Hi. Let’s review the tax lien system.
Every property owner in the United States is required to pay property taxes. These property taxes go to the county or municipal government and are the primary source of income for most local governments. The government then uses this money to pay for crucial programs like public education including schools, teacher salaries, janitors, and bus drivers, it pays for police departments, fire departments, roads, signs, and parks. Property taxes are extremely important.
The amount that a property owner pays in taxes varies by property type and the assessed property value. States typically charge a property tax rate of 1 – 2 percent, but they can be much higher or lower depending largely on the demands of government programs in the state.
Here are some of the most expensive tax deed states:
- New Hampshire (2.20%)
- Connecticut (2.11%)
- Wisconsin (1.91%)
- New York (1.71%)
- Rhode Island (1.66%)
And here are some states with the lowest property tax rates:
- Idaho (0.72%)
- Utah (0.64%)
- Nevada (0.64%)
- Arkansas (0.63%)
- Delaware (0.55%)
The assessed value of the property is the value determined by the government upon which taxes will be assessed. The assessed value varies dramatically by county. Some counties will find the fair market value by finding sales of comparable properties, then taking a specific percentage of the fair market value and calling it the assessed value, and others will just call the fair market value the assessed value. Our experience is that the assessed value is lower than the market value.
Property taxes are due at the beginning of each year for the previous year’s tax assessment. Here are the median tax bills for the same states listed above, which will give you a rough idea of what people are typically paying each year in property taxes in that state:
- New Hampshire ($5,550)
- Connecticut ($5,746)
- Wisconsin ($3,308)
- New York ($5,157)
- Rhode Island ($4,154)
- Idaho ($1,382)
- Utah ($1,653)
- Nevada ($1,542)
- Arkansas ($776)
- Delaware ($1,377)
DELINQUENT PROPERTY TAXES
Property taxes are crucial to county and municipal governments maintaining viability. Without property taxes, citizens would be without the most basic government programs.
But every year a large percentage of property taxes go unpaid. Most homeowners will pay their property taxes along with their mortgage, and the mortgage company will pay the property taxes each year. The mortgage company does this to protect their position by making sure that the property taxes get paid. But if the homeowner fails to pay the mortgage, then the property taxes also go unpaid. There are limitless other examples of why property owners fail to pay property taxes, but the reality is that 20 – 30 percent of property taxes are unpaid every year. That’s devastating for the county and its citizens.
When a property owner doesn’t pay their property taxes, the county places a lien on the property and sells the lien in order to collect the unpaid taxes. But, about ½ the states don’t issue tax liens. Instead, after a certain amount of time, usually a couple years of unpaid property taxes, the county will auction off the property to recover the unpaid taxes. Buying tax deed foreclosure properties can be an incredible source of buying distressed properties for well below market value.
The general rule in property law is that liens have priority in the order that they are filed in the county records office. This is known as the first in time, first in right rule. Based on this principle, a recorded interest has priority over later recorded interests.
A mortgage is usually first in line because they are placed on the property right during the closing process. Other liens that could be on a property include contractor liens, mechanic liens, HOA liens, HELOCs and utility liens. There are countless other liens as well. There are other government liens like income tax liens and nuisance liens. When a property goes to a foreclosure sale, liens are satisfied based on order, not amount. Generally, mortgage companies file for foreclosure before any other type of lien. Let’s look at an example!
$25,000 Judgement lien
If the mortgage company were to file for foreclosure, the other liens would have the option of protecting their lien position by settling all liens in front of them. That rarely happens. The Judgement lien is not usually in a position to cover the $150,000 mortgage, plus the Contractor lien $25,000. So, it goes to a foreclosure auction.
The auction starts at the balance of the lien that started the foreclosure. Let’s say $150,000 in our example. If the auction only gets one bid, for $150,000 the mortgage company gets their $150,000, but the other liens are left empty handed. If the auction goes up to $160,000, the mortgage company gets their $150,000, and the Contractor gets $10,000. The other lien doesn’t get anything!
