Law Articles And Legal Issues

Tax Sales, Tax Certificates, Tax Deeds: Due Diligence Matters!

We have all heard the ?infomercial? and the Internet claims regarding tax foreclosed property:

?You will own the property FREE and CLEAR!?

?All other liens and interests are WIPED OUT!?

?You will hold the FIRST PRIORITY security interest!?

?The Government Guarantees these properties!?

?All liens, interests, and encumbrances are ERASED!?

?You can do this part-time with nothing down!?

?You don?t need to set up a company?just get out there and make a deal!?

While this can make great marketing material it is not in accord with the reality of tax foreclosure purchases. As an attorney, I learned in law school that every rule of law has an exception. Knowing how these exceptions work will mean the difference between success and failure as a real estate investor on the grandest of scales! I don?t make that statement lightly, rather I make it with as much of the emphasis and weight that the English language will allow. Please read it again, ?Knowing how these exceptions work will mean the difference between success and failure as a real estate investor on the grandest of scales!? If you intend to be successful you must be able to separate marketing fluff from well researched and analyzed fact. If you rely on marketing materials and hype your failure is nearly certain, however if you rely on well researched information formulated into a methodology then the keys to success in any endeavor are in your hands.

What Does This Mean to Me and Why Should I Care?

What this means is that you must forget about blanket marketing statements when dealing with tax foreclosed property. For every statement that is contained in the bulleted list (at the top of the page) there is an exception and just like any business what you don?t know WILL hurt you. If you have contacted me by email or purchased one of my courses you know that I absolutely believe in covering all the positive and negative aspects of investment techniques. This does not mean focusing ONLY on the benefits or making wild claims about investment techniques. It DOES mean thoroughly covering what could go wrong and a relentless approach to risk reduction.

In the following sections we will review some of the areas that you must consider when researching and evaluating tax sale properties. I call them due diligence areas #1 through #5. These are not an exhaustive list but they do set out some of the areas which are typically left out of most people?s analysis. For a complete list please review my course materials.

Due Diligence Area # 1:

What Liens Will Survive Foreclosure?

One area that really upsets me is when I hear a general rule of law blindly applied to every tax foreclosure situation with reckless abandon. Whenever you hear that the foreclosure of a tax lien ?wipes out all over liens? or that the property is now ?free and clear of all other liens? a general rule has been overstated. The general rule can be found in the property code of every state and the UCC (Uniform Commercial Code) which covers commercial transactions. The general rule can be stated as: The foreclosure of the superior lien will eliminate the rights of any junior interests in the realty or personal property. This general legal rule stands for the proposition that: that when a superior lien (one that was recorded or ?perfected? before all others) is foreclosed (i.e., through the state?s legal foreclosure guidelines) any junior interests will lose their interest in the property. Remember that there are exceptions to this general rule.

Let me give you an idea of some of these exceptions:

1) Federal Tax Liens ? Since most liens on a property will likely be liens from the state or a municipality within the state you must be aware of the possibility of a federal tax lien. You can ask your title company to search for this, however a good title company should spot this lien pretty quickly.

2) State Income Tax Liens ? Some states which have a state income tax may give priority to any liens for unpaid state income taxes. As the purchaser of the property or the holder of the lien you could still have these liens surviving as encumbrances on your property even after foreclosure.

3) State Sales Tax Liens ? Unpaid state sales taxes can result on a lien which attaches to the property of the delinquent taxpayer. You should contact an attorney to find out if your investment state has a sales tax lien which could survive foreclosure.

4) Mechanics Liens and Materialmen?s Liens ? Work performed on the property where improvements or repairs are made can result in a mechanics lien if payment is not made by the party who contracted for these services. You will find many different names for this type of lien, for example: mechanics liens, materialmen?s liens, artisans liens, workers liens, etc.

Don?t forget to learn more about your investment state as your state could include others or exclude some of these liens. Don?t be scared off by this list, BUT glad that you are now informed about this potential risk. Since you have the knowledge you need only perform adequate research to avoid the risks in this area.

To read this article in its entirety please follow this link: http://www.theinformedinvestor.com/TaxLiens_TaxDeeds_DueDiligence.htm

As a licensed attorney and former business consultant, Mr. Barazandeh brings a high level a professionalism teamed with in-depth legal and business knowledge to the world of real estate coaching and training.

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