So it was now the morning of the foreclosure sale, and the first bit of news we had received wasn’t good. An IRS lien rarely is.
Meanwhile, my investor friend’s plan for that morning was to meet up with the Owner and sign the purchase contract. Securing that contract was critical because for all the efforts we had already put in since the previous afternoon, all we had was a verbal agreement from the owner. So my investor friend starting contacting her early the next morning. To no avail. On the day that she needed to be highly attentive to the process, she was being non-responsive.
Procrastination Creates Additional Tension
The deal was going to be risky for us even with her signature on the contract as there was no time for a proper closing of escrow before the 12:30 trustee sale. But without her signature, we had no security at all. Could this deal grow any more hair?? We sure hoped not!
We impatiently waited. Did she decide to put her head in the sand, like so many people in her position seem to do? Would the procrastination continue – this seemingly insidious condition which paralyzes folks and keeps them from taking action to help themselves in those times where swift action is exactly what’s needed? After all, she waited until the day before her foreclosure sale to call my friend for help.
While we waited and hoped that she would get back to us, my investor friend was also reaching out to the trustee that had been designated by the lender for this foreclosure. Meanwhile, I was discussing with our rock star escrow officer, what the chances were that the IRS would remove, or discharge, its lien from the property.
Based on the expected condition of the house, we came to the conclusion that we had at least a 50/50 chance of getting it discharged, but it would require patience with the federal agency. We would need to submit a formal application with lots of data and the IRS would have up to 120 days to respond. More on that process later.
It was becoming evident that the only way we would have a good chance to profit from the deal would be if we forced significant appreciation into it with a high-end remodel and the addition of amenities. For the same reason that the IRS might not see value in the property in its current condition, it didn’t have value to us “as is”, or even with a light remodel. We would have to invest enough to push the value of the home up significantly higher.
My investor friend texted me the reinstatement amount of $8,248.836. Yes, that’s correct – they gave us the number down to 6/10 of a penny. We decided to splurge and round it up to $8,248.84. I grabbed the cashier’s check and was headed to the courthouse steps when my investor friend notified me that he had finally heard back from the owner and was scheduling a signing with her. He would be signing her as I was trying to stop her foreclosure sale.
Stopping the Foreclosure Sale
About 10 minutes after the Trustee Sales began, this property was called out. I hustled forward with the cashier’s check and advised them that we were electing to Reinstate the loan. They halted the sale of this subject property and directed me to then go to the Trustee’s off-side offices, a few miles away, to pick up a receipt.
About sixty minutes passed before the information from the courthouse steps made its way to the off-site Trustee’s offices, and they provided me with the Trustee’s receipt for the funds. Meanwhile, the Owner had signed our Purchase Contract, so we set a 2:00 appointment with the Escrow Company to deliver the documents and open escrow.
It had been a nail-biting and action-packed 20 hours, but we got it done for the Owner. Her Foreclosure had been stopped, which gave her some peace of mind. We had taken on some risk, not all of which could be mitigated as well as we would have liked. At the Title company that afternoon, we went over the game plan for closing the escrow, just as we were opening it.
The Owner didn’t want to deal with the trespassers or the IRS lien, so we decided that our best strategy would be to complete the purchase of her property, “subject to” her loan, “subject to” the IRS lien, and “subject to” possession by the trespassers.
Once we owned the property, we would initiate the process to remove the trespassers, and petition the IRS to discharge/remove the lien. As Problem Solvers, that’s what we do.
Taking Ownership of The Problems
Once the escrow company had ordered the full title report (what they gave us the morning of the trustee sale was just a quick, informal condition of title), and once they ordered their own payoff directly from the lender, we were able to close the purchase transaction. Since we were taking title “subject to” the liens, we didn’t have to pay them off at this time. This allowed us to take ownership of the property by just paying for the title policy and escrow fees, which was under $1,000.
