IRS foreclosure: Invest in the most profitable real estate the smart way

Some of the best foreclosure deals are the properties with a Federal or IRS Tax Lien against the owner/Trustor. Most foreclosure buyers shy away from properties with tax liens against either the property or the owner/Trustor. However, these IRS foreclosure' are often the best deals!

When the IRS places a tax lien against an individual (owner or Trustor of a property), that lien attaches to any "real property" that the individual owns anywhere in the United States. While the lien may not appear against any particular property itself, it still attaches to any property that the individual owns.

You not only need to verify the liens against a foreclosure property, but you also must verify if there are any liens against the Owner/Trustor. Otherwise, you might inherit his tax lien(s). Many buyers fail to do this, and some find out the hard way that they should have. I know, I'm one of the ones that found out the hard way, and it cost me $140,000! Ouch.... ;-(

Try this example: A property is worth $200,000 and it only has a $100,000 mortgage balance; but it also has a "junior" tax lien against the owner/Trustor for $150,000 (more than the value of the property when combined with the mortgage). Now, let's say the owner/Trustor is in default on his mortgage and can't bring it current. He cannot sell the property and pull out his equity, since any surplus over the amount of the mortgage balance would go to the IRS, and with the net proceeds the owner/Trustor won't even have enough to pay a realtor a commission to sell the home. The owner is stuck, and in many cases, he is so depressed, he doesn't even want to try to save his equity. Although he will still owe the IRS, with or without his house, most debtors figure, "Heck, why bother, when they aren't going to see a penny out of it?"

The house sells at auction, and the IRS has by law, a 120 day "Right of Redemption" (that is an automatic right to buy the house back from whoever purchased it at auction for what they paid for it, plus reasonable interest). But, the IRS rarely redeems their position or Right of Redemption. There are simply too many properties and too many debtors to track. In fact, the entire nationwide budget for redemption's is only $10,000,000. That doesn't go very far when you're buying houses. It's used for the special cases. The ones they really want to get!

So how can you take advantage of this information? In many cases, the properties with the big "tax liens" are the best deals. Why else would someone let a property with 50% equity go to foreclosure? Find the properties with IRS tax liens against the owner/Trustor. Be sure it has significant equity, and make sure the lien is "Junior" to the lien you are buying (e.g. that it was recorded after the date of the loan/lien that is in foreclosure at the County Recorder's office). Then, buy the property at auction. NOTE: EVEN A JUNIOR LIEN (TAX OR ANY OTHER) DOESN'T GET WIPED OUT UNLESS YOU GO THROUGH THE TRUSTEE'S OR SHERIFF'S SALE! If you buy the property under the Notice of Default stage from the owner/Trustor, you will need to satisfy all of the liens against the property, including the IRS, if a lien was recorded against the owner (senior or junior).

Then, wait out the 120 days (don't make any improvements during this period, because the IRS won't reimburse you for that) and on the 121st day, if they haven't redeemed, the property is all yours! You pick up the owner's/Trustors original surplus equity, which in this example was 50% of the property's value! The worst case is, they do redeem and you get all of your money back, plus interest. It's worth the risk for the potential increased reward.

Beneath that tax lien can be the biggest profits of all. But, be certain the Federal Tax Lien is "junior" to the mortgage or loan being foreclosed on. IF IT IS SENIOR, THEN THE FEDERAL LIEN MUST ALSO BE PAID OFF. Don't worry, it's rare that a Federal Tax Lien will be senior to a conventional or "institutional bank" mortgage. Institutional lenders won't loan on a property where the owner/Trustor has a tax lien. Those people are not considered good credit risks. By the way, in most states a local state tax lien is wiped out at auction, if it's junior of course.

Shark Bait - The foreclosure buyers' software will help you find these special deals, determine the value and the remaining equity, and sort out the position of all liens senior and junior. Shark Bait helps you search out liens against the owner/Trustor as one of its primary check list steps, and it even generates a special report to your title company to request a search of the General Index for any liens against the subject owner/Trustor. Within minutes you can match up the owner/Trustor with those names in the General Index, with "recordings" against them, and determine if there is any liens or judgments. If there are, be sure their junior if your buying at the auction; but if your buying pre-auction...beware!!!

Whether you use Shark Bait, or just paper lists and notices out of your legal newspaper and your own research at the County Recorders office, you need to quickly determine all of these liens, variables, and check out every item before you buy. Look for the IRS liens. They may just be the best deals out there. Either way, hopefully now you know what to look for and you won't make the same mistake I did!

We hope this tip was helpful in your foreclosure buying efforts. Please visit us at http://www.digitaldeal.com and take our free tour of the Shark Bait software.

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