Buy a Cleveland OH property with delinquent taxes at a low price?

Question

Hello there,

I need the advice of those who are well experienced, especially with Cleveland, Ohio properties:

I am currently doing my due diligence on a deal of 4-Unit Brick Apartment Building that brings in roughly $2000 a month. It was recently renovated and fully occupied with tenants. It looked like a good deal until I found out that there is roughly $20,000 back taxes owed on the property. The owner is willing to do owner financing and this reduces the out-of-pocket expenses that would be necessary for the transaction. The seller seems motivated and I am planning to come up with a deal that I think he may accept.
The owner said he is on a monthly payment plan of about $280/month for the back taxes, and he wants a buyer that will assume that and pay him $25000 cash OR someone who will pay $20,000 cash (to clear the delinquent taxes) as down payment while he will finance the rest.
I like to know the risks associated with inheriting back taxes on a property from a seller. With $280 per month, it sounds like a good way of financing my deal, and still have enough cash flow. My concerns are the possibility of foreclosure in future by any kind of unforeseen government or city regulations OR exorbitant interest rate charges.

A good option I have thought about is offering him $5000 cash, take over the back taxes debt and have a monthly payment plan as well, and let him owner-finance the rest for three years.

I will appreciate comments and advice from the more experienced ones.

Thanks!!!

Terry Kavouras · Answer

I bought a house in Akron with $7500 in back taxes.  The tax debt had just been sold by the county to a third party.  I spoke with the 3rd party tax lien holder to make sure that I knew what it would take to settle the debt and if there are any complications.  It was pretty straight forward. After I bought the property and title transferred, I contact the tax lien holder and paid the $7500.  They charge a finance charge of about 4% which added a little onto the settlement price.  But once paid, they released the lien.  So as long as you calculate the the $20K, plus financing charge, into the price of the property, there shouldn't be any problems.  One thing I'm sure you realize is that you will still have to pay the current county property taxes in addition to paying the $20K back taxes.

As far as the deal goes, if I understand this right, you will be paying $25K for the property plus $20K for the back taxes.  The total is only $45K all in.  And the property is generating $2K/month. I don't know your costs, but I'd guess your monthly costs are about $600/mo.  So I guess your net is about $1400 per month, or $12.8K annually.  That's a pretty outstanding return on your $45K investment. That's a 28.4% CoC return.  I'd buy that.  Better yet, I'd pay him the $25K as he asked and assume the tax debt.  Then my monthly costs go up to about $900 (the base $600 plus the $280 for the tax debt).  I'd net $13.2K annually on $25K out of pocket.  That's a 52.8% CoC return.  Pretty awesome if you ask me.

Matthew King · Answer

@Sunday Akin  Be sure to find out who holds the tax debt. In most cases the delinquent taxes have already been purchased by a tax note collector and the collector dictates the payment plan to the owner.  You will want to see this document in writing. If the owner made a payment plan deal with Cuyahoga county, which does not happen very often, you will want to be sure that you are current at all times to avoid the county sending the property to a tax foreclosure / tax collector sale. Sound advise = Hire good legal counsel or at the very least as @Matt Motil suggested get a good title company to research this defect.

Matt Motil · Answer

first off you're going to need a title agent and an attorney. Title agent should handle the transfer and the paying of back taxes to make sure there aren't any other clouds on the title. Attorney will need to handle the note and mortgage docs between you and the seller. Hope that helps get you started.

James Wise · Answer

Again, you need to look at the situation logically. If he bought it and totally renovated it and is regularly getting 2k a month why would he let it go for 5k? He must have spent much more than 5k to "renovate" it.

Sunday Akin · Answer

@James Wise, He said he just got the property few months ago, was completely vacant.... He is a builder... He renovated it.... put tenants in it... I reviewed the current leases with tenants... they all signed leases starting March 2016. He claims he is not interested in buying and holding... I guess he is fixing and flipping...

James Wise · Answer

Let's not forget about the elephant in the room. If he is willing to let it go for 5k so long as you pay the taxes is it really going to bring in 2k per month? I suspect you will only collect 2k per month on rare occasions.

If it does consistently bring in 2k per month why wasn't the previous owner able to pay the taxes?

Terry Kavouras · Answer

One last thing, I had a good experience talking to and working with the Summit County Fiscal Office.  I found them to be pretty helpful during the process.  So don't be afraid to reach out to them too.

Terry Kavouras · Answer

I'm not certain anymore, but I seem to remember something about the lien holder getting deed to the property if they aren't paid within x period of time (a year I think).  Make sure you check into that too.

Sunday Akin · Answer

Thanks @Terry Kavouras... Thanks for sharing your example. Just as you have just analysed.... I did too, and it seems to be a very good deal. But I would love to be as creative as possible and spend the lowest amount out of pocket (being low on cash right now --- just made some purchases). I would love to assume the tax debt, but I had been reading about lien holders in Cuyhoga County who are increasing their interest rates to as much as 18%. I don't know how true this is. My plan was to use the tax debt as a from of financing for me if I can be sure the interest rate would be reasonable. And also make use of his owner financing.My concerns are exorbitant interest rates by future lien holders may eventually make it a bad deal, except I quickly redeem the situation with cash just like you did in your case. My plan is to back out for now, PM me if you are interested in the deal.

Sunday Akin · Answer

Thanks for the sound advice @Matthew King, I will definitely need the services of a real estate attorney, if I am still interested in the deal.  Looking at the following link for the said property, I saw "Yes" for Cert. Pending but "No" for Cert. Sold, which may actually imply the lien certificate may soon be sold as you said:

http://treasurer.cuyahogacounty.us/payments/real_p...

I will need a legal counsel if at all, I will be moving forward with the deal.

Thanks!!!

Buy a Cleveland OH property with delinquent taxes at a low price?

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