So, I am looking for a vacation/rental property and came across the Department of Treasury auction web site. Some interesting stuff on there, but the list of encumbrances are really confusing.
One property has a list of eight notices of federal tax liens. Are they all owed by the buyer of the property? Or is the buying price used to pay them off?
If I add them all up, they come to approximately 2.5 million. That seems wee bit high, and would eliminate all but the most aggressive of bidders.
For taxes, I believe the IRS places a lien for the full amount of the debt against any property that the debtor owns.
So if a debtor owns a $200,000 house, a $30,000 lake cabin, a $6,000 used car, etc. and owes $500,000 in taxes, the IRS will place a $500,000 lien against each of those items.
Yes, a half-million dollar lien against a $6,000 car is kinda ridiculous – nobod’s going to buy that used car for enough to pay off the lien. It’s more a way for the IRS to keep them from liquidating the property for cash. And a way to put pressure on them to make payment arrangements.
You mean that you’ve had a reputable title company do a search on the property in question and have obtained from them a guarantee that there are no other matters of record that would affect a clean title?
If you just mean that the website didn’t mention to you any other liens on the property… well, I would read the terms of the auction very carefully indeed.
I don’t have experience with federal tax lien auctions, but you would be an utter fool to buy anything from a more typical bank foreclosure without a title search.
Title Offered: Only the right, title and interest of the Taxpayer in and to the property will be offered for sale. If requested, the Internal Revenue Service will furnish information about possible encumbrances, which may be useful in determining the value of the interest being sold.
Look, suppose there is a house worth $500,000
Encumberance to IRS: $200,000
Encumberance/Lien - mortgage (eg bank):$250,000
The wording implies both the IRS debt and Mortage are to be paid by the buyer SEPARATELY after the action. So for this property, you would not bid over $50000
If the IRS encumbrances were worth more than the property , they would sell it outright, no encumbrance.
If the mortgage amounts are too high, the property would be foreclosed by the mortgage holder.
IRS chose to sell with encumbrances when there is a mortgage as this reduces the complication of getting the mortgage cleared upfront and by them at their own effort. All the lawyers fees to clear the mortgage and so on.
The existance of the mortgage suits some buyers… they can repay the mortgage as per the original mortgage terms.
Hmm… I don’t think the relative sizes of the debts determine if a foreclosure is done. Banks foreclose on ‘underwater’ properties all the time, but they are quite willing and able to foreclose on properties that have equity as well. The latter is less common because a rational actor owning a property with equity would simply sell it themselves the standard way (for a better price than a foreclosure would generate) pay off the debt in full and pocket the difference.
If the owners persist in defaulting on the mortgage and choose not to sell it themselves during the lengthy foreclosure process, banks are certainly willing to go ahead and foreclose on a property with equity. In fact, the former owners may get the ‘surplus’ cash from the foreclosure auction if the bidding exceeds the total debt owed plus all costs. (State law varies as to how this happens.)
Not all mortgages can be assumed by a new buyer. Back in '81-82, when the lowest rate for a purchase-money first for the most creditworthy customer was 17%, the only houses selling were one with old assumable mortgages*. It came down to whether the bank had a State or Federal Charter - and banks were rapidly re-chartering to eliminate the assumability of there mortgages.
Or sellers willing to finance 80% or more at a reasonable rate, so the purchaser need borrow but a few pennies at 17%.
is that what it means? I assume the IRS is selling the property to recover their lien, meaning any additional encumbrances are the new owner’s problem, but the IRS collects money that hopefully pays most or all of their money owed. Otherwise, this would be pretty bizarre. You give the IRS $50,000 and then they want you to immediately pay another $200,000 while they pass the $50,000 to the previous owner?
More likely, you buy the property with all other encumbrances, and the IRS will pocket what it was owed, and if they are satisfied the previous owner is square with them, they pass the remaining money on to him. What you are then left with is “…the right, title and interest of the Taxpayer in and to the property…” before he was accosted by the IRS?
That is my main question. If the property has been seized by the IRS, and is up for auction, I would assume that the selling amount would go to the IRS first, removing whatever tax lien was on the property.
