Back Taxes on a Property Explained (CFFL 449)
Jack Butala: Jack Butala with Jill DeWit.
Jill DeWit: Hi!
Jack Butala: Welcome to our show today. In this episode, Jill and I talk about, back taxes … On our property. We’ll explain it. Before we get into it though let’s take a question posted by one of our members on the landinvestors.com online community. It’s free.
Jill DeWit: Okay, Erin asked, “I recently sold my first terms deal and things went awry … ”
I like that!
“During contract time. The terms were 99 dollars down and 84 dollars a month for 60 months.”
Jack Butala: Nice, though.
Jill DeWit: “My buyer paid the down payment and the doc/closing fee, and signed up with an auto-pay with moonclerk.”
So far so good.
“However, when it came time to sign the contract she ultimately backed out because … ”
Jack Butala: Because, colon …
Jill DeWit: “Once I factored the county property taxes in, the monthly payment actually came out to be 124 dollars. She feels like I mislead her – ”
Jack Butala: She might be right.
Jill DeWit: “My question is, do you incorporate monthly taxes into your advertised monthly payment? On one hand I want to make sure tax liability is managed and fulfilled by my buyers, but on the other hand I don’t want killing my deals and looking like I’m profiting from collecting taxes, ’cause I’m not.
Jack Butala: This is timely too.
Jill DeWit: “Thoughts on mitigation? Anything you’ve learned in handling things?”
Jack Butala: No, Erin this is a very well-written and intelligent question and it comes up all the time and we’re gonna answer it once and for all, for you. Like everything Jill and I have made this mistake and we learned from it. Hopefully you can learn from this answer. Build the taxes into your price that you’re quoting, if you have to, keep the payment the same but extend the months, the term of the loan from 60 to like 65, 65 months or whatever it ends up being. One of the things I love about this business and what I can’t stand about the planet is all the tacked on end stuff that goes on. If you go to buy a gallon of milk, there’s a service fee now, and a tax, and a state tax, and a local tax. I just hate that stuff. So when you say 99 down and 84 a month, make sure at the end, that’s the contract they’re signing.
Jill DeWit: I feel the same way.
Jack Butala: When we buy property, we stipulate that right up front. We’re gonna pay 4000 dollars for this property, and then we’re not going to prorate taxes and escrow and then it ends up being 3000. You’re gonna get a check for four, zero, zero, zero that’s what I say when I actually talk to the seller. And they appreciate that. So build in the taxes, and pay them yourself. Don’t expect the buyer to pay them, and just build it in the deal.
Jill DeWit: I agree and I would feel the same way she did, you know clearly on a budget and she’s buying it for 84 dollars a month, and now that extra 40 bucks just wrecked, it’s not much to us, but for her it wrecked her world. And wrecked the deal, and I don’t agree. So as far as mitigation, I wouldn’t do that. I would either A: Come back with what Jack just said, “How about this, we’ll do the 84 dollars a month, I’ll make it 65 months,” whatever it is, “and we’ll work it that way so taxes are paid for.” Or B: Gosh, if it really doesn’t work out then we’re just gonna refund it, let her go on her merry way.
Jack Butala: Yeah that’s an option, it’s true. I hate to say it, if you want a customer for life, just say, “You know what? Buyer, you’re right. And it was my error, and I own the property. I’m gonna sell it to you for the same term today, and I’m gonna pick up the taxes.” Move on to the next deal.
Jill DeWit: Exactly.
Jack Butala: If she wants a property, I wouldn’t let this 25 dollars a month thing-
Jill DeWit: It’s 40.
Jack Butala: Oh, 40.
Jill DeWit: That’s a lot though, ’cause what is that coming to. That’s 40 bucks a month for 60 months it’s a lot of money.
Jack Butala: It’s 24 Jill, I think.
Jill DeWit: So what’s the property worth in the end?
Jack Butala: Oh it’s 40, you’re right.
Jill DeWit: But that might eat up a lot of Erin’s profit.
Jack Butala: I have to bring this up.
Jill DeWit: What?
Jack Butala: What does on a budget mean? What is a fixed income?
Jill DeWit: I realize Jack you do not understand this concept. Do I need to explain this to you? Is this like a [inaudible 00:04:22] with a flashlight kind of thing?
Jack Butala: Who’s not on a fixed income? Who’s not on a budget? You know there’s a lot of crap that we can afford that we don’t buy, we’re on a budget. You should always have a budget.
Jill DeWit: I hear you.
Jack Butala: I don’t care if you’re worth 4 billion dollars.
Jill DeWit: This is true, we have an acquisition budget too, and we stick to it.
