Mechanics Liens and Materialmen's Liens - Work performed on the property where
improvements or repairs are made can result in a mechanics lien if payment is not made by the party
who contracted for these services. You will find many different names for this type of lien, for
example: mechanics liens, materialmen's liens, artisans liens, workers liens, etc.
Don't forget to learn more about your investment state as your state could include
others or exclude some of these liens. Don't be scared off by this list, BUT glad that you are now
informed about this potential risk. Since you have the knowledge you need only perform adequate
research to avoid the risks in this area.
Due Diligence Area # 2:
Are Environmental Risks Associated with the Property?
In some instances you can run the risk of purchasing someone else's environmental
liability. Congress passed the 'Superfund Act' (42 U.S.C. 9601 et seq.) which made every landowner
liable for previous environmental contamination on a property regardless of whether they caused the
damage or not. There is some good news for lienholders since Congress has given them an exception
from liability if you are a lienholder not considered an 'owner or operator'. Court rules and
interpretations have been changing regarding this issue so don't risk it. I want to be sure my
liability is limited therefore I believe in being extra cautious when dealing with commercial
properties in the tax sale setting. If there is some question as to the area or type of business
conducted on the parcel you should contact an environmental specialist and ask some preliminary
questions about the area and property you are investigating.
If you want to steer clear of the whole issue then you should avoid commercial
properties all together. The chances of environmental damage found on residential properties in
zoned subdivisions is much less. I do tell my students to avoid commercial properties unless it's
a really good deal. Naturally if it is a good deal you can afford to do the extra research to make
sure there are no environmental problems on the property.
Due Diligence Area # 3:
What About Other Fees Not Included in the Foreclosure?
You should always get an idea of whether there are any other fees or dues not included
in the foreclosure purchase price. I know this sounds odd but it can occur if an entity that is
owed money was not included in the tax foreclosure lawsuit. If they did not get notice or did not
decide to 'join' themselves in the collection lawsuit then the money simply won't be added to the
opening bid amount. The purchaser of the property would still be responsible to pay for these fee
Here is what I suggest that you do:
Contact the tax collection entity or authority (typically the tax assessor)
Ask them which entities they collect taxes for
Then ask which entities are outside of their collection area
Create a list of entities whose taxes are not collected by the assessor BUT may still be owed
by delinquent taxpayer
Call and ask the entity the amount of back taxes, dues or fees
Add this amount to your bid analysis
Again, by following a simple step-by-step methodology you can greatly reduce you risk
and boost your success rate ten fold. Make sure you go through this checklist of tasks with every
property you consider purchasing.
Due Diligence Area # 4:
Bankruptcy of Delinquent Property Owner
You must check to see if there is a looming bankruptcy associated with the property. I
see very few tax sale products covering this issue. This is an ABSOLUTE MUST in your analysis of
any property. You can access federal bankruptcy records through the federal bankruptcy court in
your state. Some of these records may be online. There are generally two main possibilities that
you must be wary of:
- A Bankruptcy has occurred prior to purchase - Sometimes you will find that a property is tied
up in a bankruptcy administration while it is being prepared for tax sale. You should avoid
properties which are on a tax sale list which have a pending bankruptcy suit.
- A Bankruptcy has occurred during the redemption period - This scenario can be problematic
as well. Here the property has been sold to tax sale investor but while the redemption clock is
ticking the delinquent property owner has declared bankruptcy. Now a trustee has been appointed
to protect the assets of the estate. The biggest risk to the tax sale purchaser is that the
trustee will attempt to argue that the tax sale purchase was a 'fraudulent transfer'. For such
an activity to occur there must at least some dealing or scheme between the debtor and the purchaser
such that an attempt is made to avoid liquidation of the estate by transferring property to a 3rd
party. While the tax sale purchase really should not be classified as such a transfer if the
trustee raises this argument it can interfere with the tolling of redemption period, your ownership
rights and the final disposition of the tax sale property or lien. Keep in mind that if the
trustee wins this argument you won't lose your initial investment, but you will lose any of the
anticipated profit. It is not an easy argument for the trustee to win but just be wary of this
The best thing to do is to avoid situations where you know the property is involved or
will be involved in a bankruptcy. You should check in the owner's district of residence for any
bankruptcy filings. Lastly, don't be too frightened by this issue because doing your research will
help you greatly reduce your risk of being affected by a bankrupt estate.