Again, we were mitigating our risk, helping the seller while minimizing our cash investment until we could see how the IRS would respond to our upcoming request. We now had less than $10,000 invested but had ownership and control of the property. Our next key objectives were as follows:
- Removing the trespassers, and
- Applying for discharge of the IRD lien
Trespassers Will Be Eaten
As we gathered information from the seller and from the neighbors, we learned that the trespassers had moved in about 5 months before we came along. It started with a convicted felon with a monitored ankle bracelet, and he then let a couple of other people move in. They had found a way to get the electricity turned on, but not the water.
The neighbors were quite agitated with the noise and activities of the trespassers, including trying to take water from their spigots and using a garden hose to deliver it inside the house. The owner (our seller) was apparently intimidated, so she didn’t take any legal steps to have them removed. That fell on our shoulders when we purchased the property.
We didn’t have the names of the residents (& there was no lease), so we contacted our Eviction Attorney. The 4 key procedural steps needed to get these trespassers to surrender the house would be:
- Provide legal notice;
- File a forcible detainer action to set a Court date;
- Obtain a judgment; and
- Order a writ of restitution (if needed) to have occupants forcibly removed by a constable.
As part of the notification process, I posted a “Notice to Vacate Premises” on the front door, as well as sending it via certified mail. This was a particular notice that is directed all trespassers, who have unauthorized occupancy and demands that the occupants immediately surrender the premises.
Removing the Trespassers
We didn’t hear anything from the trespassers during the notice period, so I provided the pertinent info I had to my eviction attorney. This info included a copy of the notice letter, the certified mail receipt, and market rents in the neighborhood (for them and the judge to calculate amounts for a judgment against the occupants).
After waiting the statutory period of time, the attorney filed a forcible detainer action against “John Doe” (since we didn’t know their names). The filing of a forcible detainer sets up a court date, where the case will be heard by a judge.
As the court date approached, I got a call from the ‘primary’ trespasser, who started to claim that he had a lease (but couldn’t produce one), that he was owed a security deposit (again no proof), and threatened to file a mechanic’s lien for “work” he had done to the property (but never filed a pre-lien). He thought that we should pay him $2,500. I told him that wasn’t going to happen, and that we would see him in court.
My attorney and I appeared in court, and promptly obtained a Judgment against “John Doe” (not him personally, but any residents of the house).
It turns out that the judge was also unimpressed with the trespasser’s claims that he was a victim, as well as the lack of support for any of his claims. Upon seeing the judge award us the judgment, he suddenly wanted to work something out so that he and his friends could surrender the house peacefully.
We spent about 20 minutes with him and came up with a solution where he could move out without us adding his name to the lawsuit/judgment (and risking that his parole officer would find out he had screwed up again!) Here’s the impact of this solution:
- He doesn’t trash the place on the way out;
- we don’t have to spend more time & money on a Writ of Restitution to remove him;
- the neighbors don’t have to hear late-night banter and loud cars revving on the front lawn;
- and he doesn’t get in further trouble with his parole officer.
Sounds like a win-win-win! Another big contribution from our Power Team, as our eviction attorney was instrumental in the process and negotiation.
Do you have a good eviction attorney on your Power Team?
It’s always wise for you as a Real Estate Investor to have an experienced Eviction Attorney on your Power Team. And when situations like this come up, you’ll find out why.
Our guy (and his team) gives us sound advice, and, knock on wood, we haven’t failed to get a judgement or positive result after 17+ years of working together on more than 100 forcible and special detainers (evictions). You want to find an attorney that understands your state’s landlord-tenant laws inside and out. Each state is different, and small nuances can be the difference between a positive result and a negative, and often very costly, result. This is another good example of using OPE (Other Peoples’ Expertise).
The entire eviction process took 5 weeks and tested our patience at times, but in the end, he and the others moved out peacefully. I shot the below video right after we got possession of the property and finally had a chance to see the interior and the back yard of the house we had bought…
And, by the way, the neighbors LOVED us after we got those trespassers out, as the previous residents had certainly not made any friends with their loud noise, parking their cars on the front lawn, revving their engines, and yelling threats at the neighbors. For about 10 years this property had been neglected and considered the problem property on the block.
We were looking forward to revitalizing it with a high-end remodeling job and knew that the neighbors would further benefit from seeing a significant upgrade from what they’ve been accustomed to.