Even though the county doesn’t sell a tax lien certificate in tax deed states, they still file the lien and force the foreclosure. Because the government gets to do just about anything they want, tax liens don’t obey the priority principle. Even if the tax lien is last in line, it jumps the other non-government liens and goes into first position! If the same property has $15,000 of unpaid property taxes, and the county files for foreclosure, the auction starts at $15,000! If only one investor bids at $15,000, they get the property for $15,000 and the other liens are terminated! (You’ll want to check with your state before bidding. In some states or circumstances, there may be liens that convey, like other governmental liens, so check to make sure you know which liens may stay attached to the property even after the foreclosure.)
Imagine getting a property for pennies on the dollar. It happens all across the country every year! You’re probably asking why you haven’t heard of this before. It’s because they aren’t in the news and they don’t show up on the MLS. The county publishes their list of tax foreclosure properties, but they don’t get much fanfare or marketing. This module is going to help you find, research and purchase tax deed properties!
It may seem weird to talk about exit strategies so soon, but I’ve seen too many investors who don’t have a plan and just start buying or researching property without knowing what they want to do with it. They just waste a lot of time and money. We’ll get to due diligence and acquisition in just a bit! The markets you choose and the due diligence you perform will largely depend on the type of strategy you choose, so deciding on your strategy is a necessary first step!
There are more exit strategies than we’ll cover here, but these are the basic ones new investors generally focus on: Wholesale, Rehab and Resell and Rentals.
The goal of buying properties at a deed auction is to get a property far below market value. Before bidding on a property, you should always have a rough estimate of its market value. You will come across different types of value, so let’s cover those quickly:
FMV or Fair Market Value
ARV or After Repaired Value
Assessed value is the value that the county gives the property strictly for the purpose of taxation. That is generally the only place assessed value is used. The assessed value is often far below the market value of the property. As the property owner, that is a good thing! It lessens the property taxes you are required to pay.
Fair market value is the current market value of the property. There are several ways you can ascertain it. You could do it yourself by looking at sold properties using websites like Zillow and redfin. This is generally going to be the least accurate way, but the quickest. Next, you could ask your real estate agent to give you a CMA, or a Comparative Market Analysis. They use the MLS to look at sold properties that are similar to yours. It should give you a good general idea of the value of your property. Be careful overusing your agent. If you ask them to give you 100 CMAs each week, but never buy anything, they’ll eventually stop taking your calls. Narrow down your list to your favorite couple and then ask them for just those ones. Lastly, you could hire an appraiser to give you the fair market value. Depending on your market, and the type of property, appraisals can be a couple hundred dollars to a couple thousand dollars. Although this will give you a real good idea of the value, they take a couple days to complete and the cost will really start to climb. You also won’t have access to the property prior to bidding, so hiring appraisers is usually not a great option.
After Repaired Value is the value of the property after you complete your rehab. Fair market value looks at the current condition of the property whereas ARV considers the value after rehab has been completed. Make sure you look. This number is very important for investors who want to flip, wholesale to flippers, or cash flow investors who will want to refinance their investments once they stabilize.
One other quick item before we move to strategies. When you buy a property at a tax deed auction, the title needs to be “quieted.” If you’ve ever bought a property before, you most likely closed the transaction through a title company or an attorney. Their role is to ensure that the property is free and clear of any and all liens and encumbrances. When you purchase the property, you are given a free and clear title. That is not the case when you buy a tax deed. You will get the deed, but a new title is created for the property. When you want to sell the property, the buyer will want a clear title! You will need to hire an attorney who will ensure that the foreclosure was completely legally. It usually costs between $1,500 and $2,500 to quiet the title. In some states that foreclose using a judicial foreclosure, you’ll get a quiet title. It’s a good question to ask the county before bidding! It’s a necessary step if you are planning to resell the property. You will need to hire an attorney to push the paperwork through the court system. Plan ahead and make sure you account for this fee when you calculate your profit.
Now, let’s look at some strategies!
If you are a bit tight on cash, wholesaling can be your best option! An investor wholesales real estate when they sell property immediately after acquiring it without doing any sort of improvements. Although you may make less than an investor who improves and then resells, you’ll get your money back a lot quicker and without a lot of extra work. The strategy is simple, it’s buy, resell! Wholesaling works best when the real estate market is strong. If your intention is to wholesale, looking for property in areas that are developing and where there are a lot of sales. Before bidding at a deed auction, call and talk with real estate agents who work with investors. Ask them what their investors are looking for and how much they are willing to spend. Ask them how far below the ARV their clients want to purchase property, since you don’t plan on improving the properties, make sure you have potential buyers in line before bidding. You can also attend local REIA, or Real Estate Investment Association meetings. You’ll be able to network with other investors there. Build up your social media presence, join Facebook groups that focus on your local market. Reach out to hard money lenders about borrowers who may be looking for deals.
