@Adam K.
Adam,
I shouldn’t have said I’d never do a tax sale again. Rather I am sufficiently skeptical and hesitant based on my own research, experience and conversations with more experienced investors. These other investors seem to think that there are enough risks and uncertainty with the law that they are not doing tax sales in New Orleans anymore.
Maybe “untested” is not the right word…I am not a lawyer, and it has been a while since I did my research, but I think that the concerns are legitimate because of several reasons. That is not to say you cannot make good money doing these. You can. I did…. It is just to say that these tax sales are not without risk, and the risk is potentially significantly more than your $3500 initial investment.
1) Not infrequently in New Orleans, properties are handed down in families through informal unwritten agreements and have not gone through probate. If that is the case, and the legal owner of the property is either dead or unknown, how do you provide good notice?
If good notice is not provided, the tax sale is basically null and void, and there is no time limit to the period in which an annulment may be brought. Some articles for you to read:
http://www.nolatitlecompany.com/tax-sale/
http://parishtaxsales.com/?p=150
http://parishtaxsales.com/?p=148#comment-329
2) If you are lucky enough to quiet the title and take ownership of the property, it is very difficult to get title insurance for the property, which may mean that you can’t sell it, or even refinance it to make improvements. See article: http://www.nolatitlecompany.com/tax-sale/
3) During the redemption period, what is your liability at the property? What if someone injures himself at your property? As the property’s deed holder are you liable? I know that some investors do take out either homeowners or liability insurance or both on their tax sale properties. You mentioned that one of your properties was a car service center, correct? What potential environmental liabilities would you inherit from this property?
4) If the property is blighted or requires any maintenance or improvements, you may be responsible for that. Even if you are not responsible, it may be in your interests to perform the repair if not doing so would mean potential liability or significant additional damage to the property (think leaky roof). Then if the property does get redeemed, I do not know if you would ever get that money back… See RS 47:2161 B(1). Also see this article: http://parishtaxsales.com/?p=434
R.S. 47:2161 B.(1) Notwithstanding any other provision of law to the contrary, in the city of New Orleans, if a tax sale purchaser has made improvements to abandoned or blighted property, as defined in R.S. 19:136.1, in order to bring the property into compliance with one or more municipal code ordinances prior to the property being redeemed, the person redeeming the property shall reimburse the tax sale purchaser for the costs of improvements required to bring the property into compliance with any such ordinances. The maximum amount of reimbursement for improvements shall be fifteen hundred dollars for abandoned property and three thousand dollars for blighted property. The maximum amount shall be per property per year.
I think for those reasons, most investors buy New Orleans tax sales for the penalty and interest. This is why I suggest that you may want to provide notice to the property owners. My strategy in my tax sale was to provide notice every year with clear instructions on how to redeem the property. I figured this gave the owner as much time as possible to get the money together to redeem the property. In the end he did, but did so literally days before the redemption period ended.
When I bought mine, I drove by the property before the sale, to assess the condition. It was an inhabited and very well maintained duplex in a nice area of uptown. After the tax sale, I did more research on the property, and I found out that the home was owned by three sisters who were all deceased. They had numerous offspring, and it would have been nearly impossible for me to identify and provide notice to all of them. Through more research, I found out that the property was inhabited by two brothers (one in each unit) who were sons of one of the deceased sisters. Both brothers were in their 70’s or so, and one of the brother was moving to Houston for cancer treatment. The other was deaf and legally blind (I’m not making this up).
Once I found all this out, I decided that taking ownership would not be in my best interests, and the only way I’d be successful was by the strategy I mention above.
You also mention in your second post that you only invested $3500. Keep in mind that if the owners wait until the end of the redemption period to redeem, then you could be paying 3, 4 or even 5 years of taxes on the property. I don’t know what the tax bills on your properties are, but the total outlay could add up.
As far as the strategy to not pay the subsequent years taxes, I don’t think its silly at all. I didn’t pursue that strategy, but I think it depends on what your goals are, and what type of properties you bought. The reasons why you would cede the 1st lien position are 1) you let someone else take the liability risks I mention above and 2) your first outlay of cash earns 17% (5% penalty plus 1% for 12months), each subsequent year you pay taxes, your additional money is only earning 12%. 17% is better than 12%. That is a better return, for less risk, and allows you to diversify into more properties… Those all seem like good reasons to me.
I hope that you find all this helpful.
Best of luck.