I would also imagine that the IRS seizing his property does not remove the obligation the original owner has as the name on the mortgage (nor does it oblige the new owner to pay it). Simply though, if the original owner does not pay, the mortgage holder forecloses. So, it’s in the interest of the new owner to re-arrange the mortgage. It’s also not in the new owner’s interest to bid much higher than the IRS lien, since he’s basically handing the previous owner his equity money free and clear while assuming the hassle of re-arranging the mortgage, paperwork, etc. Ideally that extra should go to the mortgage holder, but that’s not the previous owner’s problem or concern - unless the bank can put a hold on the payment until the mortgage is sorted out.
Why would the mortgage holder be able to foreclose on my property when I do not have a contract with them? Mortgages are tied to the person not the property.
The lien IIRC is tied to the property, no matter what the title says for owner, unless the IRS auction process removes that lien. Which, it appears the auction claims it explicitly does not do.
(or the lien-holder has it removed because it was paid)
Auction is a bonus for the lien-holder, is it not? IANAL, but the original owner who could not pay the debt is replaced by someone who is more motivated and likely more able to pay the mortgage. IANAL, but I think in most states the mortgage holder is not obliged to simply replace the name on the mortgage, the entire mortgage must be renegotiated. Of course, the new owner could refinance by taking his business elsewhere and pay off the original mortgage, provided the equity is there - so both sides are motivated to find a deal.
I think that’s wrong. Otherwise it would be easier for someone to take over payments. You know what though? I just bought a house and I need to check that the principal paid at closing matches between the title company* and the lender. I’ll ask the lender about if a mortgage is tied to the property or the owner. I invest in property tax liens so it’s never been an issue for me but you never know later on.
*Our broker told us that the title company would pay us back for being over the down payment by cutting us a $3K-$4K check when we closed. Apparently title companies never do that (please confirm or deny) and they “gave it to us” by putting it into the mortgage.
A typical mortgage is both a debt payable by the person and a lien on the property itself enforceable by foreclosure; it has to be that way so that it’s harder to wiggle out of. Often the borrower signs two separate documents (sometimes a Deed and a Note) that separate these functions.
Typically it’s possible for the bank to choose to treat a mortgage like an unsecured loan and sue the borrower directly rather than foreclose. The easiest example is when someone has a second mortgage on a property that is now worth less than the amount owed on the first mortgage. The holder of the second mortgage can then basically ignore the fact that there’s a property involved at all and simply sue the person who signed the contract (the Note) for lack of payment of debt. If the person or company has deep enough pockets this tactic can apply even to the only mortgage on a property that’s underwater.
There can be a lot of variation by state on this though.
The ability to take over payments is strongly dependent on how the original contract was worded. If it says that changing ownership without consent of the bank is considered a default on the loan, then they can foreclose if that condition is met. Most modern mortgages (or deeds of trust) have such verbiage.
Selling - transfer of title without settling the mortgage - is a liability for everyone. The seller still owes a large amount of money, but now has no control to guarantee the property remains worth enough to satisfy the debt.
Buying - the buyer has to rely on the seller’s terms - as you mention, there may be a clause that allows the bank to foreclose. (Not sure how an IRS forced auction relates to a sale, whether the clause kicks in. In a logical and perfect world, it would. They may have spent a lot of money and find they don’t acquire a lot of rights.
Mortgagor - has to rely on the new owner, who may not be as heavily invested in the property. They trash the place, skip payments, and it’s not their credit rating that suffers. (Famously in Canada, in the early 80’s Alberta had mandatory mortgage transfer. A number of people would buy an underwater mortgage, skip payments and live rent-free for the next year until foreclosure.
Yes. Briefly, competing liens work on a seniority principle. If Bank X loans you money to buy a house, and then takes out a mortgage on the house, it holds the senior interest. If Bank Y then loans you money to build a pool, and takes a second mortgage, it now holds a junior interest. Let’s say somewhere in between the IRS placed a tax lien on the house.