After you acquire the property at an auction, post your deal on the REIA page, post to your social media accounts, call local hard money lenders and call the agents you spoke with before. Offer them all the first opportunity before listing on the MLS. If you don’t have any offers after your initial conversations, you can list it on the MLS. Since you bought it far below market value, you should be able to sell it quickly! The goal with wholesaling is to move through property as quickly as possible. So, don’t be greedy! Get the property sold, money in your pocket and on to the next one!
This is the strategy most people think of when someone mentions real estate investing, probably thanks to HGTV! But, before we start, rehabbing a property is nothing like what you see on TV! Most investors don’t scream at their contractors constantly, alligators don’t often climb out of toilets and you’re most likely not going to fall into your pool for no reason!
We already talked a bit about due diligence, but let’s spend just a few more minutes talking about how it relates to flipping houses!
There are a lot of stats and trends that you could look at before buying a property to flip like school districts, owner vs rental percentages, average income, commute time to work, local amenities, distance to shopping and major employment opportunities. But, the 2 that I look at the most are average days on market and sales velocity. You’ll hear a lot about days on market. Ask your agent and they can look it up very quickly on the MLS. You want to know how long to expect it to take to sell your house. A lot of investors have opinions about how long you should tolerate. Obviously the shorter the better, but sometimes market conditions create longer days on market. Whatever the average, ask yourself, “can I afford to hand onto the property that long?” Many investors have lost money because they thought they had a secret sauce that could cause the property to sell faster. Maybe you do, but until it’s proven for you, use the average.
The one stat that is most important to me is sales velocity. To put it simply, how many homes are selling in that specific area in the last 90 days? Is it less than neighboring areas? If the answer is yes, then something is driving buyers to the other areas and not yours? It could be schools, crime, jobs etc. Whatever the reason, no one is buying in your area. It doesn’t matter how good the schools are if no one is buying! You could have the nicest house in the city, but it doesn’t matter if you are surrounded by a giant pig farm.
When you decide to rehab a property, the first step is determining your associated costs, so, let’s review those.
Acquisition Cost – how much you bought the property for.
Rehab Cost – Since you won’t have access to the property prior to purchase, you are going to have to guess. It would be wise to talk with a couple general contractors. Get a sense from them what it would cost to do a cosmetic rehab in your area. A cosmetic rehab means you are replacing most of the finishes of a house; flooring, cabinets, countertops, plumbing and electrical fixtures and paint. You are most likely going to need to do a cosmetic rehab for each house you purchase, so get a good idea what it is going to cost to update an average house. If you are buying a commercial or a multi-family property your cosmetics are going to depend largely on your usage of the property. Next is going to be everything behind the drywall; windows, updating electrical, plumbing and HVAC. Check the age of the property. If it was built in the last decade, usually the mechanicals are in good shape. The biggest risk you are going to encounter is the structure/foundation and the roof! If you are buying a single-family home at a deed auction, plan on rehabbing everything. Do not plan for just a cosmetic rehab. You might get lucky every once in a while, but generally, if the homeowner was willing to walk away from their home, or didn’t sell it in time, it’s probably because there is something wrong with it. Not always, but often. So, plan for the worst and be happy when you get lucky! Find the worst house you can on the MLS and take a contractor to walk through it with you. Ask them what it would cost to rehab it, then add a buffer for additional surprises. That should give you a rough estimate to help you anticipate renovation costs.
Holding Cost – This is a cost that almost all the TV shows leave out, and they can really add up fast. The biggest ones are property taxes, (you can find them the tax assessors’ website) insurance and utilities. Plan on holding the property for a year just in case!
Money Cost – Generally you have to pay cash for properties at deed auctions, but you may have a partner, or you could refinance your property after acquisition. If you are dealing with a hard money lender, you will have points and interest. 1 point equals 1% of interest. Points are generally paid upfront at the time the loan is issued. You’ll also have a interest rate and be expected to pay interest payments monthly. If you are using a bank, private investor or partner you most likely will only have interest payments. Make sure you know when payments are due and how much they will be.
