Bargain homes at tax-deed sales can be difficult to find

Q. Could you please explain how “tax-deed sales” work? Is it true that you can pick up really nice houses at the sales for just a few thousand dollars?

A. Tax-deed sales are routinely held by tax collectors or tax assessors in nearly every county across the nation. The process varies from one area to the next, but it typically involves homes that were seized by the county because owners didn’t pay their annual property taxes.

Most counties use an auction format for the sales. The opening bid for each home usually is equal to the amount of taxes that are owed, plus court costs. Oftentimes, that means the first bid might be as low as a few thousand dollars.

The bidding, though, almost always escalates quickly. That’s because a tax-deed sale usually wipes out any lender’s interest in the property, and no bank is going to let a big loan it made on a home be eliminated by a tax-deed buyer who puts up a relatively small amount of cash to pay the original borrower’s back taxes.

For example, if the bank has made a $150,000 loan on a home but the tax collector seized the property because the borrower didn’t pay his $5,000 tax bill, the first bid might be for $5,000, but the bank may immediately raise it to $155,000 so it can gain ownership and then sell it to get all of its money back. The bank and other bidders might be willing to pay even more, especially if the home has gone way up in value through the years.

Though finding a bargain at tax-deed sales isn’t easy, it can be done. One of my favorite stories involves my friend Steve, who was able to get a gorgeous home, valued at $125,000, by paying only $4,200 in back taxes. The original owner had paid off her mortgage years earlier and then died without leaving any heirs, so the tax collector seized the home and auctioned it off before the rest of the estate was turned over to the government.

Steve had spent hundreds of hours attending tax-deed sales without any luck, but his persistence finally paid off.

Q. What is a “dry” mortgage?

A. It’s real estate jargon for a non-recourse loan.

If you have a non-recourse mortgage and fail to make the payments, the lender can foreclose on the home that you pledged as collateral but cannot take legal action to seize any of your other assets or garnish your paycheck. Though you would lose the house, the bank couldn’t “bleed you dry” by forcing you to liquidate your stock holdings or other possessions if the subsequent foreclosure sale didn’t generate enough cash to pay off the outstanding balance of the loan.

Q. Our bank has always sent us a monthly mortgage statement, and we have always mailed the payment back the next day. Last month, though, we never got the statement, and subsequently failed to get our payment out before the deadline. Now the bank wants to charge us a $75 late fee. Is this legal, considering that it’s the bank’s fault we weren’t notified the payment was due?

A. Sorry, but the lender has the right to charge a late fee even though you didn’t receive your usual notice that the monthly payment was due.

Every mortgage contract includes a provision that allows the lender to charge a penalty if a payment isn’t received by its due date. But the contracts rarely require the bank to send out a monthly statement, although most do so as a courtesy to their borrowers.

Several lenders, during the past few years, have stopped mailing out paper statements to cut costs, while others are relying solely on the Internet to send out monthly reminders.

Your letter suggests you have a good payment history, so you should contact your bank’s customer service department immediately and ask if it will remove last month’s late payment from your record and waive the $75 late fee. Many lenders will provide a one-time waiver for customers with solid payment records, but don’t expect such a favor if you’ve had this type of problem before.

Real estate trivia: Foreigners and recent immigrants bought $82.5 billion worth of U.S. homes in the 12 months ended in March, up 20 percent from $66.4 billion a year earlier, according to the National Association of Realtors. A staggering 62 percent were all-cash deals.

Ÿ For the booklet “Straight Talk About Living Trusts,” send $4 and a self-addressed, stamped envelope to David Myers, P.O. Box 4405, Culver City, CA 90231-4405.

© 2012, Cowles Syndicate Inc.