Jack Butala: Who walks around saying, “Oh, I’m not on a budget, I’m too good for that. I’m gonna go buy a fast car.” Who walks around like that? Nobody I’d want to talk to at all.
Jill DeWit: I hear you. You know what? I want to do that sometime, we’re gonna be at a party or we’re gonna be somewhere. I’m gonna be at a joint, “Well I’m on a fixed income, so I need to keep it under this. I need to keep it under 8 grand.”
Jack Butala: Yeah, my fixed income’s 1.2 million dollars a month. My budget’s 980000 a month.
Jill DeWit: Dude, I’m gonna tell this to my new assistant today, I’m gonna say something about fixed income and watch her eyes just like, “What?!” So good.
Jack Butala: I’ve heard that my whole life, but I’ve never vocalized it. I’ve heard people like, they’re walking around hanging their head going, “I’m on a budget.” Really? Everyone’s on a budget.
Jill DeWit: You should be.
Jack Butala: If you’re not, I don’t care how much money you’re making, it’s gonna half.
Jill DeWit: Yeah, if not – it’s called bankruptcy.
Jack Butala: That’s right. Then you’re on a fixed budget.
Jill DeWit: Yeah, the government makes sure that you are.
Jack Butala: If you have a question or you want to be on the show, reach out to either one of us, on landinvestors.com, Jill and I are going to salvage this episode right now.
Jill DeWit: I can help.
Jack Butala: We’re talking about back taxes on properties explained. This is the meat of the show.
Jill DeWit: Okay, so there’s two ways we need to take a look at and think about as a buyer, and as a seller. So what do you need to do with back taxes on a property and how does it happen. You know, when properties are paid for, there’s no mortgage happening, there’s no one keeping an eye on the property. You know when you buy a home and you have a mortgage there’s PITI, in there is your tax-
Jack Butala: Principal, interest, taxes, insurance.
Jill DeWit: Exactly, so your lender is making sure those taxes are getting paid, so it’s automatic.
Jack Butala: They’re paying you for it.
Jill DeWit: You’re paying that, and they’re making sure that they do get paid because of the funds that they take in. ‘Cause they don’t want that asset to go back to the county, because you owe them money for it. So what happens now, either if you pay cash for it or now your mortgage is paid off, now it’s up to you to pay these taxes. And they’re not harassing you, you get a bill, usually twice a year.
Jack Butala: Once or twice.
Jill DeWit: Yeah, for your annual or bi-annual property taxes. And then it’s up to you to pay it, and they don’t come hound you and knock on your door and leave notices, it’s kind of interesting. If you don’t pay it the first time they just add it up, then add some interest, then just keep adding it up and add some interest, and add up. And you could have years going by.
Jack Butala: And penalties, and fees.
Jill DeWit: Exactly, and it can get hefty.
Jack Butala: If you’re in New Jersey you could be over in one year. New Jersey has the highest tax rate in the country.
Jill DeWit: But yeah, it can add up. And then the whole process does take typically, especially our type, it takes years for the county to take back a property. It could be four or five years of this process, where they’re billing you, and then they decide, “All right, now we’re going to go down the steps of foreclosing and taking the property back, it’s gotta go in the papers, all kinds of other notices that come out.” You could still literally ignore this whole thing and the interesting thing is, this is what a lot of people don’t know, they’re not gonna come get you. Eventually-
Jack Butala: There’s no foreclosure process like with a lender.
Jill DeWit: That’s right. I shouldn’t say foreclosure, that was the wrong process. [crosstalk 00:08:20] But they’re not gonna ding you.
Jack Butala: They don’t have the resources to chase you.
Jill DeWit: Exactly. And it’s not gonna be a ding on your credit, it’s just gonna go away. What will really happen is the county will take the property back and you don’t own it anymore-
Jack Butala: You’ll eventually just not get a bill anymore.
Jill DeWit: Exactly, and you don’t know what happened, it just is gone. And it won’t show up on anything down the road, it’s just they took it back, have a nice day.
Jack Butala: You know what? That’s what this show’s about. You wrote this show, didn’t you?
Jill DeWit: I don’t think I did, but I should.
Jack Butala: So what ends up happening is a lot of people, the reason this came up is because some sellers call us and they say, “I got your letter, we have some back taxes and I don’t want to go through this foreclosure process like I did with my house three years ago.”
And what Jill’s really saying is there’s nothing like that that goes on, this taxing authority does not chase you down. There’s no implications on credit or anything.
