1404 : Tax sales and Wholesale purchases w/ Rick Hecker
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00:01
Welcome to episode 4 of season 14 of the Growing Empire Show. Today I'm back with my special guests Rick Hecker, Senior Vice President and General Conestoga Title Insurance Company. Today we are going to wrap up the last of our three part episode, and we're going to take a deep dive into the world of wholesales. So make sure you stay tuned.
00:27
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.
00:48
Alright, so just to like kind of recap for a second. So in a sheriff sale, you know, if you're using an experienced title, agent or attorney, they can help you understand what liens you may be assuming as a part of that sale. But in an upset tax sale, you're 100%, assuming all liens is that do I have that correct?
01:07
Absolutely. Correct. Yep. It's whatever's attached the property, you're getting it, it's now your debt and your your problem to deal with. Which is what makes them so dangerous. Something, you know, when you talk about like, what are the you know, as a real estate investor, especially if you're just starting out, where are the places to begin? The estate properties are going to be the easiest, or the ones we've discussed so far, then foreclosures are kind of the next level. And I'd say upset tax sales are for very, very advanced investors. Although like I said, there's some value that can be had, if you find it. It's just, you're taking on a lot of liability when you purchase that these sales..
01:45
Okay. All right. And what is the difference between a judicial sale and an upset sell are they one in the same?
01:52
So they are not and essentially, so the the upset tax sale and a judicial tax sale are related. An upset tax sale, like we mentioned, is the very first time the property is exposed. The second time it gets exposed, it's at the judicial tax sale. So both sales are for back taxes. It's just the second time it comes
up for sale, because a lot of times people don't bid at the upset tax sale because there's no equity in the property. So a ton of those properties go unsold. If you ever go to an upset tax sale, probably 95, 90 or 95% of them go totally unsold because there's no equity in it. So then there's another bite at the apple, which is the judicial tax sale. The judicial tax sale, essentially, there's a period of time where the county then is able to pursue a legal action to request that the court remove all liens from the property and then re expose the property to sale in a free and clear manner, much like you have with a foreclosure sale. Judicial tax sale, that's the place that if I was going to be if I was interested in purchasing real property, that's where I would go, if I was going to be purchasing a tax sale property. Because you're gonna get it free and clear. Tax sales are still tricky they are as is, where is sales, meaning the condition of the property is as is what it is. And you really need to watch out for knowing the property that you're bidding on. And again, it's another story. But here in Lancaster County, we had one individual that that went into a sale, and thankfully not a client of mine, but became a client of mine afterwards, very first time attending a tax sale he heard you can get great deals at these tax sales. And he went in, bid on a particular piece of property. Now you need to understand when they list these properties, a lot of times they list these properties by their parcel identification number, which is essentially rather than a legal description. They use whatever tax number the county uses for that particular parcel. And if you weren't aware, mobile homes have their own tax numbers, and will also show up at upset tax sales and judicial sales. And a mobile home does not come with any real property attached to it a lot of times. And in Lancaster County, there's a number three that appears at the end of a tax number if it's a mobile home. And that's really specialized knowledge. That's some of the only if you've been practicing in the area for long enough, will you recognize that, oh, every time there's a three at the end of this number, it means that this is going to be a mobile home. This individual showed up he bid on a property got it very cheap, but like in the $8,000 range. He was smart enough to go to the judicial tax sale. So he got it free and clear. But it was a mobile home. And you might be thinking, well, that doesn't sound too bad as long as it's not a real old mobile home. The problem was is that aside from the fact that it was a mobile home, it was also one that the tree had dropped on and was half crushed. Fortunately, he was the proud owner of a crunched up tin can I guess that's the best way to describe it. It's terrible. So very tricky, but an experienced person can help you through with that.
05:15
Okay. All right. So, if an investor is going to purchase a property at a tax sale, I assume you're gonna tell me that, use your experienced title agent, use your experienced attorney, as kind of the only method before you actually jump, you know, headfirst into tax sale purchases. Am I correct on that?
