Tax Sale Due Diligence

Transcript:
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.

One of the questions that I’m asked most often is what type of due diligence should I perform for tax sale properties? It sounds like a simple enough question, right? The issue is that I actually tend to struggle to answer this question in a way that most folks ask it desire. In other words, I can’t provide the answer folks are looking for. Now, I’ll be going over a few things later in this episode, but the what due diligence do I do question is a difficult one to answer.

Sounds odd, right? The tax sale guy can’t provide the answer as to what type of due diligence should be done?

The problem is that I’m often asked this question in a way that asks for a do this, do that, give me 5 things; provide a one sentence answer or shoot a 5 minute video type manner. The reality is that due diligence is the core of what we do. It IS a large portion of our business, in fact, it’s the majority of our business. Due diligence for a property and due diligence as an investment is everything. Inside The Tax Sale Academy I have two entire modules on diligence and research, along with dozens of other trainings and workshops. It’s such an important topic that truly can’t be broken down into a 5 minute video, a ten minute podcast or anything else. It’s an entire academy by itself!

So hear me out . . . here’s the answer: Your due diligence should be to know everything possible about every single property that you’re interested in investing in. That’s it. That’s the simple version – know everything possible about the property and you can’t go wrong.

Of course, then the follow question comes: Well, what is everything possible? It’s EVERYTHING! If you know everything possible about the property, then you’ll never have any issues whatsoever. I can assure you that. But that issue is that there are plenty of times when we simply can’t know everything possible. Whether this is caused by something that stops us from accessing certain records we want, or maybe it’s a matter of time we have available or maybe it’s a number of other factors, but it’s not possible to know everything possible all of the time.

The truth is that diligence also varies between investors. The investor that buys homes with the intention to gut and remodel everything won’t be nearly as concerned about the interior condition as the investor who prefers cosmetic only upgrades. The investor that has substantial capital might not be as concerned with potential issues as the investor who is investing their last dime. The investor who has experience dealing with certain issues might not worry about those things as much as a new investor should.

We can also apply the same variables to different areas – some areas are extremely investor friendly, in other words you don’t need to worry about too many issues from the local governements, while other areas can be more difficult to invest in where you have to worry about every single little issue. Obviously, that is going to lead to a different type of diligence.

So, let’s go over just a few things to consider when doing your diligence. Now, this is NOT a complete list and the details behind the factors that we’re about to discuss are also NOT a complete description of what to look for. This is not intended to be a 5 or 10 minute episode to teach you everything you need to know about tax sale due diligence, because again, we simply can’t do that. Instead, I’m recording this episode to help you start thinking in terms of what you really need to research and just how deep you need to go. I’ll be going over a number of things in a rather quick fashion, so be sure to pay attention.

Alright, let’s talk about land first. Vacant land should be a fairly simple investment, right? Well there can certainly be some issues with vacant land.

Size is one of the big issues? What’s the size of the land? There are a lot, and I mean thousands of properties that are sold that are leftover parcels from developments, cutoff from parent parcels, easements, right of ways, or otherwise tiny little parcels of land that are usually worthless. Just because you see a $20 piece of land doesn’t mean you should buy it. While checking the size, we also aren’t just looking at the total area. We need to take a look at the dimensions of the property. A one acre property might sound appealing until you realize that it’s 10 feet wide by 4,356 feet long and was originally intended for a long sidewalk that was never put in.

On those same lines, what is the shape of the property? I’ve seen some large properties with such odd shapes that they weren’t usable. Take a peek at the GIS.

Access is another factor to determine. First one, can you legally access the property? If a property is landlocked, without a very specific strategy then it’s likely worthless to you And there are plenty of landlocked properites to go around. Second question is can you physically access the property? Although appearing on plat maps, some roads were never developed, other roads are washed out or such sugar sand that the property can’t physically be accessed.

What about the buildability? Can you legally build on the property? I commonly see areas designated as green spaces, conservation areas, parks, easements, water retention areas and many other similar classifications get sold at tax sales yet they obviously aren’t buildable. The last remaining vacant parcel in the established subdivision, that’s available at tax sale might just be there for a reason. Be sure to check the land use and zoning to make sure they allow building and conform to the surrounding areas.

What about topography? In Florida it’s not uncommon to see properties that are under water, swampland, or otherwise wet properties. In other parts of the country, that 1 acre parcel might be on the side of a mountain. I know of plenty seemingly large parcels, some upwards of 10-15 acres that you can’t even stand on, much less build on without considerable expense.

If everything checks out so far, what about water and sewer? Is water available? Is sewer available? If so, what are the tap in costs – sometimes these can make it cost prohibitive to build. Is is nearby? In some cases, you might be forced to extend the lines at your expense if so. If water and sewer isn’t available, can you install a well and septic tank? Most areas have distance requirements between the two so make sure your property can meet these requirements. If everything is good so far, will the soil pass a perc test? If not, you could have considerable expense there. What about a water well? Can one be installed? In some areas, you’ll be going very deep and that will costs someone money.

