Every property owner in the United States, regardless of the property size or if the mortgage is paid in full, will pay taxes on the land itself. In fact, property tax collection revenue accounts for 72% of all local tax revenue collected annually.
Real estate tax revenue is a foundational source of revenue for local counties to keep running. But what happens when property owners are unable to pay their property taxes?
Tax delinquent properties can become a burden to the collecting county or state. However, savvy real estate investors understand that tax lien investing or wholesaling tax delinquent properties can provide a great solution to these motivated sellers while creating an optimal investment opportunity.
Often, investors who are willing to tackle wholesaling tax delinquent properties will also have experience working with distressed sellers on foreclosure or pre-foreclosure deals.
Interested to learn more about this untapped and profitable real estate investing strategy? Read on and navigate the menu below!
Every real estate property in the United States will always owe property taxes. Even if a property owner has paid off a mortgage in full, property taxes will always be levied by the county or township where the property is located.
A tax delinquent property is a property where the owner has fallen behind on paying the property taxes. When a property owner defaults on property taxes, the county has the right to recoup the taxes owed.
Every state and county will have specific rules and laws around tax delinquent property sales.
Some states utilize a process where they place and sell lien certificates on tax-delinquent properties. This is covered in more detail later in the article.
Other states go straight to a tax deed sale where the delinquent property is foreclosed on and sold to investors at an auction.
As a real estate investor, it is critical that you understand how your particular investing market operates around wholesaling tax delinquent properties. Working with a local tax attorney or real estate attorney in your market will help you stay updated on your market’s rules and regulations.
A local realtor who focuses on real estate investing strategies may also be able to advise on local rules
The rights to ownership are different between a tax lien certificate sale and a tax deed sale. We’ll review these differences below.
Similar to a mortgage foreclosure auction process, the property homeowner will receive warnings that they are at risk of losing their property. The local county or township will start issuing notices to the property owners that their taxes are past due.
With each delinquency notice, the county will place an additional tax lien certificate against the property and the property owners. Every state has different rules and timelines, but after the state’s specific time window passes, the state or county can auction off the tax lien certificates to investors.
When an investor purchases a tax lien certificate, he or she pays the back taxes to the county. The distressed property owner is then obligated to repay the back taxes to the investor, plus interest. This creates cash flow and passive income for the investor.
Interest rates vary and are typically set at the county level. A tax lien sale does not immediately give an investor an ownership right to the property.
Rather, investors who choose tax liens are attempting to create a long-term cash flow situation with the potential opportunity to acquire the property later.
If a property owner defaults and cannot pay back the investor, the investor can take ownership and possession of the property. These timelines vary significantly by state and county.
If the state or municipality operates on a tax deed model, the county can take direct possession of the house through a foreclosure process. The property owners are forced to vacate and the property is sold at a county tax auction.
In these circumstances, real estate investors make money through the direct purchasing of the property at the county auction sale.
Wholesaling tax delinquent properties gives investors of any skill level an opportunity to invest and make relatively quick money with minimal risk.
Investors have a few different options to work with when investing in tax delinquent properties. They can purchase tax lien certificates and collect interest on back tax payments. They can buy a property directly from the county at a tax deed sale.
While these two methods can be lucrative, it can also be tough for a real estate investor to break out from the competition. Traditional property auctions are saturated with investors looking for a good deal.
For those investors who purchase tax lien certificates, the investment may only come to fruition over the long term.
A real estate investor or wholesaler has a third option: he or she can locate tax delinquent properties BEFORE the situation has gotten too dire for the distressed homeowner. They can locate properties where the owner has fallen behind on property tax payments but is not yet too far beyond saving from auction.
They can locate properties that are showing signs of financial distress and are heading for a tax auction sale….but they aren’t quite there yet!
By conducting thorough due diligence and identifying these tax delinquent properties earlier, the investor can not only identify deals that the competition can’t find, but they can help the distressed homeowner get out of a financially devastating situation.
Once the property is found and identified, the investor can wholesale the tax delinquent property to a third party investor. These types of investors are often ready with cash and quick closing terms (aka cash buyers).
