Are Properties with Liens Still Good for a Wholesale Deal??

Question

My cousin & his father are trying to sell there Multi-Family Property and it has a sewer/water liens on it and i wanted to put it under contract. But was wondering if this is something i should go after? Who would be responsible to pay they liens? or can you even do a wholesale on this? Im a novice, so please help!!

Dion DePaoli · Answer

Ibrahim S, a discussion worth a different thread for sure.  In brief though.

You state, "This is why I say the fmv of the property, that is what the market of buyers is willing to pay for the property, must exceed the payoff liens (by a certain amount) for this to make sense to the wholesaler and rehabber."

When a buyer and seller consummate an arm's length transaction in an open market at a specific time, that is the Fair Market Value.

To require "must exceed payoff" is not true in call cases.  This excludes the capacity for a buyer to purchase with said lien and recover the capital used to extinguish those liens.  That happens often and almost daily in today's distressed real estate environment.  The capital recovery can come by way of improvement to the physical property, increase cash flow or even removal of the liens with neither of the former.  Brownfield and redfield projects take advantage of this from time to time.  The value of the property without the liens would be a Future Value and technically an estimate until such time a future buyer and seller consummate a transaction at that number in the future.  Present has liens, future does not have liens.

Future Value is often used but not cited when wholesale types reference Fair Market Value.  That does not make the reference correct.  When you purchase a house from the court house steps and take the deed subject to liens, you paid the Fair Market Value for that asset at that time, liens and condition included.  When you purchase an asset in need of capital improvements, you purchase the asset at fair market value with the intention of investing additional capital to take advantage of a future value where the improvements have been made.  Or in our case, the liens are removed.

My statement "when they execute" is the execution of sale not contract.  A contract does not define value since both or either parties may back out.  Further, duty for profit, while predominate is not always the driving force behind a transaction.  Again, as recent market conditions show us, a sale can be driven by a desire avoid current and/or future liabilities.  This situation may warrant such an event.

Ibrahim Hughes · Answer

Skip my last reply Dion.  I think I missed that you were approaching it from a legal standpoint and that you were speaking of the OP's need to get clear and marketable title.

I was speaking and looking at your email from a financial standpoint. Does it make sense numbers wise. Hence where my point about the fmv. My apologies.

Ibrahim Hughes · Answer

This doesn't really appear to be an issue of semantics.

(IMO) Naming a sale price doesn't necessarily create a sale. Nor does creating a sale necessarily produce a profit.

While the sale price and maybe even market value may be created at the execution of the contract (although if Nicholas is the only one willing to pay a ridiculous price for the property I wonder if he really represents the market), Equity and profit, which Nicholas' and his end buyer seek, isn't necessarily.  This is why I say the fmv of the property, that is what the market of buyers is willing to pay for the property, must exceed the payoff liens (by a certain amount) for this to make sense to the wholesaler and rehabber.

Joel Owens · Answer

"There are vacant 4 plexs in Birmingham that have sewer liens in the thousands of dollars against them."

Try dealing with 50,100,150 unit properties with water liens on them.Atlanta keeps compounding the fees over and over.

I have seen some of these liens reach in the hundreds of thousands of dollars.

Water is like liquid gold these days which is why I like separate meters for water with tenants.

If not they use 30 to 35% more on average when it is included in the rent payment.

Dion DePaoli · Answer

No, I mean sale price.  'Naming' a sale price, does not create a sale.  An agreement between buyer and seller on a number, the sale price, creates market value when they execute.  Fair market value is not this 'other thing' which some commonly refer to.  But I digress, we will not debate the semantics of that topic here.

Nicholas Hubbard · Answer

Thanks guys, you really helped me understand. I will take all this into consideration.

Ibrahim Hughes · Answer

I think you mean fair market value (typo)? Nicholas can name any price he or they want and easily exceed the lien payoff amount. But should he? That depends on the fmv and whether or not there's enough room for his end buyer to pick it up at a good price and for Nicholas earn a fee.

Nicholas - since you're dealing with family, and assuming as Dion alluded to that the numbers make sense at the end of the day, you will want to fully disclose to your kin folk that you are making a buck by finding them an end buyer who will purchase your contract (and in essence, their property).

George Gray · Answer

Same thing in Birmingham.  Water and sewer liens survive almost everything.  I have heard of some folks in our REIA being able to negotiate these down, but it is on a case by case basis. There are vacant 4 plexs in Birmingham that have sewer liens in the thousands of dollars against them.  The bottom line is you won't be able to get the water turned on until the lien is dealt with, which makes the property unihabitable.  If you are serious about pursuing the deal, check with the water and sewer authority yourself, and then have a title company search the public records.  Good Luck!!

Nicholas Hubbard · Answer

Okay..im in st.louis..i will do that!!

Joel Owens · Answer

Where the property is located state,county,city makes a huge difference with these types of liens.

In Fulton county GA for instance water/sewer liens survive the foreclosure process.So you have to negotiate with the Atlanta Watershed department.

So research where this property is at first to know what you are dealing with.