Ten tips on how to buy a tax sale property

I wanted to write a follow up or addition to my previous post about buying properties at tax sales.  Other than how to find and purchase foreclosure properties, the tax sale purchase process is what I am asked most about.

Lets get started.  It is important to realize that every municipality, state, parish, region or area will likely hold a tax sale at least once per year.  It is also important to realize where ever you are, they set there own rules around property tax collection and disposal of properties that have unpaid taxes owed on them.

There was a tax sale this past week in my home city, so the experience is fresh, and I figured I would summarize what to do, to give you the upper hand when buying tax sale properties.

It is definately a high risk way to purchase properties, however, it can also have big rewards.

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#1 Print off a list of the properties that will be offered at the tax sale from your areas website, well in advance and on the day of.  Make note of any changes.

#2 Locate the properties you are interested in buying and drive to the sites.

#3 Understand what “as is” means in your area as related to properties sold by way of a tax sale.  when you arrive at the site, causiously take a look around.  Smell the air close to the building, if you smell oil, mold, gas, etc.. you might want to walk away.  View the overall condition.  Is the property occupied, is it in an area you want to own a property in?  What is you first impression, and can you achive what you want based on the appearance.  In my area, the city takes zero responsibility for any environmental, physical, or occupant issues with properties sold at a tax sale.

#4 Determine the maximum price you will pay for the properties you selected, and make sure they will meet your investment criteria for the purchase.  Is it a flip as is, flip renovated, buy and hold with current building or a tear down vacant land hold, or if the property is vacant can you get it rezoned, or is it worth holding as vacant land.

#5 Make sure you are aware of the accepted forms of payment at the tax sale you plan to attend.  The one I attended this past week only accepted the following:

TERMS: PAYMENT OF CASH, CERTIFIED CHEQUE, MONEY ORDER , BANK DRAFT, IRREVOCABLE LETTER OF CREDIT OR LAWYERS TRUST CHEQUE AND NOT OTHERWISE. A purchaser at tax sale shall IMMEDIATELY pay the purchase price or deposit an amount equal to the TAXES, INTEREST, OTHER LIENABLE CHARGES AND EXPENSES. The balance of the purchase price, if any, MUST BE MADE WITHIN THREE (3) BUSINESS DAYS OF THE SALE BY CASH, CERTIFIED CHEQUE, MONEY ORDER, BANK DRAFT OR LAWYERS TRUST CHEQUE AND NOT OTHERWISE. COMMERCIAL PROPERTY WILL BE SUBJECT TO HST CHARGES. PURCHASER WILL BE REQUIRED TO PROVIDE AN HST REGISTRATION NUMBER AT THE TIME OF SALE.

#6 Keep your emotions in line:  The best idea is to bring a bank draft made out to the city for the required starting bid of the property or properties you have seleced.  If you do not buy them, you can take the cheque back to the bank.  Then do not let bidding emotion take over.  The reason it is an auction is to make it fair, and competitive.  Keep your emotions in check.  If you do not get a property, that is ok.  You are better to not get a property rather than pay too much.

#7 Understand the redemption period (if one exists) In the sale I attended this past week there were 17 redeemable and 1 non-redeemable properties.  What that means is that even if you were high bid and purchased a property if it was labled redeemable, the deeded owner has 6 months to pay the tax bill, interest on your money, cost of  insurance, and any nesessary cost to secure the building during the redemption period (boarding up windows, patching the roof, mowing the lawn etc.)

If you renovate the property, you will not get reinbursed for the cost of the renovation.  Also if the roof is leaking, it is best to patch it, rather than replace the whole thing.  You can cut the grass, but not trees.  You can collect rent if it is tenant occupied, but it will be deducted from your costs at the time of redemption.

You basically need to get insurance, change the locks, cut the grass, make the property safe and secure and wait the six months.  At the six month mark, the paperwork to transfer the deed will be provided.

If the property is non-redeeemable then you get to take full ownership right away.  It also means it likely has been vacant for a long time, and likely has a reason for not selling at a previous tax sale.

#8 Understand the rules around current occupants in the property:  When you buy a tax sale property they are truly as is.  That means they could be occupied by tenants who are willing to pay rent, tenants who are unwilling to pay rent, a family member to the deeded owner who cannot pay to purchase the property, but have been living in it for several years (possibly with mental or physical limitations).  It could be occupied by squatters (people who just decided to move in), you might be buying a crack house occupied by drug users, drug dealers and prostitutes.  It could have rodents, or other animals living in it.  In the case of the tax sale I attended the other day it is up to the buyer to work with the local residential tenancy board, police, pest control, and animal control to deal with current occupants.  The good news is that you can start working on your evictions or new lease arangements right away.  That will allow six months to clean up the occupant issues.

#9 Make a plan for the property, when you purchase a tax sale property you may think you know what you want to do with it before the sale.  The plan may change based on the true condition of the property once you own it.  It may change from a buy and hold to a complete tear down.  You may discover that, it is a poor fit for your investment portfolio and decide to sell it.  You may decide to fli it as is.  What ever you decide to do, you will likely have a redemption period to plan and decide which direction your project is going to go in.

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#10 Understand your personal risk tolerance.  When you buy a property from a tax sale, it is a risky investment.  Like most high risk investments, if they work out they have high returns.  If they do not work out, it is almost always a negative result.  Make sure you think about the emotional impact of paying thousands of dollars for a property that you cannot properly inspect before you purchase.  When you buy from a tax sale it is gamble.  Property investing can often feel like a gamble at the best of times, however, to buy from a tax sale, you have to keep your emotions under control, so you do not get into a bidding war and over pay.  Then you end up with a vacant property that you will need to check on regularly during the redemption period to please the insurance company.  The other side is you may end up with an occupied property, where the occupants are not paying rent.  You will need to figure out how to get rid of them.  You may also think you got a great deal, then realize the place is full of mold and asbestos.  If you are a risk adverse investor, I would not recommend buying from a tax sale.

I hope you will find these 10 tips have helped you prepare for your next tax sale.  The first step is to get educated.  I would recommend you go to Google right now and find out when the next tax sale is in your area.  Then attend as an observer.  I have found that the people working the tax sales are very helpful.  They want people to attend, so they can start generating tax revenue once again (you are responsible for the tax right from day 1, even during the redemption process).  As long as they get the starting bid amount, all back taxes will be paid.

If you need help managing your properties click here and check out our Complete Guide to Residential Property Management

Thank you for reading

Mike