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Tax-delinquent properties can be both scary and very attractive to real estate investors. They can be risky if you aren’t aware of the full situation, but they may also be undervalued deals with lots of potential.
These properties are often sold at deep discounts to homebuyers, landlords and rehabbers, and tax lien certificates can be an investment vehicle for passive income or a route to acquiring the property. Yet, it is important to know the process and timeline involved, as well as any other debts owed on the property to be able to assess the true value of these opportunities.
Here’s a look at both the pros and cons of properties with past-due tax bills:
1. Motivated Sellers
Every real estate investor is looking for motivated sellers. Many chase foreclosures, probate homes, those late on their mortgages or with rundown homes with lots of deferred maintenance to find those motivated sellers. Some of these things may overlap with past-due property taxes, but not always. Everything else may be great. Seeking tax-delinquent properties could be a good method of connecting with owners who are serious about selling houses fast.
2. Negotiation Power
Whether you are buying a new residence, a second or vacation home or an investment property, having some leverage in negotiations is always a perk. Buying tax-delinquent properties isn’t just about looking for low prices, either. The experienced know that being able to negotiate more of the terms you want can be even more important. That includes closing dates, financing, inspections and repairs.
3. Profitable Opportunities Others Are Overlooking
Competition can be killer in real estate. We’ve been through a long period with lots of competition: bidding wars, difficult agents, demanding sellers and fast-moving deals. Being able to get ahead of or around the crowd can be extremely valuable. Many fear past-due tax bills will eat up all the equity or require major chunks of cash upfront, but that’s not always the case. Tax-delinquent properties can be in default for just a few dollars. Even big liens may be negotiated out for pennies on the dollar. That can turn a dead deal into a real winner.
4. A Chance To Help
Buying distressed properties from motivated sellers shouldn’t be about taking advantage of other people’s misfortune. A few of these homeowners may have been irresponsible and landed themselves in this situation. Many are there through no real fault of their own. This is a chance to help those struggling to pay the bills, having gone through a divorce or disaster. Purchasing the home can help them move on and get a fresh start. Support the community by keeping the property from becoming a run-down eyesore that drags down the whole neighborhood and drains public resources.
1. Lack Of Equity
One problem with properties with large past-due tax bills is that these liens can quickly eat up a lot of equity. We’ve begun to see more American properties slide back into negative equity or underwater positions. Just one year of delinquent annual property taxes can add over $10,000 to that problem. Some owe hundreds of thousands in back taxes. In some cases, you might find a “cheap” house deal that has more in delinquent taxes than the price of the house, or even the value of the house.
2. The Tip Of The Iceberg
Often, past-due property taxes is just the tip of the iceberg of the problems — not always, but it’s quite likely. There may be many other past-due bills like utilities, mortgage payments, insurance and more. Or, the owners may have given up on the property due to other legal issues, code violations or rehab project roadblocks. Many of these can be overcome, but you’ve got to know what you are really dealing with before you get in and can assess it as a viable deal and at what price.
3. Payment Due At Closing
If you hope to get a purchase mortgage and title insurance, these past due taxes will likely have to be paid by the closing. This can be a big issue if the seller is short on equity. Most conventional lenders aren’t going to loan you extra money to pay them off either.
4. Where Will the Seller Go?
If they are already in financial trouble and can’t afford to pay the taxes to save their homes, you may have trouble finding the seller somewhere to go. The No. 1 reason I find that distressed sellers don’t take offers of help or sell, no matter how ugly their situation, is that they simply don’t know where they will move. Where will they take their spouse or children or aging parents who live with them, or their pets? The more you can do to help solve this, the more likely you are to get a “yes” to your offer.
Both tax lien certificates and physical real estate with past due property tax bills can be a great investment. As with any other financial move, just make sure you understand how they work, and the risks of additional debt and liens. Those who are interested in this asset class can begin finding these opportunities by visiting their local county property appraiser’s website to look for unpaid tax bills. Your county may also schedule regular tax lien and property auctions where you can access these opportunities.