They may be interested in locating properties to flip or to fix up and hold as rental properties.
Many real estate investors, especially new investors, get intimidated by this type of opportunity, leaving the market open for those investors willing to work with their counties and understand local regulations.
Finally, the owners of tax delinquent properties are often desperate for a solution and seeking help, providing the investor with a great opportunity to find a good deal and help the owner out.
If an investor is able to work with a delinquent property owner early in the process---before their property is put up for auction---a win-win scenario can be created that helps the distressed owner.
A delinquent tax list is a public record and kept on file with your local county clerk. These lists outline property addresses where the property owners have fallen behind on paying their property taxes.
As soon as a lis pendens or warning notice is officially given to a property owner, the warning is recorded and the matter becomes public knowledge. Every city and county/township will maintain a list of these tax delinquent properties.
Scrubbing a marketing list is the act of cleaning up and removing any discrepancies or red flags. Working a marketing plan with a “clean” list of data starts your campaign on the right foot, ensures you are marketing to your target audience, and ultimately sets you up for success.
Scrubbing a tax delinquent list---or any lead generation list---can feel overwhelming. However, the effort is ultimately worth it as you can save time in the long run.
If you are using a paid list service, many offer a “duplicate removal” search option. Even if this feature costs a few dollars, it is worth your time to pay it. This service will search for duplicate addresses and/or name combinations.
If you are doing your own list scrubbing manually, check for the following duplicate or suspect items: duplicate email addresses, “spammy-sounding” email addresses, or any names who have previously unsubscribed from your marketing lists.
This is also a great opportunity to proofread and correct any obvious typos.
Investors can also run their lists against the National DNC Registry. This will alert the investor to any names on the list who have specifically registered with the DNC Registry and do not wish to receive any solicitation calls.
Finding tax delinquent properties before they are taken by the county gives the real estate investor a strategic advantage over every other investor and buyer in the market. Putting together a list of properties will help the investor locate potential deals quickly.
The best free resource for locating delinquent property tax lists is through your city or county websites. Often, the local tax collector will have a specific domain dedicated to property searches.
You can also search properties by lien types to find clues on potentially future distressed homes or owners.
Most counties or townships have website search functions where investors can search for local delinquent tax lists. Investors can also read up on the local rules and regulations surrounding local tax lien or tax deed sales. The example above shows how the City of Denver handles these properties.
You should look for direct contact from the tax assessor’s office. This clerk can assist you with your search or give you pointers as you create and run your own search of the available records.
Investors with extra capital can also purchase software that integrates public information and delivers the needed data more quickly and efficiently. Two notable platforms are listed below:
This comprehensive platform covers a full sales cycle for investors from marketing and locating deals to closing. Utilizing search technology, investors can input specific search criteria and the software will pull from public records.
The back-end CRM component allows investors to manage marketing efforts (such as sending out mailers) and deal transactions.
This search platform relies heavily on data to aggregate and deliver specific search criteria to real estate investors. Given the data-centric nature of the product,
PropStream has likened itself to be on par, if not better, than a real estate agent’s Multiple Listing Service (MLS) information portal.
PropStream offers a 7-Day Free Trial for any investor wanting to try the software out!
Get Your PropStream 7-Day Free Trial & Find Tax Delinquent Properties Today!
Locate the tax delinquent property. You will do this by using one of the methods outlined above, such as running the tax delinquent property list from your county or using a paid service.
When you identify a potential opportunity, run a detailed After Repair Value (ARV) analysis. Remember, your ARV analysis should include all of the back taxes owed on the property.
This may be different from other wholesaling deals. These liens must be satisfied in full before the property can be sold.
Reach out to the distressed property owner, explain what you do and how you can help. Understand that your approach should be compassionate and it may take time.
These distressed owners are often stressed, angry, or in denial over their tough financial situations.
Negotiate a deal with the property owner. Make sure to include an assignability clause and relevant contingencies in the purchase contract.
This will allow you to shop the deal to your real estate investor network and ultimately assign the purchase contract to a third party.
