I messed up buying a property at tax sale in PA

[Ben Corby]

Hello everyone, this is my first time posting on BP. A little about me, I have been investing in RE for about 11-12 years now. I have 22 rental units, mix of SFH and multis. I have done a bunch of flip properties.

I won the bid on a house at an upset tax sale auction this week.  My wife and I spent 3 days prior narrowing down the list of properties to parcels that were worth bidding on.  

Well, I made a mistake and I'm owning that mistake, literally.  The property that I bought has a mortgage on it (according to the current owner) that makes the deal not worth it.    We did not see any mortgage for this property when we were researching the deeds.  I am going to re-research the deeds, I feel the mistake has been possibly made by checking the owners name spelled one way and not both ways.  (Stephen - Steve)  The bank with the mortgage is Ocwen, which have bought foreclosures from in the past and have heard they aren't the most up and up bank.  Another possibility is that the mortgage hasn't been recorded.

If this mortgage is real and active, I don't want the property.  I know the motto is: buyer beware.  I get that.

I also now, that if you get yourself into trouble, there is always a way to get yourself OUT of trouble.

A few of the options that I have came up with if there is a mortgage so far are these:  Take the deed because I have to and collect the rent until its foreclosed.  I only have $3,700 into it.  

My concerns with this is that the foreclosure could negatively affect my credit or my business. The reason this concerns me is because I am taking title in the LLC I've had for 10 years and I don't want it messed up. Thoughts?

My other option is if the mortgage will IN FACT negatively affect me, is to set up a new LLC and pay the transfer tax to move the property from my rental LLC to the new LLC and just let the bank foreclose.

Other than that, I don't know what options I have, simply due to the fact that I've never had this happen before.

Again, thank you in advance for any information or advice you can provide!!

[David Krulac]

@Steve Babiak is absolutely right.

I've said it many times buying at tax sales is the most hazardous way to buy real estate.

@Ralph R. that is not correct in PA.  If the OP doesn't pay the taxes then the property will go to tax sale again and he will be wiped out.

@Jesse Stephenson while you're right that the mortgage is not in the OP's name, if either the OP or the former owner don't pay the mortgage, OCWEN will bring the property to Sheriff Sale and name both the former owner and the OP. therefore the OP will have a foreclosure on his/his LLC credit record, which would inhibit them from borrowing money for maybe 5 years.

@Chris K.  Agree, I've seen many misspelling of names in the official records, or just different versions.  Some times with middle name, sometimes with middle initials, I've had my name misspelled on official records.  I've seen where there was confusion between what is a first name or a last name.  This often happens when a person's last name could be a first name like Leonard Bruce, should be indexed under Bruce, but sometimes shows up under Leonard.  It happens with common names as well as less common names.

@Ben Corby Your option 3 is not an option, if an attorney told you that, they obviously were not a tax sale/real estate attorney. The Tax Claim Bureau will automatically issue a Deed. There are other options, the $60,350 mortgage does exist, but you didn't say what the value of the property is, but the variable rate mortgage of 8.75% to 11.75% indicates several thing. First of all, only people with poor credit have 8.75% interest mortgages, when the current rate would be4% for owner occupied SFH. Secondly this mortgage is a big money maker for OCWEN, and its guaranteed by a first mortgage. They're charging second mortgage rates on a first mortgage, nice investment if you can get it.

Getting the former owner to sign a second mortgage for the amount you paid at tax sale works, if he pays, and if he signs.  He doesn't have to do either.  then collect rent from him, which he doesn't have to agree to and even if he does he may not always pay on time, if his 8.75% interest rate is any indication of his credit score, which it is.

I have another alternative.  If the house is under water with the OCWEN mortgage, then approach the mortgage holder about a short sale.  One of our mutual friends got a 50% discount from OCWEN on a mortgage, how good of a negotiator are you?

Tax Sales are HAZARDOUS, I don't know how often I have to repeat that.  Just went to a Tax Sale this month.  I've been going and buying property at this particular sale for many years.  I know all of the regular buyers.  This time there were a bunch of new faces, people I never saw before, maybe attending their first sale, maybe not knowing what they need to do.  One veteran buyer remarked to me that he didn't get any properties because the prices were so high.  One property went for almost $100,000, before increased interest in real estate investing, that property would have sold for a high of $50,000 maybe less.  People are paying crazy money, I don't know how much research they are doing if any.

One buyer bought a property that the house was torn down.  He told me after the sale that he did not know the house had been torn down and that there was a NEW $17,000 demolition lien on the property that transferred to the new owner, him.

At another sale several bidders were bidding on a house that had burn down (maybe by the owner) a few days before the tax sale.  Obviously none of they knew of the fire or looked at the property in the last few days.

At tax sale I have seen people have bought:

US Army bombing range

Expired lease on property

house with 3 walls, 4th wall missing

sliver of land 2 feet wide

50 foot cliff, access by helicopter only

land at bottom of man made lake (literally underwater property)

wetlands

flood plains

unbuildable property

failed perk test

historic dig site, can't disturb

property with no road frontage

condemned property

property already scheduled for demolition soon

former gas station with leaking gas and oil tanks underground

dry cleaning plant with toxic waste

Super fund site

chromium factory with tanks and barrels of an unknown liquid

distillery with full barrells (ATF and state government was very interested and wanted to seize and destroy those barrells)

Bigger Pockets Podcast #82