1403 : Foreclosures part 2 w/ Rick Hecker
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00:01
Welcome to episode 3 of season 14 of the Growing Empire Show and I am back with my special guest Rick Hecker, Senior Vice President and General Counsel to Conestoga Title Insurance Company. And today we're going to continue our conversation regarding foreclosures, as well as dip into a little bit about tax sales. So stay tuned.
00:24
Welcome to Growing Empires. Hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.
00:45
So I know that I've heard about other legal description challenges, right? You mentioned actually driveways, right? And I know occasionally we come across like shared driveways or right of ways. We come across easements, we come across like egress and ingress challenges, where there should be
some kind of easement or right of way, that's sometimes sometimes those things get dropped out, or are in question. So let's talk a little bit about those types of things.
01:18
Yeah, no, those are, those are tricky things. And when it comes to buying investment properties in either of the two manners that we've talked about so far, either estates or foreclosures, those can all of them cause some very unique issues. And just just by way of another story, when I was early on, in my practice, one of the things that I did is I helped the client purchase a property, utilizing a problem with an easement, as leverage to essentially forced the property away from the bank, the long, the long, and the short of it was, it was a property that my client's children have actually owned at the time. And because they were family members, that kind of allowed the children to build and construct where they wanted. And that included a very nice amount of fact, a very nice, essentially three car garage, the vast majority of which went on the parents neighboring property, but parents didn't really care, they never put an easement in place, they never did anything along those lines, because it's the kids there, they were fine with that. It included a very nice driveway. And it was really the only access to the property was driving up this driveway to the large three car garage and the driveway, not the whole way. But for a large portion of it traveled on the parents property. Again, that was okay, because the parents didn't have a problem with it. But at the time that the foreclosure came around, and a third party came in, that became a massive issue for the parents, and there was no recorded easement there was no right for the garage to be where it was or for the access driveway to be where it was. So I got into some very
long negotiations and ultimately resulted in the parents repurchasing the property back from one of the investors that had purchased it out of a foreclosure auction. And that solved the problem for for all the parties involved. But the long the short of it was that an investor had to hold that property for a lot longer than I think he anticipated, and never actually got to put it on the market to the market at large he was forced to deal with the neighbor and the neighbor exclusively to resolve the problem. Now I do
think he made it out. Okay, as far as I don't think he lost a lot of money in the transaction. But I think he probably did lose a lot of potential and time and he probably had money tied up. I don't know if he had any hard money loans out there. If he was borrowing, you know, what type of interest rate he was
paying on those funds, but it was several months that he couldn't really do a lot with the property because even access was a problem. So when you're buying properties from estates or foreclosures again going back to that experience piece, an experienced title agent could help you take a look at the legal description there and say hey, why compared this to to the property that looks like you're buying I'm pretty confident that there's a road that's that that you use to access this property is not on your property, I can't find an easement for it recorded at all. And in this case, there definitely was not or the garage, the garage looks like it's almost a property over and it was and again a big piece of the value was tied up in that very nicely three car garage with a second story that had you know in law quarters it was it was a big value of what what the investor at that time thought they were purchasing. You know, and the same. The same goes for you said shared driveways, shared driveways also can be can be a big issue especially when it comes to maintenance costs there may have might be unspoken maintenance costs or maybe unspoken, or unrecorded maintenance agreements that exist. Shared wells is another place that I've seen problems when people are pulling water from from both the same sources, and there may not be particularly good or robust to green Mental on record or there may not
be any agreement at all. Because again, it may be family or friends or things along those lines. And when the shared wall was set up, it was just something that they agreed to go in on together. So all of those are very tricky issues when you're dealing with a state's and foreclosures.
05:16
Okay. Let's jump into talking about the different types of liens that are on the properties. I mean, you did mention when you're talking about foreclosures, there's, you know, mortgage liens, but what about like municipal liens, Hoa liens, federal tax liens? What what is the difference between all of those?