Are you afraid of negotiations? It can feel scary, but it’s an essential skill of real estate investing. Watch this YouTube video for more tips around negotiating exceptionally well:
Market the deal once you are under contract. Reach out to your investor network, your local REI group, or your own cash buyers list (if you have one).
It's important to understand the rules about advertising real estate that you don't own and learn the legalities of real estate wholesaling.
Locate a third party buyer and assign the purchase contract.
Work with the third party buyer and the property owner to smooth over any details, be a coordinator with the investor-friendly title company, and ultimately close the deal!
Reaching out to distressed property owners can feel intimidating and overwhelming. If you use a script and have notes handy outlining your mission, it will help.
A script can help investors, especially new wholesalers, stay focused as they work through connecting with a property owner.
Questions and dialogue should be specific to the motivation and issue the motivated sellers are facing. Remember, it is critical that the real estate investor stay compassionate, listen closely to what the property owner is saying and ask a lot of questions to fully understand their unique situation.
It’s also important to uniquely position yourself as an investor. There is a chance that these distressed property owners have already heard from other investors.
They may be feeling completely overwhelmed. They may have already been contacted by a lot of people and don’t want to talk to anyone else.
These property owners may be in over their heads. They may have acquired the property through an inheritance or a probate process.
They may have fallen on tough financial times. Your job is to offer a potential solution and help them.
You have to offer a value proposition that not only showcases your strong abilities, trustworthiness, and professionalism but also makes them feel comfortable and safe.
You can talk about your experience with wholesale deals or your large network of support. While these are fine to highlight, make sure you keep the conversation focused on the property owner and how you bring value.
If you approach these owners with an attitude of assistance and solving their problems, they may be more willing to listen.
A potential script could be something like this:
“Hi, XXX, I understand you’re the owner of 123 Maple Street. My investing company specializes in homes with unique financial challenges. In fact, we have a tax assistance program that may help you. I came across your house and understand you may be needing some help right now. Do you have a few minutes to chat now?”
As you move forward through contract negotiations, hammering out terms and securing a purchase contract, continue to express genuine empathy and approach the situation with a win-win attitude.
Many investors prefer to focus on tax delinquent properties by purchasing them at auction, rehabbing and flipping them back onto the open market.
Below are a few tips around this strategy:
Yes and no. Here’s why:
In many counties across the country, if a property owner falls behind on property taxes, the county has the right to sell that property at auction. Therefore, a real estate investor could come in and pay the back taxes owed.
Back tax amounts will vary significantly as every state collects different amounts based on the property’s assessed value. Local government will determine the exact process for past due taxes and fee assessments.
Watch this YouTube video for more information on how property taxes vary significantly by state:
But not so fast: the investor doesn’t just automatically own the property at that point! The original property owner will have a time period called the “redemption period” in which they have an opportunity to come up with the money to pay back the back taxes, plus interest.
If the original owner can come up with the funds in the redemption period, he or she can usually get their house back.
The redemption periods can be years in length (it varies significantly by state and county). Therefore, this real estate investing strategy must be approached with a longer-term mindset. This is not a game for quick flips!
The short answer is no, you cannot sell a house with property taxes owed. You can create a deal where the property taxes will be satisfied during escrow or just prior to closing. This would then allow the house to be sold.
Remember that all liens---including back property taxes---must be satisfied prior to a real estate closing.
This is why it is so crucial that the wholesaler work these back taxes into the costs of putting together a tax delinquent deal. These costs must be covered by one of the parties before the property can be sold.
If you have questions on whether you have included all of the liens in your calculations, you can also have a title search run by a title company to verify.
Wholesaling real estate is a great place for new investors and seasoned investors to make relatively quick money with no money of their own.
Real estate investors who are willing to go the extra mile: by conducting detailed research, understanding their local county and township property rules, and reaching out to distressed property owners to have tough conversations, will enjoy a unique real estate investing niche.
Understanding how to effectively wholesale different property types will only help investors stay dynamic and ahead of changing markets.
By locating tax delinquent properties early in the process and before they go to auction, these investors can help distressed owners and find deals that beat out the competition.
Have you ever wholesaled a tax delinquent property? How did your experience go? Tell us in the comments below!
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