A tax-delinquent property refers to a property whose owner fails to pay property taxes to the municipality. When taxes are overdue, the city sends notifications reminding the owner to pay. If this approach fails, the city can auction the property to recoup the owed taxes. A tax-sale home is a lucrative investment if you are willing to take the risk.
Read this beginner's guide to investing in
tax-delinquent properties.
Introduction to Tax Delinquent Homes
Tax
delinquent properties range from undeveloped land to commercial buildings,
rural properties, and houses in a small or average neighbourhood. Auction
policies differ between regions.
A municipality cannot take possession of a
home in tax arrears. Instead, it will register a tax arrears certificate,
commonly known as a tax sale certificate. This qualifies the property for sale
at auction or public tender.
A tax lien does not necessarily mean the
property is put on auction immediately. It only gives the municipal tax
authorities priority over other creditors who might claim it to recoup their
debts. One unique benefit of a tax lien is that you can sell or exchange them,
making more returns than average real estate investments.
Defaulting and Tax Lien
A homeowner's failure to pay property taxes
triggers a tax lien on the home. The local government sends notices reminding
the owner to settle his or her taxes on time. If this effort is in vain, the
local government places a lien on the home and issues a tax lien certificate.
At this point, the owner can still pay the
owed taxes plus interest. Otherwise, the municipal government forecloses on the
home.
The Tax Lien Auction
Once the government places a lien
certificate on the defaulting property, it can declare it for sale by auction
or public tender. Investors can start bidding immediately after the government
opens and announces the sale. Investors can bid based on two factors: a cash
amount in accordance with the lien certificate or interest rates acceptable to
the bidding investors.
If the bids are cash offers, the highest
bidder wins. If the bids are interest-based, the investor willing to accept the
lowest interest rate wins. However, accepting a low interest rate lowers your
potential profits from the property.
Paying the Taxes and Possessing the Property
The bid winner must pay pending taxes and
other fees or interests. The investor also possesses a tax lien certificate,
though not necessarily the property. As the winner, you can only claim full
property ownership after the final foreclosure.
The former owner can redeem the property by
paying the outstanding taxes plus interest to the certificate lien holder.
The Homeowner Can Claim Their Home
While tax lien investment seems lucrative
to experienced investors, you must approach it carefully. After the auction,
the owner can reclaim their property during the redemption period, often up to
twelve months. During this period, the original owner pays the owed taxes plus
interest before the municipality signs the property to the new lien certificate
winner.
However, once the new owner receives
ownership rights, the original owner loses their chance to reclaim the
property.
Buy a Tax Delinquent Property As It Is
All tax-sale homes are for sale as they
are. The municipality does not allow inspection, meaning you will invest
unthinkingly. You cannot guarantee the property's value, condition, or access.
As such, it is possible to end up with a
dead investment unsuitable for unintended use. However, the best way to choose
a worthwhile tax lien property is through thorough and purposeful research of
the property and its neighbourhood.
The Property May Need Updates and Repairs
Since you bid for the property without
inspection, you may incur repairs, renovations, or updates to make it more
profitable. A real estate agent experienced in tax-delinquent property sales
can help you research all the valuable information.
Check if the neighbourhood and whatever you
learn about the home suit your intended use: residential or commercial. In
addition, it would be best to set aside some money for renovation when
preparing for the auction.
Be Ready to Purchase the Property.
You cannot mortgage a property bought for
delinquent taxes since the local government seeks to recover owed money. If you
win the bid, you must approach the auction with ready financing. A certified
cheque, ready cash, or bank draft would help. Payment rules vary according to
region. Be prepared to pay immediately.
Tax-delinquent property is a promising
investment for experienced investors and those willing to take the risk. Since
the municipality often sets the maximum bid amount almost the same as the owed
taxes, you may buy these properties much cheaper than standard real estate
investments. Do your research to find tax sale properties that are worth the
risk.