05:36
Yeah, so that's another really good question and actually ties in very well with the foreclosure aspect. And the long the short of it is each of these liens are essentially attached to the real property, meaning they have a priority in the real property. So HOA liens, of course, are your homeowners association
liens, those are the liens that the HOA will place on it for annual dues. Sometimes there's maintenance costs, things along those lines, and they attach just like a mortgage does. And in fact, there's even a super priority provision. And what that means is that they can have a priority above the mortgage, meaning that they can occasionally survive a foreclosure. So this is where a an experienced title agent could come in and advise you on how much of those liens survive a foreclosure action. So HOA liens can be a tricky place in foreclosures. The other two that are also tricky. Municipal liens, municipal liens, always have priority over mortgages, they get paid. That's that's just the way that just the way that works. The nice thing is, is that coming out of a foreclosure, most sheriff's offices will pay the municipal
liens with the proceeds. So that's a that's a real positive that they're well known. But unpaid municipal liens are a problem. Again, they operate just like a mortgage, meaning that they're monies that are due and payable to the municipality, sometimes they can be for sewer, sometimes they can be for water. Sometimes it can even be things like sidewalk liens. But those always have priority and need to be paid prior to the mortgage. So if they're on the property, making sure that they get paid is going to be a big, big issue. And again, I hate to keep going back to stories, but another quick story, and that is that in Lancaster County, there was a foreclosure that I was involved with one of the very few times I ever saw it, but there was a sidewalk lien that was missed by Miss by the sheriff needed to be paid out of the proceeds. At the end of a sheriff sale. There's this thing called a scheduled distribution, which is essentially the sheriff saying, Hey, here's who we're going to pay. And you get a very brief period, it's about 20 days to object and say, Hey, I actually think somebody else should be included on this list. It
was the very first time I ever had to bring an objection to a sheriff's to Sheriff scheduled distribution to say, hey, you definitely missed a a lien here, it's a sidewalk lien, it needs to be paid from the proceeds because it has priority over the foreclosed mortgage, the sheriff immediately corrected, it wasn't a large issue. But if you didn't have an experienced title, agent or attorney on your side, watching that scheduled distribution, your time would have lapsed, and then you go to actually sell the property and I promise you the the title agent at that point would have raised it and said, Hey, you got to pay this lien. And there's really no lot of recourse if you'd have to pay the sidewalk lien, even though it probably should have been paid out of the proceeds from the sale. Same thing then with federal tax liens, federal
tax liens are very tricky to deal with, because they get priority over almost everything as well, it is possible that they get cleared by a foreclosure but there's certain statutory provisions in particular, they actually get a right of redemption from the sheriff sale for a brief period. So that's one of those issues that if there's a federal tax lien, and experienced title agents going to need to talk with you about Hey, before you resell this, you might need to wait the 90 days for the right of redemption to pass it is possible for the federal government to waive that right. And a good attorney will will make sure that that's that that's done and the title agent can can take a look and make sure that that was done as well. But the long and the short of it is that if you're not aware of that, that could cause a problem when you go to flip this property, especially if you're very quick. If you're one of those investors that in 30 days, you're in and out and you got it back on the market on that resale, you might be caught sitting in waiting for a little bit longer.
09:31
All right, so let's just back up for one quick second, because you had said something that I don't want to get missed. And we were talking about federal tax liens, and we were talking about the right of redemption. Can you explain to me what that is?
09:45
Yeah. So a right of redemption is a time period during which the federal government in the case of federal tax liens has the right to come back and redeem the property or essentially purchase the property themselves, essentially to take over and say, hey, the property is ours now because of the the nature of our lien essentially unwind the the foreclosure process, it's a significant thing. Now, they have that right and certain circumstances. And I will tell you, though, I have yet to see the federal government exercise that right, I'd love to just more as an academic side of things I'd love to see that
occur at some point. So I'd see how it plays out. It's a statutory right that they're given unless they unless they waive it, there is a way that they can waive it and a lot of foreclosure counsel are good at making sure that that's done. But if it's not done, it can cause a significant issue on the resale because on the resale, the title agent is going to want to wait and hold that property until the right of redemption has passed.
10:53
Okay. And we talked a little bit about the order of like liens. So I assume federal tax liens always trumps everything is that correct?
