Transcript:
Dealing With Tax Sale Risk
Welcome to the Tax Sale Podcast, where tax sale investing is made easy. My name is Casey Denman, I’m a tax sale veteran, the leading tax sale expert, author of The Tax Sale Playbook, founder of The Tax Sale Academy and I’m your host right here on The Tax Sale Podcast.
Thank you so much for joining me on today’s podcast episode. This is a completely free podcast and is brought to you through and because of The Tax Sale Academy. If you’re looking to learn more about investing in tax defaulted real estate, just head to TaxSaleAcademy.com. Again that’s TaxSaleAcademy.com.
Today I want to help you understand how to better deal with the risks involved with tax sale investing. Anytime we put money into anything there is risk involved. Most people don’t think about it, but something as simple as buying a meal at a restaurant has risk involved – what if you don’t enjoy the meal, get food poisoning or something else? Now, when people make investments they routinely think of risk. And oftentimes that over analyze the potential of the risk to the point where they don’t want to invest in ANYTHING.
So, I wanted to recorded today’s episode to help you better understand how you can deal with the risks involved in this business. Now, the fact is that I can’t explain how to avoid every single risk in this business in a simple podcast episode. So instead, I want to provide FIVE key points that can help you in dealing with these risks.
The first one is proper preparation. I’ve mentioned it before but I get quite a few folks that buy something, realize they made a mistake, then go back and try to learn how things went wrong. If I had to pinpoint ONE single thing that all of these folks have in common it is that they did not prepare properly. And I’m not talking about simply researching the parcel of real estate accurately – while that is often the obvious factor, it’s usually not the root cause. The root cause is that they simply didn’t know what to research. They weren’t properly prepared prior to investing.
If I had to make a list of things on how you should prepare prior to investing, it would probably be pretty lengthy. So let me give you just a few things to focus on: know your tax sale laws. These are the rules you play by. Know your local laws that affect the type of real estate you’re investing in. Know your local area’s process for selling tax defaulted real estate. Know the process for researching this tax defaulted real estate. Have and follow specific strategies that inherently reduce your risk. And again, I could go on with a much lengthier and detailed list, but the point is that preparing, well in advance of doing any actual research is the equlivalent of laying down the foundation for a home. Without having the proper foundation, you’re business will collapse sooner or later.
The next one is that I wanted you to fully understand that your risk is primarily handled before purchase. So many people want to know how to avoid risk, minimize risk or handle risk. The truth is that the overwhelming majority of your risk, if not all of it, should be handled before your purchase. This includes performing proper due diligence – which goes back to our first point of emphasis of properly preparing, so you know what and how to perform due diligence. But obviously, you want to look at the specific property in depth before purchasing it. The deeper you look into a properly, the lower your risk will be. The guys you haphazardly buy properties based on photos alone are putting themselves into the substantial risk category. On the flip side, the ones who spend hours at the county courthouse researching every single little detail about the property from every single department, are the ones who have minimal risk. Now, obviously, there is a sweet spot here. We can’t spend ten hours researching every property. But the point is that the more accurate and thorough your research, the lower your risk.
And I’m not just talking about the details of the specific property. We also must consider your market area, your selling strategy, the time you’ll have invested and the value of that time and so much more. Take all of this into account BEFORE you make your purchase and it’ll serve to help reduce your risk substantially.
The next one is that you should know your risk tolerance. I received an email a couple of weeks ago from a gentleman about a strategy that could have proven very lucrative but also included so pretty obvious risks. My first thought was, no, that is way to risky. But then I started to think about it. His risk tolerance and my risk tolerance are two completely separate things. When I was 18, I routinely sank every single dime I had into a property that was purely speculative or risky. Now that I’m much older and have more responsibilities I’m more risk adverse with my investments. And there is not a correct answer that fits everyone. In fact, your risk tolerances will change over time. These are personal to each one of us.
But it’s important that you know and understand where your risk tolerance is set right now. For the ones who are very risk adverse, you will likely want to stick with the most simple properties, that are easy to research, wehre you can confirm your research is 100% accurate and thorough, and where you’ll have multiple ways to sell the property so you’ll make money, albeit perhaps not quite as much as you would’ve with those super risky deals. For the investors who are very risk tolerant, I’d suggest you also work in a few of the very simple deals that are sure things so you can continue to keep your bills paid, but then keep an eye our for the riskier, more speculative deals if that suits your style. And then, of course, there are obvious levels in between these speculative deals and sure thing type deals, so find what works best for you and stick to it.
The next one I actually have a related podcast episode on, but I wanted to address it again because it’s so important. Here it is: Margins Mitigate risk. An unfortunate occurrence takes place in ultra competitive areas and for investors who are impatience. The cost of the property, either set by the county initially or thorugh competitive bidding, drive the acquisition of that property to nearly the price you’ll receive when you sell the property. In other words, your margin is extremely low. If you have a property you paid $9,000 for and it’s worth $10,000, then you only have $1,000 to play with. Now, hopefully you had your strategies lined up and everything works flawlessly. But if not, that $1,000 will not go far in handling your mistakes. If you had paid $2,000 for that same property you’re going to sell for $10,000 then you have plenty of margin to handle the issue. Obviously, that’s an extreme example. But the point is that the large your margin, the more you’re mitigating your risks.
And it’s not just a matter of you paying near resell price for the property – but it could be other things. Maybe the market declines some or something like COVID hits and you have to sell it for less than what it was worth 30 or 60 ago when you bought it. Or what if you just decide to hold onto it for whatever reason and now you have taxes and possibly insurance to pay. The bigger your margin, the lower your risk. It’s an easy concept . . . until your get to the point where you become inpatient and force yourself into a purchase. Slow down, choose the right market and then buy only when everything else, including the margin justifies it.
Now, let me talk about risk after purchase. The truth is that, if everything up to this point was handled correctly this should be the easiest risk to mitigate. If it’s a structure of some sort, go out and get insurance. Now, that covers financial risk due to physical damage or liability issues. From here, it’s a matter of executing on your prepurchase strategy, which should hopefully work out as you planned, including any backup plans you had in place as part of your risk mitigation strategies. If something doesn’t work out after purchase, however, it’s important to pivot your approach quickly. Your marketing plans should always include when and how you should pivot – whether that’s increasing marketing efforts, reducing price or changing strategies altogether. Many investors get too complacent in their efforts to sell a property – they buy with one strategy and if that doesn’t work they try to force it. I’m guilty of this myself. I wrote about my 2008 financial crisis issues in Tax Sale Playbook where I tried to force the same strategies even though they stopped working months prior. Now, I’ve got that set timeline, if something doesn’t pan out, I immediately pivot and try something else. If that doesn’t work out within a set time period, I pivot again. Don’t fall into trying to force something that isn’t working, simply because it’s what you’re comfortable and used to doing.
So, there it is. There are five ways to deal with tax sale risk. Risk is always going to be part of any investment. But when you approach is correctly, it truly is possible to reduce this risk to virtually nothing. 99 times out of 100, when a bad investment is made, it’s ebcuase one of these five key points is not follow. Preparation, pre purchase diligence, knowing and following your risk tolerance, using margins to mitigate risk, and pivoting as needed after purchase.
I truly hope that this episode has helped you. If so, please take just a few seconds to leave us positive feedback on whatever podcasting platform you’re listening to us on today. It means a great deal to us and really helps out our show.
If we can help you with tax sale investing in any way, there area bunch of links in today’s show notes, including one to our primary site at taxsaleacademy.com.
Thanks again for listening and make it a successful day. See ya!