Due Diligence for Tax Sale Properties, or What You Need to Know Before You Bid

Due diligence is the most important step in the process of investing in tax liens or tax deeds. Whether you do this correctly or not could mean the difference between being extremely profitable or losing your investment. Due diligence for tax deed properties is a little more involved than due diligence for tax lien properties. When you purchase a tax lien certificate, you are not purchasing the property. You are paying the taxes on the property and recording a lien against it. When you purchase a tax deed, however, whether it’s a regular tax deed or a redeemable tax deed, you become the owner of the property and you will be held responsible for any other liens that survive the tax sale. You’ll also be liable for anything that happens on the property and any current taxes, association fees, or special assessments.

Even when you’re purchasing a tax lien, you still want to be sure that the property is worth a few times your initial investment. Even though you don’t own the property, if the property is not worth anything (if you purchase a tax lien on an unbuildable lot, for instance) then you are not likely to get paid. Don’t forget, you may have other costs besides what you pay at the tax sale for your certificate. You will have recording fees, subsequent tax payments (in states that allow you to pay subsequent taxes), and if the lien does not redeem – foreclosure costs.

For both tax lien and tax deed properties, you’ll want to see the tax assessment data for the properties in the sale. Sometimes this is included in the tax sale list that you get from the tax collector, but in most counties it is not. Most tax sale lists will only list the parcel number, a legal description of the property (usually just the block and lot), the name of the owner, and the amount due. The tax assessment data is the data that the county or municipality uses to determine the tax value of a property. It includes the size and type of the property and the assessed value, as well as the owner and property address. Sometimes it will even include the market value and/or last sale price of the property. To find out if you can get this information online, go to the county website and search for the tax assessor’s web page. You might find a link to it there. If it is not available online, you may have to go to the tax assessor’s office to have access to it.

An easy way to get all of this information without doing any work is to buy a detailed list from a tax sale list provider. Sometimes these lists can be expensive; you’ll have to weigh the cost of the list against the value of your time. If you don’t buy a detailed list, you’ll have to do the research yourself, and that could take a lot of your time. To help you to determine if you should purchase a detailed tax list or do the work yourself, you can read my article "When to Buy a Tax Sale List." You can find it at http://tinyurl.com/28ujj2.

Once you have determined what the property is worth, your due diligence for tax lien properties is almost complete. All you have to do now is look at the property. You’ll want to physically look at the property and take a look at the property on a tax map if you can get access to one. Sometimes you can get the tax maps online; other times you will have to go to the tax assessor’s or mapping office. When you look at the tax map you will be able to see if there are any easements or rights of way on the property, or if the property is land locked. These are all things that you want to avoid. Once you’ve done this, your due diligence for tax lien properties is complete; but if you’re going to a tax deed sale, your work is only half done.

The next step in doing due diligence for tax deeds is to search for any liens that survive the tax sale for the properties that you’ve determined you’re going to bid on. First you have to know what liens survive a tax sale. This will be different for different states, and some states can have different types of tax sales. In some tax sales certain liens will not survive the sale and in others they will. It’s very important to know which type of sale you are bidding at! You can either pay someone to do a title search for you, or if you know how, you can do this search yourself.

Even if you find no other liens that survive the tax sale on the properties that you are bidding on, your work is not over yet. You must also make sure that proper notice was given to any lien holders for those liens that do not survive the sale. The reason that these liens do not survive the tax sale is that they’ve been notified that the property is going to be sold for back taxes, and they have been given the opportunity to pay the taxes and keep the property from being sold. If a lien holder did not get properly notified, they could come back later and contest the sale. So the last thing that you want to do as part of your due diligence before you bid on a tax sale property is check to make sure that proper notification was given to all lien holders.

If you follow all the guidelines and steps in this article you will be able to minimize your risk in investing in tax lien certificates and tax deeds. Yes, there are risks involved in tax lien and tax deed investing, but if you know what the risks are you can avoid them. One way to avoid these risks is in doing proper due diligence on tax sale properties before you bid. But remember, even if you do due diligence on the properties before you bid on them at the sale, something could still go wrong; there are no absolute guarantees. But then nothing that is worthwhile in life is completely risk-free. Just remember the old adage, "Buyer Beware."