Fort Wayne Indiana Tax Lien Sale CONFUSION!

[Pete M.]

Good afternoon fellow BP'ers!  I attended a tax lien sale today just to watch how things went.  It was very interesting, however, it left me confused on the tax lien process.  My understanding is that the homeowner has a 1 year redemption period where they have the right to pay their tax bill, along with a fee (around 10% I believe), and everything goes back to normal with them.  If they don't pay during the one year the purchaser of the tax lien can then follow a process to gain title and essentially foreclose on the original owners.

What I saw were properties going for well over the recorded tax delinquency.  For example, there was one that the county said was around $2,000 delinquent.  It sold for around $20,000 in the auction.  So if the one year period goes by and the property isn't redeemed the tax lien purchaser would get the house for $20,000 plus costs to get title and then foreclose.

But what if the original owner pays the back taxes?  Don't they only owe the original $2,000 plus fees?  Let's say that is $2,500 total.  If they pay the $2,500 and bring their taxes back to current what happens to the lien purchaser?  Seems like they have just put their purchase money at an extreme risk unless I am missing something else.

Help set me straight on this please!  I've read through some of these tax lien posts but I haven't found any that address what happens when the purchase price is significantly higher than the debt.  Thoughts??  Am I way off base on this???

[Jay Redding]

Hi Pete-  I participate in the tax lien sale yearly.  I will explain what happens in summary form.  Please remember that the specific ligistics of how each county tax sale works is unique to each county in Indiana as well as state to state rules are different thru out the country. You must do your due diligence before hand on both the properties and the county processes.

This is the essence of how the Allen Co, Indiana tax lien sale works. The property becomes available for the tax lien sale when the property taxes have not been paid for 3 consecutive installment periods.  Property taxes are due in Indiana on May 10th and November 10th of each year.  In Indiana, property taxes are paid in arrears, meaning that the property taxes due in 2017 are the property taxes from 2016.  So essentially, the property taxes have not been paid for a 1 1/2 years on the properties that are in the tax lien sale.  

You are bidding on the debt that is placed as a lien on the property.  You have no legal rights to the property until after the redemption period has passed and you receive the tax deed. The owner of the property has 1 year in which to redeem the property by paying the back taxes, penalty fees, administration fees and interest on the overages.  If the owner redeems the property, the tax lien holder will receive his principal back (winning bid amount back) plus interest that is established by the state.  The interest rate has changed a little bit lately.  It used to be a flat 10% on the overage amount.  I believe it is now 5% if the property is redeemed in the first 6 months of the redemption period and moves up to 10% from 6 months to a the end of the redemption period.  Don't hold me to that though as I have not reviewed this lately. 

There were a lot of different strategies being played at the sale. You need to be aware of who the players are and what their strategies are.  There are typically hedge funds and private equity groups bidding on the really good properties because they want the interest they receive backed by a hard asset like real estate. They are more interested in the interest than gaining the property.  Others are bidding to hopefully gain the property at the end of the redemption period at as low a price as possible.  If the property gets redeemed, they still make some money, but the bigger spread and exit strategy is to receive the property at a significant discount to the retail market and hold on to it as a rental or fix and sell out on contract or even wholesale to other investors. Then you have what I call the mom & pop people that are interested in hopefully getting a property that is next to theirs or an adjacent lot to their property.  You also have land buyers that hope to get a lot that can be built on.  The bottom line is that their are a lot of different players bidding.  

If you are going to be successful in this arena, you must do your due diligence on the property before hand.  There were a number of people that paid way too much for the condition of the properties they purchased.  If they have not done their due diligence and only looked at the pictures on the assessor's site or google maps, they will be very disappointed as those pictures are usually 2-4 yrs old.  You need to physically drive buy the property to determine the condition. It is truly a buyer beware situation. 

The starting lien bid that is published covers the back taxes, penalties and an administration fee.  It is only a starting point and has no bearing on the purchase price of the lien.  In those situations where you saw the pricing go way up, those were very good homes in good areas and in very good condition.  The likely hood of those getting redeemed are very good.  So those investors are bidding up to receive the interest guaranteed by the state on the overage above the minimum bid.  They are receiving roughly 8-10% guaranteed on their money, not bad for this low interest environment that we are currently in.  If they happen to receive the property and gain the tax deed, they can then sell the property to get their money back.  So the key in this situation becomes bidding up the property, but not to high that you can't get your money out of the property to cover what you have invested.  Most of these players were bidding up to about 50-60% of the estimated value of the property.  If they get the property back, they could still do some fix up on the home and sell out at retail price and be able to cover their initial investment and still make a profit.  

There are many other strategies employed.  This is just a quick over view to help you understand why certain properties were bid way above the tax lien listing price.  The bottom line is that the county gets to use your money for a year while it is earning interest. The interest on the overage above the minimum bid is paid by the property owner if he redeems the property.  If not, you receive the deed to the property at the end of the year. 

Hope that helps.