EP70: The Dangers of Taxes (Must Do Methods)

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In this episode, we talk about taxes and why they are so important in due diligence. Checking the taxes on non-performing notes is always a must but it is just as important to check taxes on performing mortgages. 

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Transcript

ep70-the-dangers-of-taxes-must-do-methods 
 

Rick Allen: [00:00:00] Coming to you from sunny Orlando, Florida, welcome to the paper stack podcast, where we cover current topics in the note industry, give you tactics for your note business and talk with industry leaders to make you a better note investor. And now your hosts, Brett Berkey and Rick Allen. Hello, welcome to  

Brett Burky: another episode of the paper stack podcast. 

Brett Burky: I am Brett Berkey  

Rick Allen: and this is Rick Allen. Yep. Back at you again from the studio. That's right.  

Brett Burky: So today we're going to cover something that's pretty interesting. It is tax season. It's  

Rick Allen: Income tax season But it's also real estate tax season. Today Brett had a topic of taxes real estate taxes and really it's the dangers of taxes They are, oh man, taxes are just like, you just got to be careful. 

Brett Burky: Yep, we saw one happen on Paperstack where it was, felt sorry, but the guy didn't check the taxes. It was like a low balance loan. And we're like, why didn't you get an owner, why didn't you get an owner report? Why didn't you check [00:01:00] the taxes? He's it's only, you need to.  

Rick Allen: You need to. 

Rick Allen: Yeah, taxes were like 16 grand past due. And look, here's the thing about taxes is. There's like, when I learned this business, I was told there's three things that will kill you.  

Brett Burky: Oh, I think I know. Blight, taxes, I don't know. What's the third one? Title.  

Rick Allen: Title. Title, taxes, and blight. We're going to talk today about taxes. 

Rick Allen: And like, why... It's so important to do a tax search, but there's stuff in like the rust over the  

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Rick Allen: There's [00:03:00] certain states like Florida has pretty low real estate taxes. Definitely Ohio and Illinois, where you can have a 100, 000 house and it's got 7, 000 in real estate taxes.  

Brett Burky: Can you say something like Oklahoma was super  

Rick Allen: high? I don't know if Oklahoma is super high. But there's definitely areas that have high taxes, right? 

Rick Allen: And when you're looking at, when you're looking at assets, it's really important, especially on non performing stuff. to do a tax search. How much is a tax search? Oh, it's cheap. It's 80 bucks. So 80 bucks to... Or 85 bucks. It's like nothing.  

Brett Burky: And so you get it back and they'll go through... 

Brett Burky: and they... Why can't  

Rick Allen: you do it yourself? You can do it yourself, but a lot of times what people do is they will go onto the county website. And they'll look and they'll see, Oh, taxes are paid. And it may show that taxes are paid, but there's, you may have to call and find out were there any tax liens sold, right? 

Rick Allen: Because if I buy a tax lien, I'm, I can make, 12, 15, 18% on [00:04:00] my money in a tax lien. I'm motivated to keep the taxes being paid at that point because then after X amount of, two years, I can apply for a tax deed. Now, each state. Has their own specific real estate tax laws, so you need to figure out what those are. 

Rick Allen: I know in the state of Florida, after two years you apply for a tax deed and once you, if you get a tax deed, it wipes out. It takes precedence in the, it no, you no longer have precedence if you're a first position mortgage holder. Real estate taxes are huge. It's very important that you pay attention to that. 

Rick Allen: Another thing you want to understand is, notice I said county taxes. There are city taxes in some areas as well.  

Brett Burky: State taxes? Huh? And state  

Rick Allen: taxes too? No, mostly it's just county and city. So you'll have to, because each county and state doesn't really... So are you checking two different parts of a website or two different... 

Rick Allen: Yeah, no, it's two different websites. Oh gosh.  

Brett Burky: But if you got like an O& E report,  

Rick Allen: those both would be in there? Typically on an O& E report, but you want [00:05:00] to, an O& E report's going to cover... The title, transfers a title, it'll, it maybe will catch some liens, but you want to pay for the extra tax search on there because sometimes it doesn't do it. 

Rick Allen: You want people calling. You don't just want somebody going online and looking. You want people picking up the phone calling. Are there any additional tax liens on here that I should know about? Tax has been sold. Because the last thing you want to do is get hit with a, Hey, you lose the property. You lose your positioning on the property because of taxes. 

Rick Allen: But then if you get in there and start buying an asset and you're thinking like the person on our website or on paper stack, it was a 4, 000 purchase price, right? And they're like, Oh, they thought they stole this thing. And what was it? A second, right? No, it was a first, a 4, 000 first. And yeah, there was a 16, 000 tax lien on it. 

Rick Allen: It sucks. And so now the next thing you know is you're into it for 20 grand and you're like, I didn't know I had to put 20 grand out and hey, it's happened to, it's happened to people. You learn it [00:06:00] one way or the other. You're either going to listen to this and learn it and pay the money or you're going to get stung with it one time and pray that you've got enough juice in there. 