Selling cost – This is also a major cost that is left off reality tv! When you sell with an agent plan on giving up 6% of the sale price in commissions. You will also have closing costs, which are about 1-2% of the sales price.
If you talk to 100 investors, you’ll find 100 different ways to determine what you should buy the property for. You will need to figure out what works best for you. I’ve always used the 70% rule because it’s the simplest! This is how I do it:
ARV x 70% = Purchase & Rehab
P&R – rehab = Purchase Price
An example looks like this:
$100,000 ARV x 70% = $70,000
$70,000 – $30,000 (rehab) = $40,000
In this example, I would need to purchase the property for no more than $40,000. If you get it lower than that, BONUS! That means you made extra profit. But I don’t want to pay more than $40,000 for the property. This doesn’t mean that I made $30,000 on the property though. I still have all those other costs associated with the investment. To figure out your profit, subtract from the actual sale price all the expenses; acquisition, rehab, quiet title, selling cost, holding cost and money cost. The result is your profit!
Rentals have been one of the oldest strategies for creating passive long-term income! There are also some great tax benefits of rental ownership. Make sure to talk with your CPA to make sure you are getting the best tax write offs if you own rental property.
When I’m considering buying a property for rental income, I start with vacancy rates. It’s a great indicator of jobs and employment rates. You can check vacancy rates on the census website, but my favorite source is to talk to a large property management company in your area. If they manage over 1,000 units they generally know the vacancy rates. They may have some knowledge of improvements that the city or county is making. Vacancy rates are also often dependent on types of property, single family homes, condos or multi-family. They may also differ based on the class of property. Generally rental properties are broken into 3 classes, A, B and C. A class is the newest and nicest, B is the middle, and C is older with the least number of amenities. The type of property you decide to invest in is up to you! A class properties generally have the lowest risk and the lowest rate of return. C class properties have the highest risk and turn over but can have the highest rate of return. You will need to weigh what is most important to you, higher return or lowest risk?
A couple other data sources that I like to look for are average income and crime rates. I prefer my tenants to pay no more than 25% of their income towards their rent. So, if they make $2,000 per month, they shouldn’t be paying more than $500 in rent. If they are paying more than 25%, they’ll eventually get behind and you’ll be dealing with evictions, which are no fun.
I also like to look up the crime rates because tenants tend to move out of areas that have high crime. Tenants turning over is a huge expense and frustration. Avoid areas that have high levels of violent and drug crime.
Now the fun part! Let’s look at your calculations for return on your investment!
Group your numbers into two groups, revenue and expenses. Revenue is money coming in, expenses is money going out! Revenue usually consists of rents collected and other income from things like laundry services, vending, parking, late fees and storage. Expenses usually consist of property management, property taxes, property insurance, vacancy rates, maintenance, utilities, marketing and accounting.
When you calculate your income, make sure you include all revenue and expenses. We also calculate all our expenses annually, not monthly. Too many investors forget revenues or expenses! Your income calculation should look like this:
Revenue – Expense = Net Operating Income
Let’s say you collect $1,00 per month in rent, have 5% vacancy, 10% management, $500 property taxes, $600 insurance, $700 maintenance, $600 utilities and $200 in marketing and accounting.
$750 x 12months = $12,000 revenue
– $ 600 vacancy
– $ 1,140 management (notice we pay 10% of collected rent)
– $ 500 property taxes
– $ 600 insurance
– $ 700 maintenance
– $ 600 utilities
– $ 200 marketing/accounting
You may have noticed we didn’t discuss any type of debt service. If you ever talk with a lender about borrowing money for an investment property or appraiser about valuing your property, they are going to ask you about the property’s Net Operating Income, or NOI. Lenders and appraisers do not include debt service into the net operating income. We will include it later, but for now, let’s leave it out.
Next, we want to know what our investment into the property was. Your investment includes your total acquisition cost and any money you spent renovating it to make it rentable. Total acquisition costs include your purchase price, closing costs and quiet title cost. One quick note about renovating for tenants…I like to renovate as much as I can before ever placing a tenant. Anything that needs to be done within the next 5-7 years, do it at the beginning. Much better to replace the roof now and avoid leaks than to ignore it and have a tenant who ignores it or doesn’t notice the leak causing significant damage a couple years down the road. I also like to renovate with an eye to limiting future renovations. Putting cheap carpet in an apartment will get a tenant in now, but you’ll be replacing it often. Rather, put in durable flooring like tile or luxury vinyl tile may cost more upfront, but will be cheaper in the long run.
