Tax Lien + Cloud On Title
I had a woman call me that has a mobile home that is going through foreclosure due to deliquent taxes. She says that her ex-boyfriend's name and hers is on the title. The ex left her 3 years ago to whereabouts unknown.
Can she sign this house over to me? If not, what steps are necessary to take to clear the title so that I can buy the Mobile home. It is in a park.
How eager is the tax office in taking back mobile homes in parks due to unpaid taxes? Do they negotiate payments in back taxes and disregard any posted foreclosures (in the paper)? This is what the lady is telling me has happened. She claims to have made a deal with the Treasurer's office to pay $150- per month and they will not foreclose on her.
Please help. I will be talking with this lady on friday night. She is interested in selling her home, but worries about her ex's name on the title.
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The MH is personal property so the rules are different then if it was real estate.
You might find it cheaper to buy it from the county. The legal process for taking the boyfriend off could cost more then letting the county repossess the place and then sell it on to you. The risk is someone else will come along.
John
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deblica--(AK)-------------------
Every state has different laws related to real estate, and, I assume, mobile homes.
And this is a legal question, it seems to me. I recommend that you talk to an attorney in Alaska who could give you advice.
And yes, some tax collectors will work with delinquent property tax folk to allow them to work their way out of trouble. How much leeway they have to set up a program is probably determined by state law. Whether they will work with the non-taxpayer or not, depends upon their personality and their previous experiences with similar situations.
She may be able to continue along without your help. In my view, you should know more than you do now before you start doing things that might impact her life.
Good Investing*************Ron Starr************
I called the Tax Office yesterday. They said that they did agree to make arrangments with this woman and she did start making her agreed monthly installments to them.
I am considering a 2 year lease option with a contingency that all parties will sign off their interest. That will give me time to locate the second party and also make sure these payments to the tax office continue to be paid.
How does this sound to everyone out there? Anything else to consider?
deblica--(AK)-----------
I don't understand. She has already solved her immediate problem, the tax sale. So, is she still wanting to sell? If she is not facing disaster, why would she sell for a bargain price? If she is not selling for a bargain price, why would you want to buy?
I'd say just drop it and go on to the next situation that might be a bargain.
And I don't recommend getting involved in selling properties with lease-options. I guess you are proposing buying with one and then selling with one? Hmmm. Nah, I don't think that is good. Either get a deed to the property or move on.
Good Investing*************Ron Starr***********
Hi Ron,
What do you have against sandwitch lease options ? It seems like most gurus these days advocates them. Ron Le Grand advocates them, but only for the higher end houses (not for the mobile home situation presented here).
I haven't tried them yet, but it seemed to me, from my readings, that the concept does make sense. I don't have 1% of the experience you have though, so I am interested in hearing you elaborate what you have against them.
John Reed says they trigger the Due On Sale clause, but I don't see why that should be a deal killer since the bank is not going to find out, and the investor doing the sandwitch is not concealing anything.
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There are reasons for me looking into a lease-option with this lady.
1) We need time to find all the parties in order to sign off the mobile home.
2) She made arrangements with the tax office to pay her back taxes during the next 12 months.
3) Her loan with the back will be paid off as well in 12 months.
4) She does not want her house anymore, bad memories.
5) Mobile homes in Alaska seem to only depreciate to a certain point and no further. This is due to the fact that housing is hard to come by. Plus you can not dispose of your MH easily and replace it with another one since it would need to be barged in and out. There are NO MH dealers in Juneau.
By the way. I would not consider doing the same thing in the lower 48. Geographically, this should work well.
Hi Ron,
Thanks for your long reply. Have you considered turning it into an article ?
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On 2004-07-19 06:21, RonaldStarr wrote:
Abdenour--(MD)------------------
Usually, if you are selling with a lease option it means you are selling to people who cannot quality for a loan. With the low interest rates available today, and the ease of qualifying even with somewhat shaky credit, that means you are dealing with people who have bad credit. These are not people you should be dealing with, in my opinion. If there is any equity in the deal, sell the property to somebody who can qualify for a loan.