05:36
If you've got it Jen. that's, that's 100%. Correct. And I, I feel like I've repeated that a lot. But it's one of the things that I think you can get experience in it and learn how to do it. But if it's the first time going in, you're going to want to have somebody by your side that has the knowledge and has done this before. So you know, working with inside your real estate investing groups to identify those realtors, those title insurance professionals, and those attorneys that have done this before and have the knowledge to help you along is going to it will be very meaningful.
06:10
Okay. Last but not least, let's talk about wholesales. Because I find this to be a really well researched topic amongst investors. Everybody wants to be in the wholesale business today. So what is a wholesale and who are the parties involved?
06:24
Yeah. So sometimes a wholesale is referred to as an ABC transaction or an A to C transaction. And really, what that means is you have one individual that is out there, we're going to call it party B. Party B is the original one that researched and found the transaction, they found the seller, which we're going to call party A. And for whatever reason, the party B either doesn't want to be involved with the transaction very long. Maybe they don't have the financial capital to move a project of this particular scale along. Or maybe they they just have too many other irons in the fire, and they just need to be able to move a really good deal that they found on to another buyer. A lot of times, investors that are just starting out, they see this wholesaling as a place to start to make some money until they can build their portfolio in a
way that they can actually afford to purchase their first property. Or until they get their experience level up that they're willing to take on the risks that go with rehabbing and flipping and reselling a property. But they feel like as an investor, they can do the dirty work of finding a good deal on a transaction.
Because that doesn't require as much money upfront. And I think that's probably why these are very appealing. But the long, the short of it is B, who works we'll call party B who will call the wholesaler is then reselling this contract for a fee to party C essentially. Then party C is the one that ultimately completes the purchase. These are very tricky transactions and a lot of title agents, and I know you know this, Jen, but a lot of title agents refuse to handle an A to C transaction. Or at least don't handle it the way that most investors would like to see it handled. And there are a number of reasons why. Some of them relate to funding issues. I've definitely seen my fair share of these types of transactions that that funds, good funds, good and readily available funds are a problem. Sometimes it's it's disclosure
issues to these to the seller that can be a problem. Being upright and forthcoming can be difficult in these transactions and sometimes downright undesirable because of the amount of money that may be able to make that party B may be making in between. Then there's also Department of Revenue issue problems because Department of Revenue has issued some very clear guidance and statutory provisions that essentially do a double transfer tax. Essentially, they charge a transfer tax on the first they essentially pretend that the sale occurred from A to B and then again, pretend to pretend that it occurred from B to C and charge a double transfer tax, which can be very tricky to avoid. There are mechanisms like Novations. Novation agreements that I think are defensible ways to avoid the double transfer tax. But the long and the short of it is all of these things cause a lot of complications. And sometimes these transactions are not particularly high dollar value. So there are plenty of agents out there that will turn them down, refuse them or for some reason or another not want to handle them. So fantastic place to get started, like you said a lot of well well researched, I think because it's an easy place to get started without much in the way of funds up front. But there's more headaches there than I think a lot of investors realize.
09:58
Yeah, I definitely agree with that. And I definitely have seen some of the challenges that you have mentioned. Probably most common in my line of work is the failure to disclose. Which is sometimes causes a lot of issues, especially at the final transaction, the C party transaction. So what are some of the agreement of sale issues to note regarding wholesales?