If you bought a property for $50,000, had $500 in other closing costs, $1,750 in quiet title fees and $15,000 in renovations, your total investment into the property was $67,250.
So, let’s put everything together! Your investment into the property was $67,250 and your income is $7,660. Is that a good investment for you? Let me show you one more math equation to help answer that question. You’ll want to write this one down, if you’re going to be a cash flow investor, you’ll be using this equation often:
Cap = NOI/Investment
We call this the Cap Rate Formula. If you paid cash for your investment, this would be the same as your return on investment. If you borrowed money for part of the investment, you would need to add in your debt service and recalculate based on how much of your money you used and what your income is after you made your debt payment. For our example, we are going to assume you paid cash for it.
So your Cap Rate = $7,660/$67,250, or .114, or 11.4%. Are you happy with an 11.4% return on your investment? That’s for you to decide. If you want a better return, you need to buy the property cheaper, lower expenses or increase revenues!
Being a rental property owner has some fun upsides, most of all the monthly cash flow! If you’re careful how you manage your tenants and property management company, you could have great cashflow for many years!
Some investors buy vacant properties to hold onto. While this is a good strategy for some investors, we won’t be covering it here because it’s generally not a great idea for new investors. There are still expenses associated with vacant land but no revenue. Once you get some cash flow investments or a large pool of capital, it may be worth considering long term hold properties, but we won’t cover them in this module.
You can find a list of the tax deed properties in your resource list. But here is a quick list of some of the more popular deed states:
If you’ve already been through the tax lien modules, you may have noticed that Florida is also a tax lien state. They are kind of a hybrid state, Florida sells both tax liens and tax deeds. When a property owner doesn’t pay their property taxes, Florida sells a tax lien certificate. After 2 years in Florida, the certificate holder has the ability to start the foreclosure process. If the property owner doesn’t pay the taxes the property will go to a tax deed auction. If no one bids at the public auction, the property goes to the lien holder who initiated the foreclosure. If someone other than the certificate holder is the winning bidder at the deed auction, they get the property, and the certificate holder gets the investment plus the interest owed to them.
If you live in a tax deed state, and you want to invest in deeds, it’s always easiest to purchase in your own state, so start there! The due diligence process is simpler, and you probably already know your market better than any other market. If you don’t live in a deed state, or if you prefer a different state, you’ll have some extra work to do. Regardless, here are some things to consider when doing your due diligence:
What is my objective? Different market conditions are better for different exit strategies. Is your market a good rental market, a good flip market or a good buy and hold market? Does your market fit your goals and objectives?
What are my capital abilities? Most counties require the deed purchaser to provide certified funds at the auction, or within a couple days. Financing the acquisition through conventional loans or hard money loans is challenging. Unless you have a private investor, who is funding your investments, you’ll need to have capital available to you at the time of bidding. Some states have average auction prices much higher than others. Auctions in Los Angeles County have much higher starting prices than upstate New York. Be aware of your state vs how much capital you have available.
You won’t have access to the property you’re purchasing through a tax deed auction. It could be considered trespassing if you go onto the property before the auction. In most states, there is no due diligence period, so you get what’s there without being able to do any inspections! So, you’ll need to do as much research as possible and plan for as many unknowns as you can.
Things you should check:
County – Check the property zoning. Many counties have their own zoning identification system, so look into what the codes mean. Is it residential, commercial, agricultural? You’ll see; single family homes, commercial properties, vacant land, easements, restaurants, sewer ditches, hotel pools, farms, golf courses and everything else. Make sure you know what kind of property you are bidding on, and what it’s best usage is. Is the current zoning what you wanted to do with the property? It is possible to get the zoning changed in some circumstances, but you should never count on it.
If there is a structure on the property check for any permits applied for. Tearing down an existing property or retrofitting an unpermitted building is time consuming and can be very expensive.
Check for a survey. If no survey is available, make sure to check the plat online. Drive to the property and see for yourself if there are property dividing markings. Having a dispute with a neighbor about whose property is whose is never fun!
Is the property usable? Is there established and easy access to the property? Deed auctions incorporate any and all types of property.
