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Transcript:
Welcome to the Tax Sale Podcast, where tax sale investing is made easy.
I’m Casey Denman, a tax sale veteran, expert, and trainer, author of the tax sale playbook, founder of the tax sale academy and your host here on the tax sale podcast.
Thanks for joining me on today’s podcast, and as always, at the conclusion of this podcast, if you’re looking to learn more about investing in tax defaulted real estate head to taxsaleacademy.com. That’s taxsaleacademy.com.
Alright guys, on this episode of the podcast we’re talking about due diligence. What do I look for? This is a question that is asked so often, but can be difficult to provide a quick little answer to.
Due diligence is defined as the act of evaluating the necessary information to determine the suitability of risk to an investor. As a tax sale investor, we must perform due diligence on every single property we think about purchasing to insure that it will be a suitable investment and will meet our specific investment objectives. In short, we want to research and find out as much helpful information as possible when it comes to a specific piece of property prior to buying that property so that we can make an informed decision as to whether or not we should invest in that property and how much we should pay.
And I could spend a dozen hours explaining the due diligence process. In fact, due diligence and research are covered in extreme detail inside the academy. So, please understand there is no way I could possibly begin to cover it all in a podcast episode.
Instead, I want to provide five of the factors you must consider when you perform you due diligence.
The first factor for your due diligence should be value. And the deal is that the rest of your diligence will really hinge on what the property’s worth. And when I say value, it’s important for the very start to realize that I never teach you to work off of full market value. Instead, I teach a ball park estimate that should be less than the fair market value. This allows for your property to be placed below the market which can help you to sell it quickly, and/or it will allow you some buffer in case there are any issues with the property. But that value should be one of the first things you determine. Then you’d compare it to the opening bid and keep working from there. Maybe it needs repairs or has some sort of issues, of course all of this has to be factored in, but ultimately the value is what you can expect to get out of it in the end, so always have and keep this number in mind.
The next factor to consider are the financial liabilities behind buying that property. When you buy a parcel of real estate it comes with certain responsibilities. One of these is that you are financial responsible for it. And I’m not talking about just the acquisition price of the property, because of course, you’ll be responsible for that and any buyer’s premiums and that kind of stuff, but you also must factor in the other costs involved. In some areas, the tax rates are so ridiculous, that if you hold the property for a year you’ll have lost your entire profit when you pay those taxes. What about the condition of the property? Are you prepared to pay for the remodeling costs? Maybe you’ll run into an issue with the foundation or something else that can get pricey fairly quickly. At the minimum, even without performing any improvements, you might still be required to clean up the yard or have it maintained regularly. These are all considerations you must take into account. If you can’t stomach the additional expenses, then you need to find a more suitable property for you. There are definitely properties out there that don’t require a substantial investment, but it’s possible the return might not be as large either. So factor all this in.
Another factor are your legal liabilities. We discussed your financial liabilities, but what about the legal liabilities? Buying an old gas station with a leaking underground gas tank is probably not going to be the smartest move for you. But what about that dilapidated home you plan to remodel. That might sound like a great idea, until something pops up and delays your project and then the city comes after you for not having the house up to code. Or what buying a property with trash on it that you don’t clean up? These and countless others are things that you really need to take a look at and factor into your decision on whether or not you want to invest in that specific property or not!
Another factor of due diligence is your time commitment. And we can really apply this on both a macro and micro level. First off, how is the auction even being held and where are the properties? Can you attend the auction online or are you required to attend in person? In person auctions are great for limiting competition, but maybe your schedule prevents it. And of course, if the properties are located 500 miles away, the amount of time you must invest in a remodel or other project that might require your presence can grow exponentially. So this is a factor that might not seem specific to real estate, but it is a factor that is specific to your involvement in real estate. The last thing you want is a half finished project costing you money while it sits there, because you couldn’t invest the time you had planned.
Another due diligence factor is going to relate to your exit strategy. Sure, that lighthouse, school, hospital, or old McDonalds might look cool to own. But, how the heck are you going to exit that investment? There aren’t too many buyers out there that are looking to buy an old school building. Takes a pretty special buyer for that, right? As you research the property you need to determine if the exit strategy required for the specific property is something that fits your investment objectives. If you’re the type who’s looking to quick flip something within a month or two, then you probably don’t want a project that is going to required a six month remodel. When you determine your exit strategy you must consider your plans with that specific property based on the market conditions of that areas, which of course, accounts for the supply and demand factors. Take all of this into account before venturing in to a property.
So there’s five factors of due diligence you must take into consideration. Value, financial liabilities, legal liabilities, time commitment and your exit strategy. Now, as I mentioned at the very beginning of this episode, there are countless other things you MUST take into consideration when you perform due diligence. These are just five examples to take into account.
And that’s it for today’s episode. If you’d like to learn more about the additional due diligence requirements and the step by step process that we’ve developed over the last 16 plus years, head on over to TaxSaleAcademy.com. That’s TaxSaleAcademy.com.
And as always guys, if you found this episode helpful it will mean so much to us if you take a few second to leave positive feedback.
Take care guys and make it a successful day.
See ya!