How Do You Handle $1MM Property Liens in a Wholesale Deal?
Property Liens – Are They Killing Your Deals?
There are property liens (sometimes also called code liens) and then there are PROPERTY LIENS. They can be for safety issues like unpermitted structures, faulty electrical work or having a dangerous animal. They can also be for nuisance issues like junk cars in the owner’s yard, not mowing the owner’s grass or even making too much noise. The fines can be a fixed amount. They can also be accruing every day.
Accruing fines can add up very quickly. I once had one on a property I was buying for un-mowed grass that was nine (9) years old. At $50 a day for 9 years, the total due when I was going to close was equal to 9 years x 365 days x $50 per day = $164,250. The grass had actually been mowed for the past 8.9 years!
As with most non-safety issues the county in the above grass case reduced the fine to $165, yes, that’s $165.00. That’s an extreme case. A more typical example was when one of my Students called today to tell me she got a $400,000 lien reduced to $1,250. Even large liens for $1MM+ can be negotiated if the governing municipality is not trying to “Land Bank” the property for future development.
The ultimate fines often have a lot to do with how the code enforcement officer is “handled” by the owner of the property. Ignoring a warning and then a violation notice can lead to serious consequences much later when the property owner goes to sell his home. Because of rude behavior by the owner, some very simple issues can become very problematic as time goes on. It can, however, still offer great opportunity for investors who understand how to correct the problems.
I tell Students to call or go to the municipality’s Building Department and ask about their Code Enforcement Unit. There is a specific officer assigned to the property in question. Simply tell the officer that you are going to purchase the property. Tell him you want some guidance on the issues with the property. He will usually go over what has to be done but usually will not tell you what the city will accept as a final payoff.
Some cities are very strict and will not allow any fine reduction until the violations have been repaired. They will give no guarantee as to what percentage reduction they will allow. Some municipalities allow the code officer to negotiate the liens. Most have the final number approved by the city manager or even the city commission.
In these cases where the liens or violations can’t be resolved before the B – C closing, we fully disclose to our end-buyers the liens or violations. If the end-buyer is savvy, he will go to Code Enforcement himself. Depending on his skill level at rehabbing a property, he may or may not buy the property. However, always disclose to your end-buyer the problems. Just because you have an “As Is” contract, it does not exempt you from withholding serious deficiencies from the end-buyer.
Experienced rehabbers and contractors will usually take on the Lien Issue challenge. What is most important is that the end-buyer signs a “Hold Harmless” Addendum at closing which fully discloses the issues with the property. If the end-buyer won’t sign, you may wind up losing your EMD if you can’t quickly resell it before closing. Alert the end-buyer during your inspection period of the issues. Get an extension if necessary. Cancel the contract before the inspection expires if you can’t get the end-buyer to sign.
To your limitless success,
Real Estate Mentor Program Founder