EPA – The Environmental Protection Agency is a great resource to determine if any contaminants were used on the property, or if there were any leaks.
Title Company – This will get expensive and time consuming. You want to make sure the title is free and clear or will be after you purchase it. Ask them if there are any liens or encumbrances that will transfer to you after the sale. After you get the property, you will want to “quiet the title.” In simple terms, that just means you hire an attorney to make sure that the foreclosure was done correctly, all interested parties were notified and you will have the ability to resell the property with a clear title. Checking ahead of time will help the quiet title process go smoothly. If there are liens that don’t get wiped out with the deed auction, they will stay attached to the deed and you may be liable for them. It’s always best to check with a title company to make sure you understand what encumbrances could remain on the property.
Now the fun part! Due diligence can be time consuming, and many investors fall into the trap of checking every little detail, and never get around to purchasing anything. You will need to determine what is important to you, and what risks you are willing to take. Every investment carries some level of risk. Buying at the tax deed auctions carry potentially great rewards, but with the lack of a due diligence period, it carries a high level of risk. We’re never going to be able to eliminate all the risk! Checking with the county, EPA and a title company lowers that risk, but there is always more that can be done. You could spend years researching and never buy anything. You’ll always find a reason to not invest and reason to invest. You’ll have to decide what risks you’re willing to accept, how much capital you’re willing to potentially lose, how research you’re willing to do and finally which information is most important.
Before we get started, let’s consider confirmation bias. I’ve taken this straight from Adam Robinson’s quote in Tribe of Mentors:
In 1974, Paul Slovic — a world-class psychologist, and a peer of Nobel laureate Daniel Kahneman — decided to evaluate the effect of information on decision-making. This study should be taught at every business school in the country. Slovic gathered eight professional horse handicappers and announced, “I want to see how well you predict the winners of horse races.” Now, these handicappers were all seasoned professionals who made their livings solely on their gambling skills.
Slovic told them the test would consist of predicting 40 horse races in four consecutive rounds. In the first round, each gambler would be given the five pieces of information he wanted on each horse, which would vary from handicapper to handicapper. One handicapper might want the years of experience the jockey had as one of his top five variables, while another might not care about that at all but want the fastest speed any given horse had achieved in the past year, or whatever.
Finally, in addition to asking the handicappers to predict the winner of each race, he asked each one also to state how confident he was in his prediction. Now, as it turns out, there were an average of ten horses in each race, so we would expect by blind chance — random guessing — each handicapper would be right 10 percent of the time, and that their confidence with a blind guess to be 10 percent.
So in round one, with just five pieces of information, the handicappers were 17 percent accurate, which is pretty good, 70 percent better than the 10 percent chance they started with when given zero pieces of information. And interestingly, their confidence was 19 percent — almost exactly as confident as they should have been. They were 17 percent accurate and 19 percent confident in their predictions.
In round two, they were given ten pieces of information. In round three, 20 pieces of information. And in the fourth and final round, 40 pieces of information. That’s a whole lot more than the five pieces of information they started with. Surprisingly, their accuracy had flatlined at 17 percent; they were no more accurate with the additional 35 pieces of information. Unfortunately, their confidence nearly doubled — to 34 percent! So the additional information made them no more accurate but a whole lot more confident. Which would have led them to increase the size of their bets and lose money as a result.
Beyond a certain minimum amount, additional information only feeds — leaving aside the considerable cost of and delay occasioned in acquiring it — what psychologists call “confirmation bias.” The information we gain that conflicts with our original assessment or conclusion, we conveniently ignore or dismiss, while the information that confirms our original decision makes us increasingly certain that our conclusion was correct.
As you are doing your due diligence realize that confirmation bias is real! Choose the pieces of information that you believe are going to limit your risk the most and move forward. None of us are immune to risk and ultimately loss in investing, so mitigate it with as much research as you can, but also acknowledge when you are just spinning in circles.
