Question about Lien on Upset tax sale Purchase

[Ray Slack]

Hello all my PA genius investors! 

Need some advice.  I purchased a property at Luzerne County PA upset sale and I know I'm responsible for liens/mortgages ect. 

My question is this.. there is a PA commonwealth lien from 2008 against the prior owner for Cigarettes' tax.. (I assume he owned a convenience store or something)  for $7,000. 

The property sold (to me) at the upset sale for $17,000 The Taxes and costs due to the county were about $5,000 leaving funds to payoff the $7,000 lein on the prior owner. 

My question is will the excess funds go towards paying off the Commonweath lein? or will those funds go to the prior owner and I would still be responsible for paying off the lien. ? 

If I am still responsible for the lein any tips or advice on the ability to negotiate the 12 years interest they are probably going to want to charge on the lein? 

Thanks for any input

Ray

[David Krulac]

@Ray Slack  It should go toward lien in a certain order, so if there are other liens it possibly will not be paid off.  Contact the Tax Claim Bureau and ask if the Pa lien is on their title search, if not provide them with the evidence so they can pay it off.  

Bigger Pockets Podcast #82 guest 

[Ray Slack]

Originally posted by @David Krulac:

@Ray Slack  It should go toward lien in a certain order, so if there are other liens it possibly will not be paid off.  Contact the Tax Claim Bureau and ask if the Pa lien is on their title search, if not provide them with the evidence so they can pay it off.  

Bigger Pockets Podcast #82 guest 

Thanks David- I did call them today and the girl that answered said she had to ask someone else and that person said yes it would be paid.. I asked if I had to do anything like call the tax department that has the lien and let me know there are excess proceeds and they said no I didn't need to do anything.

I guess I'm good then.

Thanks for the help

Ray

[Melissa Brown]

Quote from @Ray Slack:

Originally posted by @David Krulac:

@Ray Slack  It should go toward lien in a certain order, so if there are other liens it possibly will not be paid off.  Contact the Tax Claim Bureau and ask if the Pa lien is on their title search, if not provide them with the evidence so they can pay it off.  

Bigger Pockets Podcast #82 guest 

Thanks David- I did call them today and the girl that answered said she had to ask someone else and that person said yes it would be paid.. I asked if I had to do anything like call the tax department that has the lien and let me know there are excess proceeds and they said no I didn't need to do anything.

I guess I'm good then.

Thanks for the help

Ray

Did this end up working out like that? 
To clarify what was stated and what was done…

Example: you bought parcel at “Upset” tax sale. back taxes owed etc min bid was 5000$ to county to cover thier taxes and expenses.. However you bought it at 15k… meaning.. the county is going to get paid thier 5k.. there will be 10k left over.. In PA this does not go to an overage fund or surplus proceeds fund.. instead.. in an upset sale any amount bid over the minimum starting bid in the Upset Sale will be applied to liens against the property in order of position… 

since the min bid includes all municipal, back taxes and county liens.. then would it be correct to stated that this extra 10k would go toward the remaining Morgage amount (if applicable) IRS liens, cigarette and sales tax liens etc..? 

so when setting a max bid for the purchase price at the sale you can account for pay off of liens against property when you max bid exceeds Min Bid set by Co.?

this would change the game drastically.. in the amount one could pay for the property at the sale. 

hope this makes sense.

Also @David Krulac stated that these liens get paid in a certain order.. I believe he is talking about the position of the lien.. do we know this order? Is it set by the prothy? Or is it common knowledge?

Thanks so much

[David Krulac]

@Melissa Brown  The overage can apply to both Upset Sale and Judicial Sale is PA.  If there are excess funds after paying the local/school real estate tax bill, the remainder can go to:

Current real estate taxes

Current Muncipal liens for water/sewer or any other bill initiated by the municipality

State Liens, usually for outstanding state taxes, sometimes employee/employer taxes

PA State Inheritance Tax which applies to all deceased owners and starts at dollar one with no exemptions, unlike the Federal Estate Tax.  (Approximately 13 states have either state Inheritance Tax or state Estate Tax, so that would possibly apply in other states besides PA.)

Welfare Liens

Nursing home liens

Mechanics Liens

Mortgages in order of recording date, first mortgages before second or third mortgages

Judgements (once boought a property where there was alien because the owner got in a bar fight and was sucessfully sued for medical bills esulting in a judgemen.)

Federal Tax Liens (Special rrules apply to IRS liens)

The precedence of pay off is determined by state law, government first, then the rest by date recorded.