We now have three lien interests, in the following order of priority:
Bank X
IRS
Bank Y
Any of these interestholders can foreclose in the event of a default on their loan. How that affects the other interests depends on seniority. If Bank Y forecloses, the property will be sold at auction. Because Bank X and the IRS have senior interests, the auction buyer will take subject to their mortgages. Y will get all the money it is owed, and the rest goes back to the homeowner-borrower, assuming there is excess.
Conversely, if Bank X forecloses, the sale will extinguish Y’s interest because it is a junior lienor (it would also extinguish the IRS’ interest except that federal law says it can’t.) So the auction buyer will take subject to the IRS’ interest. Bank X will get what it is owed, and Bank Y will get whatever is left. If there isn’t enough to pay Bank Y, tough titties to them (junior lienors have the opportunity to pay off senior interests themselves to preserve their own right to foreclose). If there is enough to pay both of them the borrower gets the remainder.
If the IRS forecloses, Bank X’s mortgage remains in place because it is senior. Bank Y’s mortgage is extinguished because it is junior, though it again gets the leftover money.
No. The note is tied to the person. The mortgage is tied to the collateral. If you buy property that is subject to a prior (senior) mortgage, the original borrower is personally liable for the loan balance, but you take the property subject to the mortgage. If the borrower defaults, the bank can foreclose, even though the property is now yours.
Please cite the federal law because that is not logical. What you’re saying is that federal law places the IRS lien before the first mortgage. How many banks would lend money if that was possible?
Suppose a property is worth $300k with a $220k first mortgage. The IRS places a $140k lien on the property. The buyer abandons the property, so the bank forecloses. If the buyer had to assume the $140k IRS lien, then his bid would only be $160 ($300k-140k). That means that the bank is the loser of $60k. No, the true scenario is that the bank, being first lienholder takes their $220k and hands the IRS a check for $80k. The remaining $60k is an unsecured debt to the IRS from the seller.
With the exception of property taxes and some delinquent condo fees, liens are satisfied in chronological order. Anyone can bid at a foreclosure auction, including any lienholder who thinks the bid is too low.
Note the wording - you as buyer are purchasing the “right, title and interest of the Taxpayer”. I assume this means if there is also a mortgage on the property, or other liens, the IRS is not paying them off. OTOH, you would bid perceived value of the property minus those encumbrances… and it’s up to you to be sure you’ve found them all. (IIRC if they are not registered at land titles office, they don’t exist in law?)
The IRS likely does this to avoid having to go through the whole process of finding and settling other liens - they’ll leave that up to the new buyer.
Of course, having taken the previous owners title, you are now motivated to find and settle other outstanding debts - simply because the “Taxpayer” now has even less motivation to pay these, so you may find the property foreclosed on - at which point your only value is what’s left over after the next auction.
I assume the IRS has some special permission in law to seize and auction the “right, title and interest of the Taxpayer” bypassing the traditional foreclosure process and probably speeding up their cash recovery.
Who can bid at a foreclosure auction varies by state. Often this will include anyone, but that’s not true in all states. The trustee is forbidden from bidding in some states, for example.
There are a few other exceptions to strict chronological order.
Chronological order priority is by the order the documents were actually recorded by the county, not the date the documents were (allegedly) signed. This is necessary to prevent deliberate backdating of documents, but can make things interesting if a lender doesn’t record a mortgage promptly.
Subordination agreements, wherein the chronologically senior lienholder formally agrees to become junior in consideration to some other lien. Sometimes this is done where the same bank holds both liens but accidentally records them out of order. Banks do this for other banks occasionally, though I don’t know why they choose to agree to do this.
Utility liens (e.g. unpaid sewer bill, water bill) will typically not be extinguished by a foreclosure, for reasons similar to those for property taxes. In some cases municipal fines levied on the property may also not be extinguished.
Depending on the state, mechanic’s liens can have anomalous priority. This could be, for example, a lien on the property by the general contractor due to lack of payment for a major renovation. Rather than the recording date, in some states the priority of such a mechanic’s lien may be retroactive to the date the work started.