Should I buy a property with an IRS lien via seller financing?

Question

Brand new to Bigger Pockets. Through show 19 so far, but first post.

I just got a property under a standard 1-4 residential TREC contract in Ft. Worth, TX for $45K. It is schedule for a tax sale on June 5th (next Tuesday). It was originally brought to me through a wholesaler who stepped out and put me in direct contact with the seller when they realized how tight the timeline they were dealing with was. I called the wholesaler's title company this morning to see if they had gotten far enough to be able to issue a commitment that would allow me to close on it by Monday. After originally saying that they were ready, they came back and said that there was a federal tax lien and that would take them at least 30 days to curate.

I called the law firm handling the property tax sale and they said they could not put a hold on the sale even if I sent them the contract for purchase. Further, they said the only way to stop the sale was payment in full (~$10K) by Monday, June 4th. I have the cash on to make that payment.

My question is -- does it make sense for me to switch this around and make it a seller finance purchase with $10K down used to pay off the taxes. I would then stretch the remaining $35K over 30 years or due upon settlement with the IRS, whichever comes first. I'm spit-balling here. I have never purchased via seller finance before, but the seller is motivated to get her IRS issue cleaned up -- roughly $31K.

I know this is a risky proposition on the $10K, but I think I am willing to gamble on this to give us enough time to work through pay-off arrangements with IRS if it is the best way to keep control of the property until we can get to clean title. We just flipped and sold a property directly across the street for $119K, and we have another property up the same street currently under contract -- so we know and like the neighborhood.

The other way, I have thought of to handle this is to have the seller take a loan (from a 3rd party) to pay the property taxes (if she is willing to take the loan) and keeping our current TREC contract in place buying us the time to work through the IRS issues and go to conventional closing once those issues are resolved.

Lastly, I am not very knowledgeable regarding tax sales, but my understanding is that the property owner has some amount of time to "redeem" the taxes that were purchased for a premium of like 25%, but I don't really want to potentially lose control of the property or add in any unnecessary costs.

Eager to hear any other thoughts or suggestions.

Thank you in advance for your feedback!

Doug Woodward · Answer

Wayne, Thank you for the response. I really appreciate it. Based on your feedback, I sent a text to the seller almost verbatim. She replied that she was good with every aspect of it, including waiting on her portion of the sale proceeds until after the IRS debt was satisfied. So, she and I are on the same page.

The attorney at my title company didn't respond until today. His response was as follows: "You will have to buy this privately. I can do this at my office on Monday afternoon. She signs the deed, you give her $, pay collection agency for the taxing authority as well. Make sure the property is taken off auction Tuesday. There is no guarantee of clear title."

I am much more comfortable with your suggestion that the proceeds remain in escrow (less the amount that I have to pay to the taxing authority) v. "give her the $", and I have sent him that message back to which he has not replied. This got me thinking that making the tax payment would also entitle us to put a lien on the property for the amount of the taxes that we are paying -- is this correct?

If so, is my lien superior to the IRS' lien or subordinate to it? Just curious.

Thank you again for taking the time to respond.

Best,

DW

Elvis Vasquez · Answer

Call the IRS Lien department and get a faxed copy of the lien amount.

Doug Woodward · Answer

Thank you for the feedback. After numerous conversations with other investors and two different title companies, I wanted to provide an update on what we did. Neither the title company that originally opened title for the wholesaler nor the title company we normally work with were open to holding the remaining balance (less the property tax payment) in escrow. Their responses were very similar as to why. The long and the short of it is that the time frame, amount etc. are all too unknown for them to escrow funds. In other words, they felt like the amount which was needed to be paid to prevent the tax sale may not even represent all of the property taxes due. Additionally, the uncertainty around the amount due the IRS may represent an amount greater than our total agreed upon purchase price. In the end, just too many unknowns for them to feel comfortable about holding the balance in escrow.

This may have a happy ending after all, though. The other day the seller had mentioned that she had been contacted by a company willing to make her an 18% interest loan to pay the taxes and stop the sale. I had her call them back to make sure that it was a simple interest loan with no prepayment penalties. It was. She agreed to take the loan today, thus giving us the time to curate title and hopefully get to closing conventionally in the next few months.

Wayne, I credit your suggestion for helping us arrive at the solution. Thanks so much.

Doug Woodward · Answer

Thanks Steve. The last info from the title company was that IRS lien is $31K, but it also said plus fees. If it goes above $35K, we would still be OK on our numbers to some level.

It sounds like you are confirming that this deal is a bit of gamble, which we knew it was going to be heading into it.

I really appreciate you presenting something much simpler than what I was trying to make it,

Best,

DW

Doug Woodward · Answer

Steve, That sounds logical and I am inclined to agree with you on knee-jerk, However, when wrapping or seller financing, my understanding is that the mortgage supersedes any claims against the buyer from the IRS. So, my question is -- it just a matter of order (which lien came first), or does the type of lien take precedent?

Should I buy a property with an IRS lien via seller financing?

Should I buy a property with an IRS lien via seller financing?

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