Dealing with the IRS Lien
Upon once again leveraging a member of our Power Team (eviction attorney this time) to handle the heavy lifting of the eviction process, we turned our focus to the other significant problem that we took ownership of from the previous owner – her IRS lien. As you may recall, the lien was estimated at about $38,000 and was attached to the property that we now owned. Our challenge and goal was to remove it completely from the property.
Our success with the lien would be tied to whether the IRS believed that there was sufficient equity in the property, in its current condition and after the 1st position mortgage was considered, for them to get paid off. Procedurally, it was up to us as the new owners to show them why discharging (removing) the lien from the property would not damage their ability to collect on the lien in any meaningful way. The IRS wants to be paid — don’t ever think otherwise — but they don’t necessarily want to tie up someone’s property if a path to payment isn’t apparent.
IRS Form 14135 is the Application for Certificate of Discharge of Property from Federal Tax Lien. In order to give the IRS the full picture of the property and situation as it related to their collateral, here are the key deliverables that we included with the form:
- Copies of our Purchase Contract, Title Report, and Closing Settlement Statement (form HUD-1 or similar)
- BPO – a Broker Price Opinion of value, from a licensed real estate broker
- Letter of Explanation
Within the above documents, the following key points were highlighted:
- The collateral was recently sold to us as a distressed sale.
- The debtor (our seller) did not receive significant proceeds from the sale.
- Debtor had stated that the property had been neglected for years, with lots of deferred maintenance, old HVAC system, etc.
- Traditional financing would likely not be possible for this property due to its current condition.
- Trespassers had seized possession of the property and we had initiated legal assistance to evict them; access to the house was not legally available.
- There was only 1 bathroom, making the home functionally obsolete for most families in that area.
- The Broker’s BPO report concluded that the “As Is” value of the property was at or near our purchase price.
This last bullet point is perhaps the most important one. The IRS was evaluating whether their position is measurably stronger by keeping a lien on the collateral, versus discharging it. So it all came down to values.
The BPO showed comparable property sales in the immediate area, of similar age and size as our subject property. But the broker also pointed out that those houses that sold were in superior condition to the subject. The report estimated that a large amount of rehab would be needed to reach the level of the comps and that a typical homeowner wouldn’t have the skills to do this.
In short, once the underlying debt and the estimated rehab costs were considered, the Broker determined the current 3-bedroom / 1 bath house was worth just slightly more than what we paid for it. The broker commented “In present condition, only an investor paying cash and skilled in rehabbing highly distressed homes would be interested in (this) property. Traditional financing is not available for this property.”
Based on the BPO and the bullet points above, our application to the IRS asserted that there was “no determinable equity” in the property. We filed the application with the local IRS office, realizing that the government gives itself up to 120 days to respond to such requests. And we crossed our fingers as again we were waiting on another governmental process, in parallel with the eviction process.
We were pleasantly surprised when the IRS’ response came back quickly, within a month, and the news was favorable. They sent us an executed Form 669-C, which officially discharged the tax lien from the property, removing their interest in it. This was excellent news for us!
We had taken a very complicated and hairy deal, acted quickly and decisively when needed, assessed and reassessed risk as new info emerged, and put ourselves in a position to succeed. By leveraging OPE and a solid Power Team, we stopped the foreclosure, handled the trespassers with a win-win-win solution, made the neighbors happy, and discharged the IRS lien.
We had already realized that we would have to do a very nice remodel to force enough appreciation to make the project a true winner. In parallel with the eviction and IRS issues, we were planning out how we could maximize the return on this investment by executing a stellar remodeling project. Our exit strategy would be to sell it to a retail buyer at the highest price that a house that size in that area would appraise at.
Sure, now that the title was clear and trespassers gone, we could have wholesaled it, like we usually do when we secure an off-market deal. We could have made a small wholesale fee, and a fix/flip team would likely make money if they did the same level of remodel as we envisioned. But that wholesale fee wouldn’t have begun to reimburse us for the time and brain damage we had invested in this deal. Besides, after everything we’d been through, we wanted to see it all the way to the welcome mat on the porch and the For Sale sign in the yard.
We would need to be on top of our game.