Vacant Land Tax Deed Bid In Texas - What To Do About IRS and State Tax Liens Post Purchase

[Bryan Hancock]

We have been negotiating with a seller for a piece of land we intend to develop (if purchased) in Texas for several weeks now and I don't think we'll get a contract. We are gearing up from a procedure standpoint to bid on the tax deed at auction. We have one more week to ink a contract and cure 1 of 3 liens (the county taxes) and contract with the seller.

Scenario:

-Vacant land => Upside unknown because we don't have time to get things through the city, but the floor price is valuing it at 2 buildable lots which represent a value of about $40k for us based on what has to be done to the property for utilities, site planning variances, etc.

-Three liens:

1. County taxes = $28k
2. Federal taxes = $8k
3. State taxes = $250

that is it....all verified by our super duper title company.

The county is the one foreclosing and the seller won't take $40k for the property even though he stands to make a little bit of money for doing so. We offered to pay for the balance of the closing costs so he'll clear roughly $3,750 by doing so.

We have thought about a number of strategies for buying this property:

4. Offering the seller to participate with a profits sharing agreement. I like the guy, but we really don't want to get in bed with him

5. Offering some options during his 6-month redemption period (not his homestead...vacant land) so that we can pay things off post auction once we have had more time to do due diligence on valuations for more lots. The property was contracted for $160k in 2009 prior to the crash and it fell out during the crash

6. Buying at auction. More on this below along with questions

7. Paying off county tax lien and getting deed of trust from him to record in trade to basically take the county's position. Then we could foreclose and pay off the other liens. Since the county is the one foreclosing we'll need $28k to do this in trade for the same in a deed

I would really prefer to do number 7, but I am not sure he'll agree to this at a contract price of $40k. Thus buying at auction seems like the best scenario. After the auction these liens will still be attached though....ugh.

I am worried that these taxing authorities will go after us for the money during his redemption period and thus we'd have to pay them off. If he redeems we're screwed because we already shelled out this money. There is also the problem of this potentially polluting my credit during the 6-month redemption period.

Questions:

-Will this pollute my credit if I buy the deed at auction if the IRS or state go after us for the taxes during the redemption period?

-Any thoughts on how I can buy this for $40k? Before auction, at auction, or after auction (during redemption period) are all fine. We want the property though and don't want to pay more for it because of the uncertainty associated with the variance for subdivision. If we had more time we could pay more, but we don't have more time

-If more than $28k (the county lien) is bid at auction do the excess proceeds go to pay off the other liens, to the county, or somewhere else? If we bid $40k at the auction and the excess proceeds went to pay off the other liens we would be golden assuming this is the high bid. This is probably unlikely because the property is worth more to someone willing to take the risk associated with variances and being able to build more than 2 houses on the land. 4 or 6 seem to be likely, but we won't know until we submit things to the city

Advice or commentary is appreciated.

[Steve Babiak]

IMO, the IRS won't foreclose - they aren't in most senior position here. So that leaves the IRS with their 120 day rights of redemption. That usually starts with the recording of the deed at the county recorder, since that gives the public "knowledge" that the property has experienced the event that triggers the redemption rights. If they redeem, they buy it back from you for what you paid, so you are best to not do anything to the property during the redemption period. It might also be possible to pay the IRS some smaller amount (to be negotiated), in exchange for them not redeeming.

Can't speak to your state rules.

Usually, any overages go toward paying off lien holders in order of seniority. And if anything is left, the former owner gets something. But this is one of those things that might vary by location.

Once it goes to auction, the general public can bid as high as they choose, so there's no guarantee of the bid remaining below $40K in that circumstance. Before auction, the liens will have to be satisfied; but keep in mind that sometimes the IRS will release their lien in exchange for partial payment, if it can be shown that the IRS debt exceeds value (think short sale). After auction, in some areas redemption rights can be purchased, so that might be something you might consider - but then you would have to redeem so you need to understand the redemption process and what must be paid to redeem.

Keep in mind that the party that owes the IRS will continue to owe the IRS unless the IRS gets paid in full; even if the IRS redeems and collects part of the debt owed, the remainder is still owed by the original debtor. The IRS debt does not transfer with the property; "equity" in the property is about all the IRS can expect.

Originally posted by Bryan Hancock:

...
I am worried that these taxing authorities will go after us for the money during his redemption period and thus we'd have to pay them off. ...

I don't exactly follow this part. The state bill is $250 - no big deal to just pay off IMO. You are buying the tax deed, so the county will be paid off (you might owe current year's tax bill, but that goes with the territory). IRS has to redeem. So who's left to come after you?