Rick Allen: Have you ever been stung? Yeah. Yeah, we got nipped with one, but we were buying non performing. How did  

Brett Burky: you, what, you didn't,  

Rick Allen: you didn't have your process in place? We missed, we just missed it. We were doing it, picking up the phone, calling, and it was, we missed a, I think it was, we missed a city. A city tax. 

Rick Allen: Instead of a county?  

Brett Burky: So you tell the county, and you just, and how'd you find out?  

Rick Allen: When we got something in the mail that says, Hey, by the way, you owe, six or seven thousand dollars. It's oh, but that's why it, when you go to buy them, you're just like, I'm going to go ahead and just pay for your due diligence reports or else you'll pay for  

Brett Burky: it later on. 

Brett Burky: So O& E and then you, it's just, what's an upcharge  

Rick Allen: for the tax? Yeah, there'll be separate tax stuff. And so they'll usually bundle it up we can check pro title. Just hold on one second. Yeah. So pro title, you can definitely, when you order the O& E report, it already has a tax report in there. 

Rick Allen: Different [00:07:00] due diligence companies have, you have to order a separate tax surge or the option to just order a tax surge, but like pro title. Their O& E report is comprehensive and comes with a complete tax search. So interesting. Yeah, tax is definitely important to focus on the taxes. And understand that you're going to have to pay them. 

Rick Allen: It becomes less of an issue on escrowed performing stuff, but still something you should always  

Brett Burky: check. Even if it's performing, always check taxes. Yeah, I always check the taxes, yeah. Let me ask you a question. With the taxes, do they say I get a tax bill, is it usually do they come out? Only twice a year, so you have some time to get that money saved, or it's you get the bill in the mail, it's due that day. 

Rick Allen: Most of the time, how it'll work is, you'll get the the taxes for the prior year.  

Brett Burky: Oh, so it's already late, okay.  

Rick Allen: No, it's not already late, but what'll happen is usually they'll give them to you... In November, right? And they'll say, and they'll have a graduated payment. Look, if you pay it by this date, the taxes are this much. 

Rick Allen: If you pay it by this date, they're [00:08:00] this much. And then if you pay them by the end of March, it's like you pay the full amount. So they'll usually give you a discount if you pay them early. And that's why with escrow accounts, you pre fund those accounts.  

Brett Burky: So let me ask you a question. If you had a non performing note, you take it back, you're trying to work with the bar, but they have these back taxes,  

Rick Allen: You've already taken the  

Brett Burky: property back? 

Brett Burky: Oh, you're, no, you're still working with them. Okay, so you haven't taken it back yet. You haven't taken it back. In that sense, if you got them performing again, who's paying these taxes?  

Rick Allen: There's a couple different options there. You as the lien holder can pay them and then, you can put them on the loan or have, have a negative escrow and it goes against the total payoff. 

Rick Allen: Usually what I do is I try to say, look, if you wanna keep your house I need 5, 000 in earnest money to deposit and I need the taxes paid. You haven't done, you haven't paid the taxes need to be paid. And if they want to keep the house, they'll get it done. If they don't, they won't. 

Brett Burky: Interesting. Yeah. Wow. It's always, and then, if they do get out, then, of [00:09:00] course, you pay the taxes. Correct. But if they turn and pay, then you either can restructure the loan, throw it into the back end, you'll put, that's correct. Which could actually be pretty good for you, because if you do that, now you've restructured the entire loan to be a brand new mortgage, not an amortization  

Rick Allen: schedule. 

Rick Allen: A hundred percent. And you can re... Anytime that you have a chance to talk to the borrower and if they're, if they, you need help or they need help like restructuring the loan to cover taxes or anything, it's a prime opportunity to fill in the gaps on the loan. So if there's deficiencies in the title or something like that, you can essentially have them sign something saying you're the rightful owner or something like that. 

Rick Allen: Talk to your attorney. I got that again, but it's a very good time to fill in the gaps. Okay. So bottom line with this, strengthen your legal stance.  

Brett Burky: Gotcha. So bottom line, if you're taking anything out of this guys, check the taxes. I'm performing and non performing, but always do it. 

Brett Burky: Cause it could come to bite you in the butt. If you [00:10:00] don't, and you don't want to lose your position and you can lose your whole investment. I'm a tax attorney, so I don't know. Yeah, besides that, of course, go get the reports. The O& E doesn't cover it. You're going to need the  

Rick Allen: tax writer. 

Rick Allen: Some O& Es will have it, but other ones you'll have to order a tax report, or you can just order the tax report separate. Get the tax report. That's 80 bucks. Go check. It's different with everybody. Oh, okay. It's minimal compared to... Losing the house or getting stuck with a 14, 000 tax  

Brett Burky: bill. 
 

Brett Burky: Yeah. Okay. Yeah. Good stuff. I think that's pretty much it. Just make sure you check the taxes and that's it. So we'll see you in the next one. If you have your own questions for us by us, Rick please let us know and we'll be sure to answer them. Yep. Yeah. So guys have a great rest of the week and we'll see you soon. 

Brett Burky: Thanks.