end up with a property free and clear of a mortgage assuming it had one to begin with, that you had bought at a County Foreclosure Auction.
The statute of limitations for a Mortgage Holder to foreclose on a property in Florida is five years from the recording of a lien. Some attorneys argue that the time period for the statute of limitations to begin is from the date of default, but this is one for a smart property attorney to look at on your behalf, it does happen, but obviously, it is infrequent. Indeed, I have never been the recipient of such good fortune, we always live in hope and believe it or not I always check this out when I look at foreclosure properties, as it’s on my checklist.
Municipal Liens are like nettles, they are on most neglected properties, they can hurt you, but they can be cut down and rendered harmless.
Municipal Liens are attached to Real Estate for many reasons. Still, the most common is neglect, which is reasonably apparent if somebody is facing foreclosure. It can be for something as small as a vehicle parked on the grass, which nevertheless is against the local City ordinance, trash being left out and not put away in an appropriately designated area or for broken windows or tall grass.
The fact is these liens are about the local Municipality trying to keep their locality up to scratch. Getting these liens removed or even reduced is easily achievable if you go about it in the right way.
I’m sure you have all seen Municipal Liens with a ridiculous ongoing fine attached on a daily or weekly basis. These amounts and daily accruing penalties are placed on the property to get the owner to take action quickly without procrastination.
This is one of the few occasions when you are going to have to be on your best behavior and find the right person in the Municipal Office to make your new best friend. This is especially true if you’re buying County Auction properties in the same location regularly.
Generally, the people that work in these Municipal offices are sensible (there are exceptions to every rule of course), their primary motivation is to keep the community looking beautiful.
If you can show that as the incoming owner, you are going to put back the property to code and will be making improvements, nine and half times out of ten, you will be able to do a deal.
I have seen $800,000 liens negotiated down to $5,000, $700,000 become $10,000, and $5000 become $0 etc.
If you get the chance before the County Foreclosure Auction, take a trip to the local municipal office. Find someone that you can get on with, tell them that you are thinking of bidding on a neglected property that they have in their area, and what your plans are if you win.
Ask whether they could help you by removing (don’t use the word reduce, start with the ultimate goal first, then talk about reduction) the Municipal Liens.
They are never going to give you a cast-iron guarantee on the spot. Still, history and my experience have shown that these liens can be significantly reduced once you start taking action, and the Municipal office sees that you are going to do as you say.
Please understand, I am not saying these Municipal Liens are going to disappear completely. Providing you behave in a civil, friendly, and professional manner, you can expect these liens will drop to around or below 5% of their original value once you have talked sincerely to the Municipal office.
Another gem I have learned, thankfully from other investors, don’t tell the Municipality one thing and do another, keep your word. Otherwise, you will be eating a whole load of fines you don’t want that will be difficult to get reduced or removed.
Once you have completed the fixes to bring your property up to code as you promised the city you would, life will become much easier on future properties in the same Municipality. You are establishing a reputation for being a responsible property owner and developer. They will know your track record when it comes time to negotiate future liens with the city.
One thing to consider is that Utility Liens like sewage, water, etcetera, which are typically put into the same category as Municipal Liens, are rarely, if ever, negotiable.
Homeowners Association (HOA) Liens and Condominium Building Association (Condo Liens)
I am not going to lie to you; these are the most difficult liens to get wiped out or removed from a County Foreclosure Auction.
These liens come about when a home or condominium owner fails to pay their monthly association fees or special assessments.
With penalties and interest, together with attorney’s fees, the amount now owed does not resemble the original debt.
Homeowners start to drown in the exponentially growing debt once a lien has been issued, usually followed in many cases within six months by an updated lien, reflecting additional costs. For this reason, some people just throw their hands up in the air and give up. There is no negotiating with HOA and Condo boards in most cases.
That is why there are many HOA & Condo liens in foreclosure, which I may add in the right circumstances I would like to buy them. You can find out why if you read my article on HOA Foreclosure Play for Big Profits at the County Auction at PropertyOnion.com.
There are very few plays as an investor buying at the County Foreclosure Auction for removing or reducing these liens; they are among the very few liens that survive a mortgage foreclosure.
However, I have once in my career managed to remove an HOA lien and ultimately defend my position with the Plaintiff’s attorneys, I will tell you how, just for giggles.
In September 2016, I was contemplating buying a large estate home in the Palm Beach County Foreclosure Auction; as always, I was looking for angles to make it a great deal.
Part of my due diligence, even today, is to look at the County quickly records to see how old the last update of the Condominium Declaration and Bylaws are.
By chance, if not providence, the last time the bylaws were updated on this particular property was some 15 years prior.
This was and still is very unusual as HOA’s and Condo Associations are continually updating their Bylaws. I decided to go into the public records and take a look at their Bylaws. There’s a section in the Bylaws, which is usually named something like “Covenant For Maintenance of Assessments”, and buried in the middle of this section is a paragraph that covers what happens to delinquent maintenance assessments once the property is sold.
The paragraph read like magic, and I quote here, “The personal obligation for delinquent assessments shall not pass to his successors in title unless expressly assumed by them.”
Notice how this old untouched Bylaw is written in the masculine, probably by some old Male Chauvinist attorney that did not realize what a disservice he was doing for his client, serves them right!
Considering the debt was approaching some $70,000 this information. That in truth was pointed out to me a month prior, to add to my due diligence by my then-attorney, ended up making me a very happy camper, not to mention giving me eventually, a healthy payday.
After I won the property at the County Foreclosure Auction, I waited several weeks for the expected letter from the HOA’s attorneys. I promptly referred them to their Bylaw, which they quickly discounted, quoting some other legal precedent, which made this Bylaw null and void.
My attorney directed them to the Florida District Court of Appeal that had upheld a judgment in a similar case in May 2015, when an HOA had appealed a case they lost.
Apart from this rare circumstance, the only other occasion that an HOA or Condo lien is wiped out is at a Tax Deed Sale, there are no exceptions in this regard, as private liens get Wiped, and State and Federal liens remain.
HOA and Condo liens are very rarely if ever wiped out during or after a County Foreclosure Auction, so please account for these lien amounts and the run-ons (the amounts owed, after the lien is recorded) in your calculations.
So you can see why other experienced County Foreclosure Auction investors and I love messy liens, the messier they are, the better the deal gets many times. It thins out the herd of competitors at the County Foreclosure Auctions; the uninformed will take a look at Municipal Liens, perhaps tethered to an IRS Tax Lien and some Mechanics Liens and run a mile.
But sitting down and looking at exactly what you have and working out if you can resolve these encumbrances to your advantage, makes for a nice windfall for your acquired knowledge of how to remove IRS Tax Liens, Mechanics Liens, Municipal Liens. Mortgage and HOA Liens. Don’t let deals zip past you because they seem “too messy”, roll up your sleeves and profit!