11:04
Almost. I mean, they there are a few provisions that allow them to subordinate to like a purchase money mortgage, the federal government does automatically subordinate to purchase money mortgages. And that that's really, that's more of a policy decision on their point, but they have adopted provisions that permit that. But by and large federal tax liens, pretty much trump everything. And if they exist against the property, they they are attached to it. They do self satisfy that when a lien is recorded, there is language in them that allows them to self satisfy after the passing of an applicable statutory period, which is typically a little over 10 years, unless they're renewed during that period. So there are some nice things that are available out there. But the long and the short of it is more so than any other
lien that is out there. The federal government's liens attached to just about everything.
12:00
Okay, and then below the federal tax liens, what is next is it municipal liens, and HOA liens, and then mortgages.
12:08
That's, that's about right, you've, you've kind of hit the nail on the head there. Municipal liens are also going to get paid. The nice thing about municipal liens, though, is that they are property specific, but on that particular piece of property, they are going to be paid from the proceeds of the sale and going to need to be paid. It's very rare that they become personal in nature, meaning that they attach to all property that a particular individual owns. There is provisions under what's called act 93 in Pennsylvania that permits for that to happen, but by and large, they tend to be property specific and but have a priority that is higher than a mortgage. Then when it comes to Hoa liens they would be next. Now, Hoa liens have an interesting statute, the way and the way that statute works is it gives them six months priority meaning that six months, the last six months of dues, and any special assessments have priority over that of a mortgage. But if there's 18 months of dues that are due and payable, then the 12 months 12 of those 18 months do not get priority and are instead fall below a mortgage. So it's a
very complicated statutory scheme. But the long and short of it is a lot of the HOA fees are going to have what they call super priority or a priority that is in excess of the mortgage.
13:29
Okay, and tell me a little bit more about that purchase money mortgage over like a traditional mortgage and somebody would have, is there a difference?
13:36
There there is. So the setup of it is probably the biggest difference. Pennsylvania has a statute that defines exactly what a purchase money mortgages, but a purchase money mortgage is what it sounds like. And that is it is a mortgage that is advanced for the purposes of purchasing or acquiring a piece of real property. It is not the refinance of that mortgage. It's not a line of credit mortgage, it's just the mortgage that you take out to buy a particular piece of real property, it has the mortgage has to have special language in it. And one of the biggest pieces is on the top of it, it's going to say the words purchase money mortgage, but there's also some language that needs to be in the body of the mortgage as well for it to qualify as a purchase money mortgage. So those do have additional protections. And some of them relate to recording, but some of them also relate to priority. And that's part of the reason why the federal government has made the decision to to auto subordinate to some of those mortgages. And I think the the thought there too, is that the purpose of the IRS lien is not to keep
people out of homes or keep them from purchasing homes, but it's to attach to the equity that they make over the course of owning a home and the IRS can can evaluate this and say, Hey, there's going to be equity or there should be equity unless there's a downturn in the market. When it comes to real
estate. There's probably equity that's growing in a particular home so allowing this individual to park Trust that and grow that equity increases the chances that we get repaid. So because of that there's provisions that allow the IRS lien to auto subordinate to purchase money mortgages.
15:13
The episode will continue in just a moment.
15:16
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16:
And you mentioned as you're mentioning foreclosures, you're mentioning a sheriff sale. So is is the sheriff sale the process where the mortgage is essentially the bank is foreclosing or on the property and then it's it's handled as sheriff sale.
16:31
That's correct. Yeah. So the sheriff sale is like the culmination of the foreclosure process. The foreclosure process itself is the legal process, the filing of the documents the complaint, the service that occurs, meaning somebody's handing the complaint to the defendants, somebody's giving notice to the folks that have liens are interested in the real property that the foreclosure is occurring. The sheriff sale is the big event, though, at the very end. That is the period that the sheriff quite literally holds an auction and at the auction, they solicit the highest bid for the property. And when the gavel falls, the highest bidder is the one that's going to take that take that property, assuming that they pay the monies that are that are due as part of the sheriff sale and each their sheriff sale is a little different on what the rules aren't related to the sale. But over overall, this is the big event is the sheriff sale.