Jill DeWit: So here’s the interesting thing, so here’s a situation. Say now you come along, so that’s what’s happened to the property, and what could happen – it’ll go back to the county. All right so I’m a buyer I’m coming along, I’m looking at some properties and it might have some back taxes on it. Okay, what does that mean to me now as a buyer? I can just buy the property, exactly as it is, which is usually what I do. And I negotiate, I’ll look up and I’ll know that, okay maybe I’m paying 4000 dollars for the property and it’s got 1000 dollars in back taxes, so since I’m factoring all that in I might give them 3000 dollars and tell, “Don’t pay the bill, here’s what my offer was, I know how it stands, I’m still gonna give you 3000 dollars, I’ll take care of that. Are we good?” And most of the time they’re like, “Heck yeah, great, thank you. It’s off my plate.”
So now when I purchase a property, I do not have to pay those taxes right then. Not like when I’m buying a home. If I’m buying a home and there’s a mortgage company, right. All the taxes are prorated and caught up to that exact day.
Jack Butala: Cause the lender doesn’t want to land money on a property that is not up to speed with taxes.
Jill DeWit: Correct, so it’s up to me at this point, when do I want to pay them? I can pay them right then, I can pay them six months later, I could pass them through. So you have all these options, so now I own the property, now it’s up to me as I’m marketing the property. Now I’m a seller, do I want to pay the back taxes now, do I want to the back taxes when I sell the property and tell them that it’ll be current-
Jack Butala: Do I ever want to pay them?
Jill DeWit: Right, or do I ever want to pay them? And just disclose, we’ve done all three. I’ve had times where it just wasn’t very much and I caught it right up. Or it was a couple hundred bucks or something and I just told the buyer at the time of transfer, the property taxes will be paid current, and when they pay me, I pay the property taxes, and it’s all current. They start fresh. And then I’ve done the third one too which as a seller, I can just disclose, “Hey, by the way, you’re only paying 6000 dollars for this property because it’s worth 15 and it’s got 1000 dollars of back taxes FYI,” and they’re still thrilled.
And what’s interesting, I’ve had buyers that when I explain the whole process to them, they like this because they don’t have to pay those taxes right then and there too. It gives them a little cushion, so they don’t have to pay the whole 6000 plus an extra 1000, they can delay that extra whatever, especially if they’re the end user. They like that, “I can pay them in six months, whatever, it’s all good.” ‘Cause remember, maybe I’m picking up this property, I’m a year or two into these back taxes, we’ve got years to go before they have to be caught, and before anything happens.
Jack Butala: Here’s the takeaway from this show, as far as I’m concerned. And that was a fantastic summary of taxes on real estate.
Jill DeWit: Thank you.
Jack Butala: When property has accumulated back taxes, they’re not just a couple months late, it’s a sign that something’s going on. Some people, some of our competitors, believe this is a good sign, that they’re taking a situation, maybe a desperate situation and they’re making it their advantage. They’re using it to their advantage, while conceptually that’s not such a bad thing, here’s how the real world works with land investing: if you send everybody the same letter that owns the same type of property and some of the people have back taxes on it, and it’s all the same number right, same offer price. The people who don’t have any back taxes on the property, have kept it current, are gonna be way more eager and the deal’s gonna be a lot easier to purchase than the ones with back taxes.
Maybe somebody died, that’s usually the reason property has back taxes on it. Maybe the person that died didn’t convey the property before the passed away properly, so it’s stuck in probate or some kind of thing. So be prepared, if you want to specialize in property with back taxes like everybody seems to think is glorious, except Jill and I, and the members of Land Academy, just be prepared to put your lawyer hat on. Be prepared that every deal’s going to be a fight, just do yourself a favor and do it our way.
Jill DeWit: Right.
Jack Butala: It’s cheaper and easier, and faster. And you’re gonna get a lot more deals done and make a lot more money if you forget about these back tax properties.
Jill DeWit: Right, roll them out, but don’t single them out.
Jack Butala: Good, I like that. That’s a slogan.
Jill DeWit: Thank you very much. That’s how I feel. When I explain to people, the traditional buyer that doesn’t know you can not pay your back taxes, they’re getting this bill every year and it’s killing them writing a cheque. And they can’t wait to get rid of this asset, that’s what’s so interesting, those are traditionally the people that I run across, they didn’t know they could not pay the thing. And they’re so sick of this property, they’re even more excited to give it away.
Jack Butala: Right.
Jill DeWit: Not give it away, but more motivated-
Jack Butala: To get out of it, to end it.
Join us in another episode where Jack and Jill discuss how to use information, that’s me.
Jill DeWit: And [inaudible 00:14:29] that’s me.
Jack Butala: To get just about anything you want.
Jill DeWit: We use it everyday to buy property for half of what’s it worth and sell it immediately.
If you have any questions or comments, please feel free to email me directly at jack@LandAcademy.com.
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