Understanding Surplus Funds: Tax Sales & Foreclosures

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What is an overage? What does it mean when somebody has a tax overage or foreclosure overage? Well, we'll be discussing that on today's episode of the Note Closure Show. Good morning, good afternoon, good evening everybody. Welcome to this episode of the Note Closure Show. As always, Scott Carson, Excited to be here with you today. Today's episode is dedicated to a special person, somebody who asked a question on one of my recent replay videos when it went live on LinkedIn. I have to give it up to Khadijah Larimore. Hey Khadijah, thank you for asking the question. And this episode is all about for you. So Khadijah asked the question, can you talk a little bit more about overages Now? Let's talk about overages real fast. There's kind of in the mortgage space you'll see or overages on a couple of situations, you'll see overages on a tax sale or on a foreclosure sale. Now an overage is when a it occurs when at a foreclosure with a tax or traditional foreclosure, when the bid on that foreclosure gets bid up above what's owed, above taxes, above the foreclosure mortgage. Let me give you an example. Let's talk about first, on a tax sale, counties will take, you know, will either file a certificate or they'll do a tax sale after a couple years of taxes not being paid. Right. So when a tax sale comes due, the county takes the property of the tax auction, Right. Which happens the first Tuesday of the month here in Texas. It happens elsewhere all across here. So let's say the county's owed 10 grand, we'll say the property is worth a hundred grand. Simple math, right? So tax sale taxes are superior liens to everything. Can wipe out stuff and wipe out mortgages first, second, stuff like that. So county takes the, you know, they send out statements to the lender, let them know, tax out to the borrowers, let them know, nobody responds. The auction takes place, crier for the county gets on there and you know, it's usually a tax story gets on their sheriff sale, gets on there. So okay, we'll start the opening bid at 10,000. Boom. So many bids because there are a lot of investors like oh, I'll bet 10,000 that may get up, bid up, let's just say to 50,000 because that's still a pretty good deal for a foreclosure investor to take down a property at 50 cents on the dollar. So 50,000 is bid going once, twice, sold. The Investor pays the $50,000 to the county, the county out of that 50 takes the $10,000 in to pay their taxes. Well that leaves $40,000 sitting in an overage account that's sitting there at the county waiting for the first lien holder, the mortgage company to claim it. And we've done this actually quite a few times when we bought portfolios, especially when we bought where it's an all in offer, we gotta buy everything. We have found that some of the properties went to tax sale and there was an overage waiting out there for the first lien holder to claim it. Now most, most states, most counties, if there's a mortgage, a first lien, they have the right to claim that overage first. So like let's go back to this example I gave you. Let's say 90,000 is owed on the mortgage, okay. On a hundred thousand dollar value house tax sale for 10, it gets bid at 50. Well the mortgage company can claim that $40,000 overage because they're in the first lien. What you're going to need to show is that you have the right to collect in a payoff amount greater than that 40. So they, if the mortgage company which screwed up, they're, they're actually out 40 grand because they only got actually 50 grand because 90 was owed, they only got paid 40,000 there. That's not a good thing. This is why it's important to record the assignments of mortgage when you buy a note so that you're alerted when a pending tax sale is going to take place. Now if that was the originating bank and they Were into it for 90. Yeah, they're out 50 grand. You know, finance 90. They only got paid 40. The tax sale, that's not a good situation. Right. This is why you'll see a lot of banks or lending institutions, they want to escrow taxes, insurance, up to, you know, 80% of the value. Now, in some states, it's the borrower can claim the overage. It's. It's like first to show up, like an Indian, I believe it's its first two shows up. Whether it's the borrower or the mortgage holder, whoever shows up first can claim that overage on behalf of themselves. Okay, now how we've used this in our favor a couple times is when we were buying, looking at buying notes, we saw that stuff had gone to tax sale, and we would call the county and say, okay, I see this went to tax sale last year, two years ago. Is there an overage? And they would pull up like, yeah, There was only five grand owed. It sold for 70 grand. There's a $70,000 overage sitting in either unclaimed funds or at the tax tax office waiting for somebody to claim it. And so we would often, you know, say we're funding this whole portfolio. Say, no, immediately that we've got this over. Sit down there. Sometimes we paid five grand for a note and we ended up collecting 70 grand. We've collected up to as much as 100 grand in a tax overage before. An overage for tax sale, foreclosure overage that we were able to take back. Now, that's on the taxes side. Taxes come first. That money sitting there. Let's talk about a tax. I'm sorry, let's talk about a mortgage, foreclosure overage. Okay, so let's take that same example. Let's say I'm going to foreclose on that house. And let's say instead of being worth 100, it's worth 150. Well, I'm owed 90. Borrower hasn't paid up to time. We. We get a judgment, final judgment in the amount that's owed. We take it to the foreclosure auction. Our highest bid is 90,000, because that's all that we're owed is the bank. We can't claim more than what we're owed. But investors come in, you know, the whole auction situation. Well, the auctions, let's say they bid it to 120, it's worth 150, right? So they bid it to up to 80% of value. So an investor pays that 120. I as the bank get my 90 because that's what I do. I'm claiming. So 120 paid by the investor. 90 is due to me. That leaves $30,000 sitting in overage at the county, usually for a year or two before it goes to unclaimed funds. So the borrower has the right to claim that $30,000 because the first lien got wiped out.

