Investing in tax-delinquent homes is a smart approach to generating income, diversifying your portfolio, and potentially paving your way into homeownership.
It all starts with understanding how to bid. When you buy a tax-sale property, there are risks. There’s also a potential upside of a high return. Learning how the tax sale system works in your area is key and knowing where to focus your attention is essential.
Here is your guide on how to start buying tax-delinquent homes.
Know Why You’re Buying
You may be buying tax delinquent properties to use as your own, rent, or renovate and sell. Define your motivation. Know how you intend to profit from a sale and what a profit looks like. This is the key to knowing how to bid, what to bid on, and when to stop bidding.
Research the Process
Find out whether you are interested in the tax sale by public auction or public tender. Both operate differently, and each municipality has rules for guiding these tax-delinquent property sales.
Attend a Tax Sale
If they host tax sale auctions, attend one before you decide to become a bidder. This will get you a feel for the competitive atmosphere, allow you to see how the bidding rules are executed, and may even organically suggest strategies you can use later.
Bid As Instructed
The last thing you want is to find out your bid was disqualified because you didn’t follow how to submit a bid. Review the rules of your local tax sale. Follow the correct procedures and ensure bids are submitted by the deadline. Most municipalities are strict with how they run their tax sale.
Research As Much As You Can
When you find a tax sale listing that interests you, research it as much as possible. The more research, the better. You could make a costly mistake without data and research backing how you bid.
Analyze the Local Market
Analyzing the local market can help you identify promising tax-sale real estate investments. Consider the neighbourhood, amenities, similar property values, population growth, and other local statistics.
Assess Tax Delinquent Homes
A buyer does not have the right to a home inspection. You buy a tax-delinquent property sight-unseen, as-is, and with no refunds. Despite the risks that come with purchasing real estate in this way, here is what you can do to assess the condition of a specific property:
Assess the exterior condition of a house by observing it from a public road or public space. Employ a drone to see the house from a bird’s eye view. Consider talking to neighbours or other homeowners to understand the property’s reputation.
Scout Properties Online
Always run an online search on Google, social media, and in local forums. See what you can discover, such as past events or additional details you weren’t privy to. You may even find real estate listing photos from a past sale to use as a frame of reference for the layout.
Run a Title Search
A title search is invaluable. It will let you know if a tax-delinquent home has liens or encumbrances. A tax-delinquent home may come with Crown interests attached, unpaid utilities, and other issues. Investigate what hidden financial obligations that may be attached.
Prepare to Compete
In a tax sale, you are competing against other bidders. This will drive up the price of the product. Don’t overbid. Don’t buy by emotion or get lost in the competition. Come to a tax sale with your data, research, and strategy. Protect your financial interests by knowing your upper limit.
Obtain Financing
A tax sale requires a bidder to show up with the funds accessible. There is no pre-approval financing. No lender will provide you with a mortgage to start buying tax-delinquent homes. Financing must be your own, whether from cash reserves, cash advances, savings, or loans.
Reserve Contingency Funds
A tax-delinquent home may have structural issues, an environmental spill requiring cleanup, or extensive damage requiring immediate repair. Reserve contingency funds for any repairs, renovations, and updates you may have to make from day 1.
Understand Tax Obligations
Research what you may owe from a tax perspective on buying a tax-delinquent home. Any profits from selling or renting may be taxable. Keep detailed records of every dollar you put into the property. These expenses can be used as tax deductions to minimize tax liability.
Be Ready to Evict
If you are buying a tax-delinquent home with existing occupants, you are responsible for pursuing a legal eviction. This will require contacting a lawyer and initiating the eviction process only after ownership is fully transferred.
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