I am not speaking from experience here (never done a lease option yet - only learned about the technique a few months ago), but from readings and listening to tapes. People may not qualify for loan because of something in their credit report that they expect will go away a year from now (such as a bankruptcy filed 9 years ago, charge off recorded 6 years ago, etc.). Or because they are going back to school and have no big income now but expect to have that a year from now. Or they may be going through a divorce and their lawyer told them not to acquire any property before their divorce is finalize. Or starting a new business and don't meet bank criteria. Lease optioning to those is providing a service people need, and being paid for it by the extras you can charge on option price, rent and exercise price. And I don't see why I shouldn't deal with these people.
I agree with you that if I own a house with a lot of equity and I can find a buyer who qualifies for a loan, I would rather sell the house and get my cash now then do a lease option. However, when doing a sandwitch lease option, the question is not whether you should sell or lease option the house, since you don't own the house in the first place. You only lease it with the right to sublease.
Another situation, more relevant for this forum, is for houses acquired at tax sale, while the buyer may not be able to get title insurance. I am thinking about lease optioning those out (if and when I acquire them) while I am clearing the title.
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Also, if you have read John Reed, you know that he raises some ethical concerns about taking in hopeful people who are not realistic about their ability to close on the property. If you read the websites on this topic, you will see that those using this technique suggest that only a small portion of the leasee/optionees exercise their options and become the home owner. How would you justify taking money from people and not helping them come to own a home? Would you want that to happen to you? To people that you love? What are your ethical standards?
I think tenant buyers should be given a prospectus explaining the drawbacks of lease option and asking them to think hard whether they want to risk their option money. That should get them thinking about the likelihood of being able to exercise the option. If, after reading that and thinking it over, they decide to go with the deal, I don't see an ethical problem. I find John Reed condescending to those tenant buyers, essentially saying they are too stupid to know what's good for them and that you should refuse to lease option to them even if they want to.
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Then, too, the lease option approach, while it has been around a long time, was not much used before something like 7-10 years ago. Thus, it has been made popular only during a time when the real estate housing prices have been rising rather steeply in most parts of the country. Thus, should there be a downturn in the housing prices where you do lease options, you can expect few people excercising their options.
It's better for the tenant buyer, in a downturn market, to forfeit their option money, then if they had bought the house with a larger downpayment then had no or negative equity because of the downturn. And it's no problem for the investor doing the sandwitch, since if the tenant buyer doesn't exercise, the investor doesn't excercise and will still have made money from the spreads in option money and rental amount.
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So, people say, you just redo the deal with other people. My guess: nope. People will not be willing to do lease options when they expect prices to decline. They will not be wiling to put down big dollars for options. They will not be willing to pay over market value for the properties. So, where is the profit in the deal?
I agree with that one. No profit in a downturn.
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Also, if you do not have the deed to the property, you are in a weak position, it seems to me. Many people who advocate lease-options advocate them only for disposing of properties, not acquiring them.
The gurus I have read advocate sandwitch lease options. You neither acquire nor dispose of properties, but only act as a middleman with better marketing skills creating the spread.
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Please understand that a lot of so-called real estate investing "gurus" are rip-off artists. They don't really care whether what they teach works or is safe for you. Their approach is say anything that will get people to buy their educational materials and services—usually overprice. Whether it is a good approach or not. The lease option and the sandwich lease option appeals to beginners who have little money. Thus, they have little resources to bail themselves out of trouble should things go wrong. But it appeals because of the prospects of making money without having resources.
That, in itself, doesn't make the technique bad. Higher rewards for higher risk.
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Some of the other advocates of lease options have only done lease options within the time period that the approach has worked, because of the rising housing values. So, they could honestly be enthusiastic about the approach. However, being enthusiastic about an approach is not the same as being right about it working all the time. They may not be dishonest, they are just not cautious and telling you everything to be concerned about with the approach.