Okay.

Now if nobody bids at the auction, then I take that, you know, I as the bank would take that property back. I can then sell it for. For whatever I want to. Okay. If I want to actually take the property back and not risk going to foreclosure, I could actually offer the borrower cash for keys or deed in lieu to avoid a foreclosure on the record, or give some cash for the equity to take the property back to avoid losing it at a foreclosure auction or getting outbid, which we've done this before. Okay, We've done it before. So in. And there are people out there that track the foreclosure auctions. We've got one of our students who's a note investor who closes on performing non performance. But he also tracks foreclosure overages and tax sales across the major states. Here in Texas, he's actually from Canada, and he uses a VA to pull the tax records and foreclosure sales the first Tuesday of the month to see if there's an overage with the bit the judgment map for was and then how much, you know, how much did it bid above. And he makes a good. I think he charges like 25 of the overage amount to help borrowers claim that. Now here's the great thing about it. A lot of times these overages are sitting out there. The borrowers don't know they exist. Or it's maybe with a vacant property that somebody in the family, like grandma, grandpa or aunt, uncle, they passed away and the, the heirs have the right to claim that for that overage. So Cal does a good job in helping them, you know, track that stuff down and make money. And he makes a little bit of money, but he helps those folks collect that. And in some places you got to hire an attorney. Like in Harris county, which is Houston, Texas, you have to hire an attorney and I got to pay the attorney a thousand bucks to go before the courts to. I got to provide them a payoff statement, assignment of mortgage and that stuff. And they'll go and claim that on our behalf. I can't show up and claim it I actually have an attorney. And some more and more counties are doing that because they want to make a little more difficult for people to collect because that's money sitting out there that they could technically use if nobody claims, you know, which is. I don't think that's a good thing. But anyway, we've actually used a tax sale, though, to make money on a deal before. And I'll give you an example. This was actually in Houston, Texas, Harris County. We bought this note on this property. I want to say I paid. Actually paid like 25 grand for this note. Okay. It wasn't the greatest part of Houston. The house was worth about 100,000, 75,100. Well, borrower left. We were trying to do a foreclosure. We did a foreclosure on it, and we kept having squatters move into the property. Okay. They kept moving into it. They kept trashing the place and moving into it. And so I just said, it doesn't make any sense. It wasn't the greatest part of town. We bought it as a part of a bulk offer. Okay. So we're sitting at. Okay. We know the property would sell for a hundred, but we're like, I'm not going to rehab the property. Keep getting it trashed out and the stuff stripped out. So we just sat on it for two years. Okay. And a tax sale is coming up. Taxes would do it. Well, I'm not paying the taxes. We will use the tax sale to clean up the title and get paid without having to rehab the property. I know sounds a little shady, but completely legal. Okay. So remember, we were into this deal for 25. As it sit, was worth about a hundred. If we could get 50k for it, as at a tax sale, we'd be sitting fine. So taxes own like 10 grand. I think 10 to 15 grand. Tax sale. Tax sale comes, we send somebody the auction to bid up the property. Yep, we totally do that. So goes to cry gets up there, One of our reps was there and bid this tax sale up. There's other people bidding on the asset. I mean, a lot of stuff in Houston goes crazy at the Harris county tax roll. There'll be hundreds of people there. So somebody was bidding on it because they pulled a quick Zillow value, and a Zillow value showed like 110, 120 on this property. We knew it was only worth about a hundred, but somebody bid $90,000 on this asset and we. And, you know, sold. Well, that's fine. 15 grand went to the county. 15 grand from 90,000 is $65,000 in a tax overage. Well, we're the first lien holder borrow, owed more than a hundred grand on it. So we gave the documents, the payoff statement to the attorney for a thousand bucks and he went and was able to claim that $65,000 overage to me, which was good. We still ended up making $40,000 on this deal, but we're only into it for roughly 30, 25,000 plus you know, some of the repairs and stuff like that we were able to offset and stuff like that. But still a good deal. So we've used that attack sale and we've bought non performing notes at a big discount to help speed up the foreclosure. Or if there's issues with like the collateral file, if we don't get a clean chain of assignments or a clean. We're missing an assignment somewhere in the middle. A hard time foreclosing on a regular on a clean basis, then we may use