17:21
Okay. And the sheriff sale is a public auction. Am I correct on that?
17:25
Absolutely. That's correct. It's open to the public. Every county has one. Like I said, Each county has a little bit of different rules on how they're handled and how often they do Sheriff sales. Some of them it's once every two months. Some of them it's as they have properties available, some it's more frequently and you know, the rules on how much down money do you need to bring? When does payment in full need to be made? And what are the forms of payment that they accept, they differ between county, but if you go to the sheriff's office and the particular county in which you're interested in purchasing a property, I promise you they will have the guide, they will have some type of information for you on what you need to do to be able to participate in those Sheriff sales.
18:07
Okay. And, you know, I've been to Sheriff sales personally before. And in some instances, obviously, you know, there there are some consumer or investor that's they're buying the real estate right once wins the auction. But in some cases I've experienced where the mortgage company actually takes the property back.
18:28
That's correct.
18:30
What, why is that happening? What is the situation that would that would make that happen?
18:34
Yeah. So there, there's a couple different things that that are occurring. But when it comes to the sheriff sale itself, the lender is entitled to do what's called credit bidding, meaning when they foreclosed on the property, there was during the legal process, there was a judgment that was entered, and the judgment is going to be an amount somewhere close to the balance of the mortgage that's due and payable. Sometimes it's a little bit additional, because they're going to have attorneys fees that they can add into that judgment, they're going to have expenses that they may have put into the property to turn off the water to protect it from during the winterization process things along those lines. But the long the short of it is they're going to have an amount of money that they can do what's called credit bidding, and they are permitted at that point to bid up to their credit amount and they can bid in excess of their credit amount if they feel that there's equity that they want to protect. I don't know that I've seen a lender bid in excess of their credit, but the credit bid essentially means they get the bid up to that particular amount without needing to pay any additional money into the court at all. So if you had $150,000 property, and let's say their judgment was in the amount of 130,000, they can bid up to 130,000. And then they don't need to turn around and actually hand a check for $130,000 to the sheriff, they already have $130,000 on credit by virtue You have their recorded lien. And sometimes their credit bid is just so large that it's exceeds the amount of the property. And so the lender is happy to take the property back, I will say that there was definitely a growing movement and a number of counties that started that lenders started to allow the foreclosure process to go through and to have property sold to the third party because there was actually competitive bidding occurring at the sheriff sales. And I think that's
probably grown amongst counties, presently. But there definitely was many years ago, there was a pretty big bias to to the lenders watching a property get sold to a third party, because there weren't a lot of investors showing up to these foreclosure sales. So they were going for very, very low amounts of
amounts of money. So the lender was highly motivated to make sure that they made the largest credit bid that they could. So for example, in in Lancaster County, if you ever go to this sale, it is very customary for the lenders council to get up during the sale at the very outset and say the upset price is x. And that's the amount that what he's telling you is that's the amount that the lender will stop bidding at. And because of that the sheriff actually doesn't accept bids below that particular amount. So once that amount is announced, then it's opened up to the public at large to submit bids in excess of whatever that particular amount was announced that and that that has roots in the fact that lenders were concerned that if they did not put in their full credit bid, that the property would sell for well below
market value, and they would not ultimately get the the value of their lien paid.
21:46
Okay. So I assume then once the bank essentially does their bidding takes the property back, I assume those are then the properties that then hit the open market in some fashion in later in time. That's correct. Yeah. Because that, as you were saying before, that must be because they believe that there's equity in excess of maybe what their debt is on the property.
22:06
That's right. Yeah. And you may be able to talk to that more than I can. I know, there are multiple third party sites that are out there that, that solicit bids for these types of properties after the sheriff sale itself. And I'm sure you've probably dealt with them before. I'm, I'm less familiar with them. Because a lot of times it hit that point, I was telling them hey, go go talk to your your your realtor, because they're the ones that are going to be able to guide you through the next step.