How about any liens or code violations? Just because a property is vacant does NOT mean that there are no issues to worry with when it comes to the city or county. Trash dumped on the property, weed ordinances, snow clearing and many other things pop into my mind because I’ve dealt with all of them. Check for liens and then check for what you’re expected to do.

And the last one to note is contamination. Is the property contaminated? Check county records, use common sense, dig deep into the history of the property. That corner parcel in the middle of town might have had an old gas station on it and that contamination is now your problem.

Alright, let’s talk about buildings. You obviously need to research everything we discussed to this point and more.

So what’s the condition of that building and how does it relate to your strategies? Since we can’t access the interior, we should always assume a property is in poor interior condition while doing out best to judge the exterior condition.

We also must check the records for the building, including permits, age, history, all that kind of stuff. And when we do, it’d probably be a good idea to compare that information with what we see. It’s not uncommon to see a building with unpermitted additions, which could cost you money in the long run OR, I’ve even seen building that were missing entire sections due to fires or foundation issues.

Along with this we have to look into the code enforcement records. Is the property condemned or on a demolition list? Just because something looks pretty from the street doesn’t mean that it isn’t on the county or city’s list because of a bad foundation, fire damage inside or other potentially hazardous issue. Be sure to review the list for all records related to the property.

What’s the foundation look like? Is it sagging? Are wall sagging or are they rigid like they should be? A house with an obvious sagging foundation, leaning walls, collapsing roof or other visible issues is going to be a house that’s expensive to repair and potentially comes with major liability issues.

Don’t forget to also look at the doors, windows, roof and other things to help give you an indication of what’s inside.

Now, outside of the physical attirbutes there are a number of things to look at. Be sure to do a search of the liens against the property – are there any county or city liens? If so, you’ll be responsible for those. Is there an IRS lien? This might cost you some extra time waiting on them.

What about the maintenance requirements? Some cities are VERY strict, especially when it comes to out of town investors. I’ve told plenty of stories before, but I’ve had situations where an inspector would drive by one of my investment homes for something as simple as a broken window and write me a citation every single day until I replaced it. Be sure to dig deep into what you’re responsibilities are there as a property owner.

On that same token, what are the other laws there that could apply to you? For instance, some cities might have require an inspection every time a building is sold. Others might have a moratorium on new rentals. Every area is different and if you don’t play by their rules, you’re going to put yourself in a tight spot sooner or later.

Then obviously, we have to think about selling the property right?

The most important aspect of this will be value? What’s the property worth? And based on this number, what should be out bid amount? And I’m always ultra conservative with a value I place on every property then I go in with a super low bid amount. That way in a worst case scenario I can still make money. You should get to the point sooner or later where you can easily look at a property and without much further research say, THIS is what the fair market value is for this property. This is what I would pay and this is what I should make. Become a valuation expert in the area you’re investing in and it’ll make your life much easier.

Along that same token is supply and demand. If a property has a worth of $3,000 but nothing like it has sold in five years then you’re going to have to factor that in. I had an acreage parcel a while back that I got an insane deal on. When I contacted a local Realtor, he basically told me that the property was worth around something stupid like 40 or 50 times what I paid for it. Then he declined to sell it for me – he said nothing like that has sold here in many years, there simply aren’t any buyers for it and I’d be wasting my time and resources listing it and marketing it. He recommended I put it for sale myself and plan on it being on the market for many years. That hurt! There are many subdivision specifically that have thousands of undeveloped, rural lots that pop up at tax sales – you might be able to get them cheap, but can you sell them. That’s the question.

And the last one is your strategy. Does the property fit your strategy? Buying a property that you want to sell within a week might require a different approach than a property you want to hold on to as a rental or you don’t mind sitting for some period of time before selling. Likewise, if you’re investing from across the country, then you’ll probably approach something different then if you’re investing locally. Be sure it fits your strategy.

So, as you can likely tell by now, there is A LOT involved in tax sale due diligence. I highly suggest that you get the proper training, that you educate yourself by researching, analyzing and practicing prior to invetisng your hard earned money.

Again, as aI mentioned at the beginning of this episode. In short, if you want to know what tax sale due diligence is, it is knowing everything possible about the property you’re investing in as an investment, based on your specific objectives.

Hopefully this episode has enlightened you just a little bit with all that goes into performing due diligence on a tax sale property. I think everyone, at some point or another, is guilty of investing in something without truly knowing everything possible about it and while we might be able to luck out once in a while, at the end of the day, the safest, most secure way to invest is by knowing everything about what you’re buying.

Thanks so much for joining me today. If this episode or any of our episode have helped you out, please take just a second to leave us some positive feedback on whatever platform your listening to us on right now. It truly means a great deal to us when you leave those positive reviews and I’m so very thankful for each person who has done so already.

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Take care and make it a successful day. See ya next time right here on The Tax Sale Podcast.