For real estate investors, tax-delinquent properties offer a unique opportunity to build and expand one’s portfolio. Purchase houses at below market value. It’s an easy pitch to believe in. That said, without knowledge, strategy, and careful due diligence, an investor can end up with a dud. This comprehensive guide breaks down the best tips for investing in tax delinquent houses, ensuring you are confident in where to place your money and why.
Determine an Exit Strategy
Your exit strategy is why you’re investing and what you’re going to do with the tax sale investment. Investors might flip, rent, or wholesale a property post-tax sale. Your exit strategy guides everything you will do around a tax sale.
Read Up on Local Rules
Unless you already have, read about your local government’s process for conducting a tax sale. Look at the rules, the process of submitting a bid, and how and when a tax delinquent house finally becomes entirely yours. Missteps can cost you profit or the deal altogether.
Review Tax Sale Listings
Run through the full list of tax delinquent property listings before the tax sales date. Identify worthwhile investments based on a defined criteria that you have arrived at beforehand. Investigate each tax sale house to confirm what is most likely to produce a significant return.
Set a Clear Investment Budget
Decide in advance what you can afford to spend on a tax delinquent house. Determine a maximum price for each tax sale house, based on its market value, condition, and repair estimates. Factor in purchase/bid price, potential repairs, legal fees, and future property taxes. Adhere to your budget at all costs. Never overcommit financially and stress your bottom line. Be a responsible investor.
Analyze the Market Carefully
The risk is always present that a tax-delinquent house will prove difficult to sell, rent, or recoup a return. To mitigate this, research the market value of a property especially as it relates to whether a property has enough demand to be sold or rented. If a property is located in a declining neighbourhood or has a low value, consider moving to another house to avoid a potential financial loss.
Run a Title Search
Run a title search before placing a bid on any tax delinquent home. See if there are any unresolved legal issues associated with the property, such as liens, encumbrances, code violations, or other complications. Consider consulting with a real estate lawyer to investigate a house thoroughly.
Maximize Your Financial Return
A tax-delinquent property is attractive to many investors due to the potential for high returns. That said, an investor must consider how much money they’re putting in. The more they invest, the potential for less of a return. Carefully consider how much you’re willing to pay for a tax delinquent house.
Complete a Drive-By Inspection
Physically inspect a tax delinquent house from a public place, such as a park or road. Assess the condition and look for any red flags, i.e. broken doors and windows, obvious signs of property damage, or poor surroundings.
Only Use Your Own Money
Do not borrow from family, friends, or any lender to buy a tax delinquent house. The risk is too high. If things go awry, you may not be able to repay. Only use your own funds when bidding on a tax delinquent house. These funds can come from your savings or any other source exclusively yours.
Estimate Repair Costs Early
Many tax delinquent houses are distressed or abandoned. As soon as you’re able to, have a full home inspection done after a tax sale. Receive a rough estimate on what repairs or renovations are needed.
Invest in a House at a Time
It may be tempting to diversify your tax-delinquent house portfolio. However, the risk is you stretch yourself too thin and then don’t have the funds to complete repairs, renovations, and redevelopment properties under your name. Invest in one tax-delinquent house at a time and take it slowly.
Retain Your Tax Sale Investment Long-Term
A tax delinquent house is not a quick in-and-out investment. Expect to hold on to this asset for a year or two at minimum. There may be a redemption period that needs to pass, in addition to the time spent on repairs, renovations, updates, and preparing your house to reap a return.
Be Transparent with the Prior Owner
A declared winner might want to consider reaching out to the prior owner. Continue to communicate respectfully and positively with them, even if you are in the process of evicting them.
Pursue Evictions with Legal Support
Any work you do with your tax delinquent house investment should be done with respect to what’s legal. An eviction should be done with the help of a lawyer, following all legal rules to ensure it is done correctly.