22:33
Sure. Okay. So how does an investor protect themselves when buying a foreclosure? Like how would you know, ahead of bidding on something in a sheriff sale? What liens are going to be required to be paid versus, you know, we mentioned free and clear title in a previous trip when we were talking about estate transactions, but in foreclosure, how would you, as an investor, protect yourself when buying one of these to know exactly what debt you have to assume?
23:00
Yeah, the best way to do that is to talk with an attorney that can provide you with a title search, there are some investors out there that have gotten comfortable enough that they can review the title search. But it definitely needs to start with a title search. And then copies of the documents in the foreclosure. There are there are some experienced title agents that are that are happy to review those with you and work with you as well on that front, but you definitely want somebody this is one of those areas that you want somebody very experienced to review those documents with you ahead of ahead of placing a bid in the auction. And I'll be honest, when I was in private practice, I know for a fact my busy time was always the few days leading right up to the sheriff sale, because that was the time that your spent, I personally was spending a lot of time searching looking at looking at the titles. So that way when the investors called me and said, Hey, I'm thinking about placing a bid on, you know, 225 Main Street, what can you tell me about it, I could have a pretty quick answer to be to be like, hey, this particular property looks good. But the one down the street, they totally missed a mortgage and it's gonna have priority coming out of that sale. So unless you're okay, accepting that mortgage, and paying off whatever's due on that particular mortgage, you may want to skip that property. It definitely requires a lot of research and knowledge on a sale, not something I would do on my own for the very first time, although eventually I know there are plenty of investors that once you get experienced in it, you can get comfortable with with understanding what are the big things you need to watch out for?
24:40
Okay. What is a upset tax sale?
24:42
Yeah, that's that is a great question. So we talked a little bit about municipal liens, Hoa liens and federaltax liens. Tax sales are quite literally for real estate property, and an upset tax sale is the very first timea piece of real Property is exposed to a public auction for the purpose of paying the back taxes that are owed on a particular property. In Pennsylvania, that's typically two years. back taxes typically makes a property eligible for exposure to an upset tax sale. And an upset tax sale is kind of what it sounds like. And that is, essentially, as long as you are the high bidder coming out of the auction, you are paying off the taxes that are due, that's the real estate taxes that are due. But then the property comes with every lien attached it nothing gets cleared in an upset tax sale. So an upset tax sale is a very tricky sale to be
at and to bid at, because you need to know everything that's against the property, because you're assuming the property with everything that's attached to it. That can be mortgages, could be municipal liens, federal tax liens, all of those things are coming with that property. Because of that, if you ever go to an upset tax sale, the sale prices are incredibly low, like very, very low, a lot of times just the amount that's needed to pay the last two years of taxes. So it may be three or $4,000, sometimes five or $6,000
that a property is going for. And while title can pass in an upset tax sale, you just have to keep in mind that you're also inheriting everything else that that individual owed. And it's very rare to find a property that has equity in it at an upset tax sale, because the long and the short of it is that if they weren't
paying their taxes, a lot of times that's the last thing that they stopped paying, they usually stopped paying a lot of other things well before they stopped paying their their tax bills. So equity can be hard to find here. But when it is found an upset tax sale, it's usually a pretty large windfall. And so the the investors that I would work with that did upset tax sales, they always said it was kind of like searching for a needle in a haystack, a bunch of junk, a bunch of stuff that you never got to place a bid on. And you're looking at a lot of tiles and trying to figure out, Is there any equity here, but when you find the one, there's a lot of value to be had. And hopefully you're the only one that did the work to find that particular property because otherwise you'll be in a competitive bidding situation. So a lot of work with with a potential upside.
27:25
So I assume the upset tax sales are also held at the county level. Is that correct?
27:29
That is correct. Yes, that is county by county. Typically it's held by the tax claim bureau. And sometimes people also refer to them as Sheriff sales. But in reality, it's really not the same, because it's a different entity that's holding the sale. But typically tax claim Bureau and whichever county you're in is the one that's going to handle these sales. Okay.
27:49
I hope you enjoyed our episode today and our deep dive into the foreclosure world work. We'll be back for our next episode, and we're going to continue our conversation regarding tech sales and get into the world of wholesales. So until next time, take care.
28:07
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