10:22
Yeah. So agreement of sale issues that that frequently raised their head. One of them is, you have to have an assignable agreement or at least some type of a Novation that that can be done. If you're going to pay double transfer tax, I'm fine with an assignment. And the reason I say I'm fine, I have what I'm saying is Department of Revenue is fine if there's a payment of double transfer tax in those particular instances. But the agreement needs to be written in such a way that this can actually happen, then that there can be an assignment of the agreement. And I had one of those cases, when I was in private practice where an individual drafted their own agreement. They didn't use a realtor they didn't, they just kind of did their own what I'll call a napkin agreement of sale. It really was not a sophisticated item didn't permit for the assignment of the agreement, and they thought they were going to wholesale the property. Well, when the seller found out that there was money that essentially was being left on the table that that party B was going to make a fair amount of money on the resale of the property, they
ended the whole transaction. Because seller because party B didn't have the ability to assign the agreement of sale. So that that can be a big problem. If you're looking to avoid the double transfer tax, having somebody that can help you through a Novation agreement is generally the accepted way to do
it. But knowing the difference between an assignment and a Novation agreement is a big deal. And one of the things with a Novation agreement that is difficult, that kind of hurts these transactions is there is some disclosure that occurs. Because the Novation agreement requires the Joinder of the seller where an assignment doesn't require the Joinder of the seller at all. If the contract permits it, an assignment can just be an assignment from party B to party C. So again, you know, these are tricky
areas to to navigate. Relationship wise, they can be very difficult and can make for a very rough settlement when the final one comes around.
12:28
The episode will continue in just a moment.
12:31
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13:30
So why don't you explain a little bit more about what the actual Novation is?
13:34
Yeah. So a Novation agreement is essentially an agreement that terminates the original agreement of sale and puts a new one in place. You could skip the Novation agreement, if you wanted and just do an actual termination of the agreement of sale and put a new one in place. But there's a lot of risk in that because the minute you terminate the first agreement of sale, now you have a seller that has full authority to pre negotiate a brand new agreement of sale with a brand new price and may cut into the amount that party B thinks that they are going to be receiving. And it gives a moment of opportunity for a party for the seller party A to have a lot of a lot of power over the transaction. The Novation is a joint agreement between party A, party B, and party C that does all of this all at the same time, essentially
hoping to reduce any moments of risk. So it agrees to do away with and terminate the first agreement of sale and enter into a brand new agreement of sale that that flows from party A to party C. So it essentially substitutes the parties much like an assignment does. But the operative piece of this is that it terminates the original agreement of sale and puts in a new agreement of sale in place. And that's essentially the manner in which you're able to maneuver around the guidance that has come from the Department of Revenue and and the statutory provisions that are out there, and I should say that's the prevailing, the current prevailing belief. I will put a little caveat in there that is that as this practice becomes more and more prevalent, there is a possibility the Department of Revenue may seek to close what I feel is a little bit of a legal loophole. Because it is, it definitely feels a lot like an assignment. But generally speaking, that is the accepted practice in Pennsylvania presently.
15:26
Okay. And if I understand this correctly, party B never actually takes possession of the property. Is that correct? That is 100%. Correct. They're just a facilitator between A and C? That's correct. Yes. Okay. You had mentioned that there's some potential funding issues in a wholesale, what are those?
15:46
Yeah. So, you know, these transactions can be structured in in a good manner that that permits party C to be the only one that needs to bring funds. A Novation agreement is one of the ways to do that, because we don't have the original agreement of sale. But sometimes these transactions are done as a two step transaction where you have one closing, which is party A to party B, and then a second closing from party B to party C. Those are done a lot of times when you're trying to avoid the confrontation, there may be a large amount of money that party B stands to make, and that party A is not fully aware of that amount of money that they stand to make. So you may try to do a two step transaction. And one of the big problems that comes in there is funding. Because a lot of times, party B doesn't may not have the money to to complete the purchase. And so there, they try to pressure title agents into utilizing party C's funds for the B to C transaction to fund their A to B transaction. And that's a, that's a big no no for a title agent. And there are a lot of regulations that cause that to be a problem for a title agent. But it's definitely a common issue. And the core of it is that, as a wholesaler, sometimes, I would say a majority of the time, wholesaling is attractive to new investors who may not have the financial backing necessary to complete the purchase. And so getting creative with how to make funds available at settlement is one of the problems that they have to solve. And they're always very creative and coming up with ways to solve those problems. And I certainly applaud the ingenuity, but there are some of
those that are that are off limits. So funding each transaction can be tricky.
