Ten years ago, one of my good friends purchased a lien for $1,200.00 in Reno, NV. The lien was for unpaid taxes asserted against a house. If the then-current owner didn’t pay my friend’s lien within a year, the title transferred to my friend. Unfortunately, the owner had passed away, so no one paid the lien, and my friend obtained the title to the house.
Ten years later, it is a house with an estimated value of $400,000.00. Let me say that again: My friend paid $1,2000 for a home worth $400,000.00.
What happened to my friend wasn’t a scam or a get-rich-quick scheme. Although his situation may be rare, I have worked on hundreds of matters with similar results as a Real Estate attorney.
We are all familiar with Real Estate investing. Purchase a home, remodel the house, then sell for profit. Nearly all these transactions utilize the escrow process when purchasing and selling a home.
“Escrow” is the process of ensuring that a home buyer receives clear title to the property purchased. After a seller accepts an offer to sell from a buyer, a title company reviews the property’s history. Next, the title company looks for liens that may exist on the property. The escrow company then uses the purchase funds to satisfy identified liens before issuing a clean title to the buyer.
Most people think escrow is the only way to purchase a house, which is false. Instead, escrow is the safest method to buy a home to ensure a clear title - but that safety comes at a premium.
There is no legal requirement to purchase a home via escrow. For example, suppose Lindsay wants to sell her home to her friend Tom. Lindsay explains that Zillow estimates the fair market value of her home at $700,000.00, and Lindsay has a mortgage on the property for $500,000.00. Tom agrees to pay Lindsay $600,000.00 for Lindsay’s house. Lindsay signs a “quit-claim” deed to Tom. Tom now owns the property, but the mortgage company can foreclose on the property if Lindsay does not make any payments on the mortgage. Tom has different options for using the property. He can live at the property or rent it until the mortgage company forecloses, or he can sell it, pay the mortgage company, and pocket the $100k proceeds.
While it wouldn’t make sense for Lindsay to sell her house, this simple example frequently occurs via lien foreclosure sales. For instance, if a home is within an HOA community, the owner must pay HOA dues. If the owner fails to do so, the HOA can assert a lien against the property and then set the lien for a public sale. Any person can attend the sale and bid for the property, with title going to the highest bidder. What’s more, is that an HOA sale can potentially extinguish a mortgage attached to the same property. But at any rate, purchasers at an HOA foreclosure sale typically pay a fraction of the home’s fair market value.
Lien foreclosure sales (HOA liens, tax liens, mechanic liens, etc.) can be an excellent investment with enormous returns.
However, to be successful, an investor must:
1. Educate his/herself on the laws applicable to a lien foreclosure;
2. Understand how to research title records attached to property being foreclosed upon and understand property records related to the lien;
3. Understand the risks involved and employ methods to mitigate those risks;
4. Retain quality legal counsel to assist in the process.
Dragon Law Group, PLLC will publish additional blogs examining Nevada’s various types of foreclosures. With this knowledge, a savvy investor has excellent potential returns.
Please get in touch with us should you have any questions.