So ? I can just the technique when and where it works. And forget about it when or where it doesn't work. I am not going to get married to the technique until bankruptcy do us apart. But being able to recogonize when and where to use it.
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I recommend two approaches to investing in real estate: hold rentals for the long term. Or buy well below market value and then resell as soon as possible. The lease-option does not fit this model. You are supposed to hold for one to three years or so. This puts you at risk for a downturn in the market.
No such risk in a sandwitch, since you can just not exercise, and still come out ahead with the spreads in option money and rental rates.
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Interestingly enough, it also puts you at risk of being unhappy if there is a strong upturn in the market. If the property is much more valuable than the strike price on the option, the possibility is that the renter will exercise the option or sell the option to somebody who can exercise. Then you do not get the benefit of the appreciation. Could that make you unhappy? Might it make you unhappy enough to try to prevent the optionee from exercising the option? I don't know about you, but it is certainly a temptation of some of the leasor-optioners.
I see no reason to be unhappy about it. I get part of the profit and the tenant gets a bigger part. I wouldn't have benefited from the appreciation anyways if I sold the property at the time I agreed to the strike price. The main problem there is the seller refusing to deed me the property, then having to sue the seller while the buyer is suing me. That would be a sandwitch lease option turned into a sandwitch lawsuit.
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I know of a family that had a lease option and the seller of the property would not deed it to them because their letter notifying the owner of their intent to exercise the option was not mailed registered or certified mail, as the contract provided. How'd you like to be in those people's situation?
The existence of people abusing a technique doesn't make the technique itself bad.
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Do you see how that little story might play out if you had a sandwich lease option and your seller did not like the profit being made by you or your buyer?
Yes. The sandwitch lawsuit.
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Oh, you thought we would be done by now, did you? Nope.
Seems like I opened the Pendora's box here.
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There is an issue of income taxes here. The federal income tax code says that you cannot take any investment real estate tax benefits on properties unless you bought them with the “intent” to hold them for the producation of income, as an investment, or for operating a business in/on the real estate. Many people who do lease options are, it seems to me violating the spirit of the law. Because they hold the property long enough for it to qualify for long-term capital gains tax treatment when they sell—held for over a year—they claim the long-term capital gains treatment even though they never had any “intent” to hold the property as an investment property. Thus, they are, in my view, cheating on their taxes.
That's a valid argument. Another valid argument, as far as taxes are concerned, is that my intention is to keep and rent the properties, but read so many horror stories about tenants trashing up houses that I want tenants who will treat my house as their own, be responsible for the light maintenance (Peter Conti and David Finkel say to make the tenant pay for repairs under $200) and intend to stay long term. Proof that my intention is to rent, not sell: the fact that you stated earlier that most options are not exercised.
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Also, I wonder if there is the possibility that the IRS will wise up? They see all these lease-options coming through and treated as long-term capital gains. Well, suppose they say “no?” Suppose they say this was a property in inventory for sale. You have to pay ordinary income tax on the gain of the sale. You also have to pay the social security self employment tax which is about 15% of the profit. So, you have underpaid your taxes, apprarently deliberately, and there are likely to be penalties and back interest to pay.
You only pay penalties if you are negligent. If, all you did, was underpay based on a good faith, but wrong, assumption (i.e. you really believe the lease option business is a rental business) then you only pay back taxes and interest. Years after you should have paid them in the first place. That's called an NQLIRLI: a no qualifying low interest rate loan from the IRS that you may or may not have to back. I would borrow money with such a loan anytime.
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OK, now you know why I advise against doing lease options.
Good Investing***************Ron Starr*******************
Thanks for your elaborated answer. It was very informative.
<font size=-1>[ Edited by RonaldStarr on Date 07/19/2004 ]</font>
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l/o's can be headaches i have done a few but never again. these are some of the most coomon reasons. the seller is desperate to sell because they have had the prop. forsale for months with little luck , the buyer can't quailify any other way because of poor credit or no money for down payment. becareful and cover youself.........kenmax