If you are looking to invest in a property at a very low price, tax sales properties are a good option. This is a rare avenue that enables you to buy homes and properties below the market price. Before you jump at this opportunity, learn what you need to know about how this works so you can make informed decisions when you are ready to take the leap.
What is a Tax Sale Property?
Tax sale is the process of selling a property that is presided by the municipality. The goal is to obtain any unpaid taxes on the property after it has been in arrears for 36 months or more. When a property is listed for tax sale, the goal is to recoup the unpaid taxes during the time that it had been in arrears. It does not take into account the appraisal of the property’s market value. Aside from any unpaid taxes, it also calculates for the interests or penalties on that property. The cost of staging the tax sale is also added to the final cost of the property.
Despite all of the additional fees, the cost of the tax sale property is still considerably lower than the average price of the market. For this reason, many potential investors are interested in obtaining tax sale properties. It gives them the opportunity to obtain properties for a much lower price than the prevailing market prices.
Depending on where you are, there are two types of tax sale homes: tax lien and tax deed sale. Both of these involve properties that have unpaid taxes. However, they are completely different in the purpose and process. You should not confuse these two, especially if you want to purchase the property for investment (tax deed sale).
The tax lien sale is when the winner is awarded the opportunity to collect the liens (with interest) from the current owner of the property with unpaid taxes. The property can be foreclosed if the existing homeowner fails to pay the liens.
How Does it Work?
The potential to buy properties for a considerably lower price is one of the advantages of tax sale properties. Hence, many are interested to pursue them for the potential to gain a huge profit. If you are interested in buying one of these properties, it is important to know how the process works. Unlike buying a house off the market, the process is a bit more complicated. Those who are new to this process must take the time to learn about the process and the different terminologies involved.
The actual process for a tax sale will differ depending on your location (city or state). However, you will find a few similarities with them regardless of where the tax sale is being held. The local government will be responsible for presiding over the tax sale. They will give out notice to the public days or weeks before the actual tax sale. If you are interested in buying these properties, make sure to keep an eye out for the local government websites or local newspapers.
In order to participate in the tax sale, you might be required to register. This will give you permission to participate in the bidding process. There are different rules that apply to how these tax sales work. Some would require you to issue a check (if you have the winning bid). You will also be required to either pay the amount in full upon winning the bid or a certain percentage of the total bid.
Aside from the public auction, there is another method of obtaining a property from a tax sale – via public tender. In Ontario, a huge percentage of tax sales are done via public tender. A public tender is when you send the local government a written document expressing the amount that you would like to offer for the property.
When providing an offer for the property in question, you need to abide by the minimum tender amount set by the local government upon listing of the property. This amount has been determined by the local government as equivalent to the unpaid taxes for the property along with other fees and penalties. You can choose to settle for the minimum tender amount or offer up a higher amount (in the event that there are other offers for the property). The person who submits the highest offer will be awarded the chance to purchase the property.
Ownership and Using it as Investment
A tax sale of a property gives complete ownership of the property to the highest bidder. If you made the winning bid, you can gain ownership of the home at the price you offered. The property prices are much lower than the average market value. However, the cost of buying them could be driven up by competition as potential buyers aim to put the highest bid.
If you have the winning bid, the property is already cleared of any mortgages and liens that are tied to it from the previous owner. For this reason, there are many investors who look at this as an attractive opportunity to obtain properties at a lower price.
There are certain limitations awarded to bidders (and even winning bidders) with regards to the tax sale properties. You need to pay it due diligence to not only understand the condition of the property, but also to learn the best practices of investing in these properties. According to expert investors, you need to take on the approach of avoid losses first and then thinking about how to make profit second.
First and foremost, you should not bid for properties of which you have not had the chance to examine. Try not to bid on all of the available properties. Instead, look at which properties you believe has the best potential and focus on your bid on those. It is better to have a lot of information on a few properties than to try to bid on as many properties wherein you have limited information on.
At the same time, you can use this opportunity to assess the area where these properties are located at. This will give you an insight into the potential of your future investment.
It is also a good idea to maintain open and honest communication with current owners of the property. This will make a seamless transition when you have the winning bid and must finalize the purchase of the property. There are various forms of settlement that the previous owners might ask for; try to make this process as amicable as possible. If this is not possible, there are many legal channels that you can utilize to complete the eviction process.
Considerations Before Buying Tax Sales Properties
Investing in properties from a tax sale is a favorable prospect. But there are a lot of factors to look into before investing in a property outside the selling price.
Here are a few of the things you need to now before buying tax sales properties:
- The local government is not in obligation to offer sale for a property that is not vacant. One of the most important things you need to know when buying properties at a tax sale is to check if the property is occupied. If you won the right to purchase the property, you must handle the eviction of these occupants. You might need to hire a lawyer and bailiff to execute the eviction.
- Unlike traditional methods of buying a home, you won’t get the chance to examine the house before buying it from a tax sale. Some of the properties are even occupied by the previous owners. This is a risky move because you cannot determine if the property is still in good condition, or if it is in need of repairs. A comprehensive home inspection is also one of the primary requirements you need before buying a home. Unfortunately, this won’t be possible with a tax sale, either.
- In connection with the point above, if the property is still occupied by the previous owners, there is no telling if they won’t cause damage to the property. Some homeowners can be disgruntled enough to leave the property in a poor state. This could mean you might incur more costs to handle the repair or restoration of the property.
- The price set by the local government on the property is not really what you are going to pay. In the event that a public auction is held, there is a possibility that other interested buyers could drive up the price of the home. While the listing price is low, the actual selling price may not always be as cheap.
- If you have the winning bid for the property, you will be required to pay the amount (in full or in significant percentage) immediately. However, you won’t receive the title to the property even when you make payments on the spot. Instead, you will be awarded a certificate of sale. You will be given a redemption period (typically a year from the date of the sale) in order to claim full ownership of the property by settling any unpaid taxes and any accrued interests.
- It is your responsibility as a buyer to check if there are any problems or issues with the title. Check with the appropriate local government agencies in your city if there are any such issues with the title, or have an assessment conducted on the property.
By knowing the process and understanding the potential risks of buying properties in a tax sale, you can make an informed decision about the purchase. At the same time, you can find ways to circumnavigate those risks and make a good profit out of your investment.
