Real Estate Note Investing: Tax & Title Considerations
Let’s review the tax and title considerations as part of the due diligence process. When buying non-performing loans, it’s particularly important to review the public records and identify delinquent taxes and any liens against the property.
Since the borrower isn’t paying the mortgage, they’re often not keeping other obligations currents such as property taxes and water and sewer bills, which can adversely impact the note holder. There are several title reports available to help research this information. The most common of which is the ownership and encumbrances report or O&E. The O&E report identifies the last recorded owner, the legal description, and the recorded deed of trust or mortgage of a particular address available from the public records. O&E also contains any open liens, mortgages, lis pendens, and judgments that are attached to the property or the current owner. The report typically provides the assessed value of the property and the property tax information. The information is generally summarized in an easy to read report. These reports are usually used by investors before bidding at an upcoming foreclosure auction or during the due diligence process when evaluating the purchase of a note.
So let’s define a lien. A lien is the right to keep possession of a property belonging to another person until the debt owed by that person is discharged.
Let’s talk about a tax and title lien and how they’re created. State governments came up with a solution for homeowners that don’t pay their taxes. They sell the deed or lien to investors often through an auction process. There are 31 tax deed states where the deed is actually sold due to back taxes, and it transfers full ownership of the property. In other states, delinquent taxes are turned into tax liens, and tax liens are sold during the year at different intervals depending on the state. Taxes can generally be redeemed prior to the expiration of the redemption period, which varies by county or state. As a note holder, you want to protect your investment and ensure any sold taxes are redeemed prior to the expiration of the redemption period. The process of requesting a tax lien pay off varies and can be done online in some cases. Sometimes it has to be over the phone or even by mail only. There are also municipal liens to be aware of as a lender. These include liens resulting from non-payment of water bills or sewer bills, and you need to be aware of code violations as well, which can result from the city deeming a structure to be unsafe or even a public hazard.
Let’s recap the big ideas covered by due diligence. It’s critical to understand property valuation and how to evaluate a broker price opinion or BPO. Understanding how to read a pay history and evaluate collection comments are crucial to assess the borrower and the performance of a loan. There are several components to the collateral file that must be evaluated before purchasing the note. It’s critical to be aware of compliance topics and find a servicer that’s a good fit for your portfolio.
Lastly, when buying non-performing loans is particularly important to review the public records to identify delinquent taxes and any liens against the property.
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