When it comes to finding good real estate investments there is usually a lot of work involved. I’m sure that you are familiar with finding the potential properties, crunching numbers and deciding whether or not to pursue the investment further. If you do continue, there is usually a long list of steps to take before the property may eventually be added to your portfolio. Chances are that these properties that do make it through will be good performers over time, but what if there was a pool of other properties that would potentially get you better return on your investment? Would you be interested? I bet you would. Let’s take a minute to take a look at the potential of tax distressed properties as an investment.
No matter where you live there will be properties in tax enforcement. You will find a wide variety of properties from run down homes to mansions that are in some stage of tax enforcement. There are a multitude of reasons why these properties end up in this situation including lack of interest on the owner’s part, financial difficulties of the owner, and even in some cases the owner has passed away and the estate has not dealt with the property yet. Whatever the reason, these properties give you the opportunity to invest in real estate potentially at a fraction of the property value and can make good candidates for both investment properties and opportunities for a quick flip.
Ideally, you would be able to pick up the property for the price of the back taxes, but in many cases you will still have to offer them something for the property as well. It pays to gauge their need and desire to get rid of the property to make a reasonable offer that will make both of you happy.
When you are approaching the owners of these properties you need to make sure that you are contacting them to help alleviate their problems with back-taxes and not there to take advantage of their situation. In most cases they will be happy to have someone there that will help relieve the stress of being in tax enforcement and this makes the sale of their property mutually beneficial to both parties.
Even though this might just seem like a piece of cake once you do get the owner on board with the idea to sell their property to you, it isn’t. Just like any other property you still need to do your due diligence and get all of your ducks in a row before committing to buying the property. Don’t be blinded by the potential profit that you will be making from the deal – remember that you should be looking at all of your real estate investments without emotion.
While this is not a complete list, it will give you an idea of some other things that you might want to consider before committing to buying a property that is tax distressed.
1. Check out Existing Liens
Depending on where you are buying the property it may have one (just the tax lien) or more liens on the property. Ideally you would like to find one where there are no other liens against the property but it won’t always work out that way. Make sure you know what obligations you will be assuming before committing to the purchase.
Many of these properties may have had their utilities shut off for an extended period of time which may result in additional costs to have them reconnected. Be aware that some of these costs will include reconnect fees as well as inspections (for example, if the power has been shut off for an extended period of time you might need an electrician to inspect the wiring). Be sure to factor in those additional costs as well when doing your analysis.
3. Building Inspection
While you might usually be brave enough to skip the building inspection it would be a prudent course of action to do one in these cases. If the owner has neglected paying their taxes there is a good chance that they may have neglected to maintain the building as well. Many people would make the inspection a condition of their offer and it would be money well spent.
While zoning might be a typical thing you check into when looking at an investment property many investors skip looking into it altogether. Check with the municipality as to what the property is zoned as to ensure that your investment is a good one. You don’t want to end up in a situation where you are not allowed to develop or renovate the property in any fashion – you are looking to make money from your investment, not lose it.
5. Get a Lawyer Involved
When you are investing in these properties, you want to make sure that you are covered and not met with any surprises after the sale. By hiring a lawyer, you will be able to ensure that you haven’t missed anything and hopefully will allow the whole transaction to go through stress free.
So, if you haven’t looked at properties in tax enforcement as investment vehicles, you should take the time to check them out. It is a great way to add properties to your portfolio at a deep discount and they can provide a great return on your investment whether you are looking to hold them as investment properties or flip them quickly for a profit. Just remember that there might be a little more due diligence involved when making your buying decision, but it will be time well spent.
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