Salvaging bad flip (defaulted loan/taxes overdue)

[Karen Polis]

Seeking ADVICE / Property is in Norristown, PA

I lent money to somebody (a land trust) for a fix and flip. Unfortunately, I did not do my homework beforehand, otherwise I would have realized there are 4 other investors prior to me that were already defaulted on for their loans. The Land Trust has just been served for back taxes.

All five investors are now in touch with one another and we are trying to salvage this deal to the best outcome for all. At this point, we only want our original money back–we are not even expecting profits, although that would be nice.

One of the original investors is trying to get the property deeded over to him so that he can finish the deal, however, we just learned that if this happens, it could wipe all of us other investors out completely. Since I am the last in line on this, I am told that I am the one who should be foreclosing. Also, if the taxes are sold, then we are all out of luck.

I am willing to buy the taxes to keep it in our control, but I don't know where to go from there. We have tried to get in touch with the land trust owner and of course, he is ignoring us. He even ignored several attorneys letters sent to him in the past. At this point, my guess is that he has used our money to live on and is running scared. 

All five of us investors have legitimate contracts with paperwork that tie us to the property, so in that sense, it is not a scam. But we can no longer rely on the land trust to make this right. The investors have to band together and because we are all newbies (obviously the land trust owner knew this)–we are not sure how to handle it. 

Any advice from people who have actual knowledge in this area and not just conjecture from reading books would be wonderful. 

Thank you! Karen.

[Steve Babiak]

So, I was able to research some more details on this property.

First, the loans.  All five had a initial principal balance totaling to $84,000.  That includes all five loans.  I'll call the borrower by his first name of Calvin; land trusts are supposed to be used allegedly to "protect privacy" - but in this case the name is in the public records anyway ...

Second, property was purchased for $28,000 by Calvin. In that area, properties at that price usually need full rehab. Looks like before Calvin bought it. it was listed on MLS in the $70K range, but the listing had expired.

Third is ARV (after repair value). This property has a few things not favorable to high ARV. It is on a busy section of state road, and directly across the road is an industrial facility and warehouse. And it is close to freight train tracks (but not near the railroad crossing where they blow the train whistle and drop the barrier across the road). it is close to the river but luckily not in the flood plain according to FEMA maps. But it is only a rowhouse (townhouse if you want to be fancy), so values will be lower for those. My guess is ARV around $140K, but could be lower if appraisers use the negatives against the property. With luck it might fetch $150K, but I wouldn't expect that or anything higher than that. It is in a desired school district.

The repairs needed are not known to me, but I would expect $40K to $50K minimum, and upwards from there.  If we have a flat fee listing, so let's use $400 for listing side commission,  and 2.5% to buyer's agent, plus transfer taxes for seller will be 1%, the math looks like this:

$140K x 96.5% - 400, or $134,700 possible to seller.  The adjustments for seller's portion of taxes and the back taxes still need to come off of that, as well as repairs.  If rehab is $50K, that puts the number at $84,700.  As you can see, there won't be any profit expected; probably best strategy will be to attempt to minimize losses at this point.

The biggest problem is this: it is facing imminent judicial tax sale (like less than two weeks away).  At tax sale, I would expect the high bid to run anywhere from like $30K to $50K based on the house and location.  So letting it go at tax sale won't get anybody paid except maybe first position; second position might get a little, but not much at the low end of tat bid range.  Karen has to figure out what approach makes sense for her, and whether she can do this within her SDIRA because otherwise it might put the SDIRA in jeopardy of being declared distributed by the IRS.