If you’ve already selected your state, and you’re far enough along that you are about to bid on specific properties, you next need to consider the city and neighborhood. Some of your considerations about the city, neighborhood and specific property are based on your exit strategy. If you are wholesaling, as long as you have a buyer who is willing to buy in that city or neighborhood, the rest shouldn’t matter to you. If you are renting multi-family properties, you’ll want to make sure that the public infrastructure is solid. If you’re buying undeveloped land, you want to make sure employment growth is coming. If you’re flipping single family homes, crime rates and school rates are usually very important to buyers. I’ll cover as many parts of due diligence as I can
First, look for major employers or employment opportunities. How stable are the employers? What is the unemployment rate? Government jobs are usually very stable! Every year United Van Lines publishes a migration study that shows the percentage of trucks that move households out of a state vs into a state. For years, Washington DC had the highest percentage of households moving into the state! Education and healthcare jobs are also usually very stable. Investing in areas where there are a lot of long-term stable jobs is a recipe for success! Investing in areas that have dwindling job sectors will cause major heartburn!
Next, look at the immediate neighborhood. This is always on my list. It doesn’t matter how good of a deal you get, or how well the city is doing if you can’t find someone who wants to use the property or who wants to live on it. If you are looking at vacant land, look to see if the surrounding properties are developed or developing. Otherwise, you are going to be holding onto that property for a long time! Buying a single-family home in the middle of a commercial development isn’t a good idea if you want a rental property, but may be a good idea if you want to join in the commercial development! Flipping a house in an area with a lot of sales, are points in the win column.
Are homes selling? I call this “Sales Velocity.” This to me, is the most important stat I look at. Ask yourself a simple question: If homes are selling, do any of the other data points really matter? If homes aren’t selling, do any of the other stats really matter? Probably not! I look to purchase properties where there is a lot of active movement.
Check the crime rates. All neighborhoods have crime! Check the types of crime and frequency. Check the registered sex offenders list.
School ratings. Not everyone has kids, but those that do will care about the schools their kids attend. Looking at the type of property you’re purchasing will dictate how important this is. If you are buying a 3-5 bedroom house, this is important. If you are buying a 1-bedroom condo, commercial property, land or a golf course, it’s not so important!
Perhaps most importantly, you don’t have interior access. That means you’re going to have to make your best educated guess. And it is a guess! Plan for the worst-case scenario. Remember, the previous owner lost their property to a tax foreclosure. There is a really good chance that they didn’t take care of the interior of their property. We’ve been surprised before, but plan on having to do everything in your rehab.
There isn’t a large database of tax deed properties for sale like the MLS. Some counties handle the sale themselves, and others use a third-party website to handle the sale. You may have to spend some time researching the county website on your favorite browser to find the website that handles the auction. If you can’t find it, a quick call to the county’s office will usually help.
The largest websites that handle tax deed auctions for a wide range of counties are Realauction.com and Bid4Assets.com. If your state isn’t listed on either of those websites, there’s a good chance the county handles it themselves.
Some county auctions are done online, and some are still done in person. Before bidding, always make sure you read through the requirements to participate. Whether the auction is online or in person, most counties will post the requirements and specifics about the auction online. Some things to pay attention to:
Do you have to register? When is the deadline to register?
Is there a deposit required to participate in the auction?
How soon after the auction ends are you required to fund the purchase. Some counties require immediate payment, and some allow for a day or 2 to pay the balance of the auction amount. Most counties only accept certified funds, so make sure you have immediate, or near immediate access to the funds you’ll need to purchase.
What are the settlement instructions?
Are there any other costs associated with purchasing the property?
How does the auction work? Is it a silent bid? Round Robin? Highest and best? Does the deadline extend for 5 minutes after the last bid? Make sure you know what the rules are so you can bid accordingly.
If the auction is in person, don’t be scared off by the amount of people there. We have found that the majority of people who attend the auction are there just watching! Most importantly, work your numbers and follow your plan. I’ve seen too many investors get caught up in the moment and get attached to a specific property. They exceed their maximum bid amount and end up losing money. Don’t do that! Determine your Maximum Allowable Bid, or MAB, and do not bid over that number! Make a plan and follow it!
Your max bid is going to vary based on what you plan on doing with the property. You may value it differently if you are planning on flipping, renting or wholesaling. If you have questions about what your bid should be, go back to the exit strategy module and run through the examples again and work backwards.
One final nugget about acquisition…it’s been said often in real estate investing that “you make your money in real estate when you buy. You realize your profit when you sell.” Spend the necessary time finding and researching your properties before bidding. You’ll always regret buying something you shouldn’t have more than you’ll regret not buying something you should have.