Then is anything else is left over it goes to the former owner.

On one of our purchases there was a big Nursing Home lien that the Tax Claim Bureau was not aware of.  We got the documentation for it and gave it to the TC Bureau so that it waould be paid out of the proceeeds and not have to be paid by us as the new owner of the property.(this was Upset Sale where all liens transfre to the new owner.)

I am not an attorney, nor an accountant, nor a CFP, nor a doctors and am not giving legal, accounting, financial or medical advice.

David Krulac

Bigger Pockets Podcast #82

[Justin Summers]

Just to add here.. Lately I have been seeing Municipalities in NE PA really go after all the excess proceeds.. One claimed $100 per day fine from not cutting grass for 2 years to take the $70k excess proceeds.

[Ashish Acharya]

When you purchase a property at an upset tax sale in Pennsylvania, you generally assume responsibility for any existing liens, including a Commonwealth lien like the one for cigarette taxes. The excess funds from the sale typically go to the prior owner, not towards paying off liens. This means you would likely still be responsible for the $7,000 lien.

As for negotiating the lien, it’s possible to reach out to the Commonwealth and try to negotiate a reduction, especially given the age of the lien and the accumulated interest. Explaining the situation and offering to settle for a lower amount might be effective. Consulting with an attorney specializing in Pennsylvania tax liens could also provide you with more tailored advice and help with negotiations.

[David Krulac]

@Ashish Acharya  That has NOT been our experience and we have purchased over 200 deeds at Pennsylvania Tax Sales, both Upset and Judicial.  In every case that we have been involved in; the Tax Claim Bureau does a title/lien search to determine the distribution of excess funds. They do NOT just hand over excess funds to the former owner.  They typically also vett the former owner with the Pennsylvania Department of Revenue.  While mortgages, judgements and liens are recorded at the local courthouse, sometimes liens such as welfare liens and nursing home liens are not proptly recorded.  In some of those cases the liens are not recorded until after the former property owner passes away.  And while Pennsylvania State Inheritance is typically also not recorded, all 67 Pennsylvania Recorder of Deeds are instructed to collect the tax if there is any indication that the property owner is deceased.

[John Irwin]

@David Krulac I know this is a bit off topic but you seem very knowledgeable on the subject.  What happens if during an upset sale you win the property with a bid of $100,000 and it has a $300,000 mortgage attached.  I understand you’d pay the $100,000 up front and then do you assume the mortgage by making monthly payments or do you also have to settle that immediately?

Thanks!

[David Krulac]

@John Irwin  It would depend on the mortgage lender, some might want immediate payoff envoking the due on sale clause, while others may be just happy to get payments.  In reality if people don't pay their taxes, they usually are not paying their mortgages either.  Then the time cycles usually come into play.  Mortgage foeclosure in PA is Judicual and typically take a year + to get to Sheriff Sale.

Tax Sale in Pa. takes 2.75 years to go from delinquentcy to Tax Sale.  Therefore the time frames don't align and presuming that people logically stop paying their taxes and mortgages at the same time, the Sheriff Sale would happen long before the Tax Sale. 

The second thing that happens is that many mortgages include escrow for paying the taxes.  The lenders pay the taxes out of the escrow.  But I've never seen a case where the lender took moeny out of their own funds to pay the taxes.

Obviously logic does not always prevail. 

[Jay Hinrichs]

Quote from @David Krulac:

@John Irwin  It would depend on the mortgage lender, some might want immediate payoff envoking the due on sale clause, while others may be just happy to get payments.  In reality if people don't pay their taxes, they usually are not paying their mortgages either.  Then the time cycles usually come into play.  Mortgage foeclosure in PA is Judicual and typically take a year + to get to Sheriff Sale.

Tax Sale in Pa. takes 2.75 years to go from delinquentcy to Tax Sale.  Therefore the time frames don't align and presuming that people logically stop paying their taxes and mortgages at the same time, the Sheriff Sale would happen long before the Tax Sale. 

The second thing that happens is that many mortgages include escrow for paying the taxes.  The lenders pay the taxes out of the escrow.  But I've never seen a case where the lender took moeny out of their own funds to pay the taxes.

Obviously logic does not always prevail. 

Very specific and specialized knowledge seems to be mandatory to play in PA tax sales.. way to complicated for me thats for sure. I bought one courthouse step deal in Philly and that was quite the ride.. its a locals market for SURE..

[John Irwin]

Thank you for the detailed response @David Krulac, much appreciated