Due Diligence Area # 5:
Doing Deals in Your Own Name
This is an area that is very critical to apply and apply correctly. If I could refuse
to sell my products to someone who does not have a legal business entity from which they will make
these purchases, I would do it. That means that if I find out you are buying tax sale property in
your own name I will come and take my course from you! No seriously…this is a very critical issue
and I just want you to understand how much it worries and keeps me up at night knowing that some of
you will ignore my advice and buy tax deeds as 'John Jones' instead of 'Jones Real Estate, Corp.'
Why is this such a bid deal? The reason is that when you purchase a property as an
individual you are now personally liable for the anything that goes wrong with the property. This
could include someone getting hurt on the property (yes, even a trespasser can sue you),
environmental issues with the property, liability from 'unknown' liens, and a myriad of other
However, when you form an entity you generally will not be personally liable for these
acts, omissions, or hidden liabilities. What will happen is that the corporation, partnership, or
LLC will take the hit. Now why did I say that 'generally' you will not be liable? I said that
because if you do not maintain the entity using the proper formalities you will lose that
protection. In a landmark business law case the courts determined that to "preserve equity
and prevent injustice" it could "pierce the corporate veil" and hold the
shareholders or owner(s) liable for the acts and/or omissions of the corporation if proper
formalities were not met.
If you go to any real estate investing seminar and they tell you, "Just do a deal
or two then worry about forming your company", please run out the door! It will only take one
bad deal to make you liable thereby risking everything you own. Before you attempt a deal you
should find an attorney to help you determine which form of business entity will serve you:
Corporation - C-corp or S-corp.; or
Limited Partnership (LP); or
Limited Liability Limited Partnership (LLLP); or
Limited Liability Partnership (LLP); or
Limited Liability Company (LLC)
You should then have the entity up for you and teach you how to maintain its formal
status in the eyes of the law. I have helped individuals with the matter and I can tell you that
you must have an attorney who will listen to your needs and spend time educating you. The reason I
think education is important is that if you don't maintain the entity correctly its the protective
shield will not exist in the eyes of the law. It will be as if you never incorporated at all.
What good will the slick corporate minute book and fancy company logo be if the attorney did not
teach you how to keep the entity separate from your personal dealings? Unless your attorney takes
the time to teach you how to maintain your entity status it will be worthless.
I want to wish you the best of luck in your endeavors and email me if you ever need help!
Information contained within this article was not intended to be, nor should it be taken by the
reader as legal, financial or tax advice. The above article was written for educational purposes
only. If the services of a Texas attorney, or real estate mentor or coach are desired please
contact Mr. Barazandeh or seek the services of another professional.
The author, Darius M. Barazandeh, Esq. is a licensed attorney in the state of Texas. In addition
to his legal knowledge he has a Masters Degree (M.B.A.) in Business Finance and brings experience
from numerous fields including tax sale investing, real estate construction, corporate finance,
and business consulting. Frustrated by the lack of realistic information regarding tax foreclosure
sales and other investments, he is "unlocking the secrets" to many of these creative
investment methods with his unique 'clear cut' writing style, attention to detail, and legal
knowledge. His product Texas Houses
for Pennies is the highest rated tax foreclosure guide in
the United States! 
Current Membership Includes:
- Real Estate, Probate, and Trust Law Division of the Texas Bar Association
- Business Law Division of the Texas Bar Association
- Taxation Division of the Texas Bar Association
- Environmental and Natural Resources Division of the Texas Bar Association
- Alternative Dispute Resolution Division of the Texas Bar Association
- Consumer Law Division of the Texas Bar Association
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Texas Houses for Pennies has
received a customer rating of 9 out of a possible 10 points.
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