a tax sale to get that foreclosure to go through, knowing that we can still claim that overage because we can show that we're the most recent assignment and a payoff statement. So we've used that a couple. We actually just used this on another deal in Miami to leverage against the bar. This was a deal that had been going on for roughly three years. Going, yeah, two plus years. We're in a third year. And this was a deal. We bought a note. We bought the note. On this one, they owed $168,000 in the mortgage. We bought a hunt. We paid it for 100,000. It's in a high rise hotel, high rise condo, nice looking condo. And we're like, oh, it's worth 200. They owe 160. I mean they owe technically us 168. We paid $100,000 for the mortgage. And then guess what? Covid kicked in, right? So it takes us a year going through Covid, another year going back and forth. And the weird thing, it was weird because it was the. The LLC was on the note, but somehow at the county, it was in the name of the three borrowers who were all international borrowers. Ukraine, Northern Africa and someplace else. I don't know. So it's one thing we're like, that's. And we couldn't foreclose because we couldn't serve these three yahoos. It was a weird thing in Miami that the borrowers on title didn't match up with the name of the llc. I mean, the LLC was the name of the loan. But when it was filed to the title, it showed up with three individuals. I don't know how they were able to do that. Anyway, it was a tricky aspect. Well, we kept having delays, couldn't serve the borrowers and the judge wouldn't allow us just to publicize that. They said, you've got to serve them. So we're getting up and lo and behold, here comes the third year of the taxes and we're like, oh, we could bid now the house is worth. At this point, the condo had appreciated to like 270 to $300,000 had gone up some. So. Well, what we could do is we could actually bid this thing up at the tax auction. If it's worth 300, we could bid this up to 168 and you know, if it gets bid up, you know, beyond 168, we're good. If it gets bit up to 200, somebody bids 200, that's great. We get the 168 minus any or, well, the 200 minus anything of back taxes owed. So we were leveraging that to make that happen. Well, lo and behold, the borrowers realized this was going to happen and they reached out to us and settled completely. They paid it off at 168 because they didn't want to lose it at a tax sale. So if you understand taxes, tax foreclosures and regular foreclosures, and if you understand overages, it's a different animal to play. You know, especially in this line of work where you're seeing lists of notes come out, especially stuff that's been bouncing around for a while, it's worth making that one phone call extra to the county, not just checking taxes out online. But if you see that a tax sale took place, or a tax deed, something like that, or foreclosure take place, it's worth making the phone call and asking, hey, is there an overage sitting out there? How much is that? And we'll go for anything. I mean, listen, if it's a thousand bucks or more, we'll, we'll fill out a little paperwork and send it in. It may take 30 to 45 days. If we're sending into other places, some may take longer. But hey, if it's gonna cost us less than a, you know, if we can make a thousand bucks on the deal, it cost us a hundred bucks or so, it's worth doing it. So like I said, we've had tax overages of a minimum of a thousand bucks. 5, 20, 50, 75, a hundred thousand plus on an overage on a tax sale foreclosure that we took place and then we've used the foreclosure process as well to get taken care of. So something now keep in mind a little bit more advanced strategy but guess what, it happens all the time and it's, it's something you can use in your repertoire of tools as a note investor or it's another thing to help you identify opportunities when most people will just say oh that went to tax foreclosure and move on. The great thing you got to realize too is that some states, actually quite a few states have a redemption period. So if I'm buying a note and I see that it went to tax sale but it's still within that redemption period, I have the right to pay the taxes plus the interest to whoever paid bid that taxes to take the asset back. So I've used that there was a tax sale to sweeten my bid to get my bid reduced more from the note seller. So I hope that was helpful. Overages, know them, understand them. It's not that complicated. Just got to work through the numbers and realize that you're the bank and you can that's why it pays to pay the taxes off if you're the bank to avoid that. And occasionally you'll see this too in HOA forecloses. In some states like in Nevada where HOAs are foreclosing you may see an overs that then can go to the the bank. But that's why a lot of the banks lenders in in Nevada they don't want to lose it to condo HOA foreclosure. So they're paying those off to avoid those foreclosures just like they would pay off the taxes. So hope that helps you guys go out, take some action and we'll see at the top. Bye Sam Sa.