17:44
I would imagine if you are doing 2 transaction, so that's 100% going to be a double transfer tax.
17:50
100%. Absolutely. And and when you see that a lot of times it's because B is willing to is willing to eat the additional transfer tax solely because they want to avoid the confrontation or, or the damage to the relationship that might exist if A knew how much additional money he was making,
18:12
Which just goes back to the disclosure issue, right? And so one of the things that I think party B is always trying to keep silent is the amount of money that they're making on the backside of that transaction.
18:23
Absolutely. Because if you compare it to a realtor's fee a lot of times it's it's well beyond that.
18:29
Yeah, yeah. Significant in some cases. So I guess I'm gonna know the answer to this question, but I'm gonna ask it one more time anyway. How is how important is the title agent or the company you work with regarding wholesales? If you are closing wholesale deals, how important is that title, agent?
18:50
Oh, it's it's key. And I think this just goes back to what we've been been talking about here. If you're an investor and you're trying to invest in real estate, I think your team is everything. Your your group of real your realtor, your attorney, your title, agent, all of the pieces there. Having an experienced group in your corner that you can go to when these things arise, it means it, it really sets apart the successful investor from the unsuccessful one. Because there's a lot of knowledge and wisdom that occurs and is exchanged between each of these parties that set everybody up for success. I'm a big believer in it and I've seen it work a lot where when people established their teams to be able to their team of people that they're going to utilize. If they're an experienced team, they have a tremendous amount of success, rather than trying to reinvent the wheel all on their own.
19:45
I couldn't agree more. I could not agree more that the team is so critical to to the success of the investor. So last question for you, Rick. Is there any additional advice that you would give investors looking to purchase any of the types of properties that we talked about today that we didn't already talk
about? Any other words of wisdom?
20:08
Yeah, I, you know, I think that I like real estate investing. I think it's fantastic. I think it's something that it makes a lot of turns property around in a valuable way. And I believe, I very much believe in it as a valuable service to the community at large. But I think the biggest thing I would tell an investor that starting out is don't hesitate to ask. Everybody started somewhere. Even even I did. You know, I've been doing an in the real estate investment community for probably about the last 10 years. But I'll tell you, the very first time I walked into a real estate investment meeting, as a brand new attorney, I had no idea what a sheriff sale was, what the difference between a tax sale and an upset tax sale or judicial tax sale was, what that meant, what type what were the rules surrounding them, and how do you get money
into these transactions. What were the pitfalls? I knew none of that. And if you're if you're in the real estate investment community, the amount of people that are willing to share their knowledge is astounding. I think it's a tight knit community. It's one that everybody's trying to, to advance their
professional life and advance their careers. But they're also very willing to help new folks come along, because I think we there's a there's a high level of collegiality.
21:30
Yeah, I definitely agree. Well, I can't thank you enough, Rick, for your time today. You are such an incredible wealth of knowledge and your ability to break down each piece of this, I think is going to be incredibly helpful to our investors, both new and seasoned, to understand some of the nuances, about the different types of opportunities that are out there for investors to buy properties, and be successful. So thank you so much for your time. I really, genuinely appreciate it.
22:01
Yeah, thank you, Jen. I really appreciate it and have a great day.
22:04
All right, you as well take care. I hope you enjoyed my three part segment with Rick. And as I'm sure you got to see he has quite a wealth of knowledge. If you didn't get a chance to hear episode 2 and 3, make sure you jump back into those episodes, we went through everything from estates to
foreclosures, to tech sales to wholesales and everything in between. And if you're looking to buy investment properties, and you want to get a leg up on the competition, these are the types of deals that you're going to want to purchase. So I hope you enjoyed it. And until next time, take care.
22:40
For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio visit growingempires.com