Tax Sale Due Diligence

Legal

Legal due diligence is going to have to do with things like the chain of title, encumbrances on the property whether they be liens, encroachments, or easements, and other paperwork related issues. Much of this will be done by way of digging through county records.

Physical

Environmental

Operational Due Diligence

Allow me to go a little deeper on operational due diligence.

Know the Laws

Remember how important it is to know the laws the rules and procedures. Not just a state level. It will be important at the state level, county level, and in some instances even need at a municipal level. That’s going to depend on where you take part in the auction.

Know Your Goals

You need to know your goals at a property level. Let me explain what I mean. All successful investors I have ever met know how to specialize. I’m no exception. I know quite a bit about pretty much all areas of real estate. However, I have specialized in single-family residences. I know other people who specialize specifically in apartment complexes. That is a sub-specialty within the realm of commercial property. There are folks I know who deal with warehouse commercial property only. Or office type commercial property; again, only. They know their stuff and it is ALL they deal with. I mentioned in one of the earlier posts an attorney I know in Arkansas who specializes in vacant land. Well, that is not even completely true. He specializes in vacant land purchased at Tax Deed Sales. That’s all he messes with and he’s done very well at it.

Know Your KSAs

The other thing I want to mention is KSAs. These elude us sometimes but they are worth some time. KSAs. Spend some time in quiet reflection and get to know your KSAs. You know what I mean by that, don’t you? That stands for Knowledge, Skills, and Abilities. what you know that you know is fine, What you Don’t know you can learn. What is dangerous is the things you don’t have a clue that you don’t know.

Somebody told me a little story once that I would like to pass on to you guys. I wish I could give credit, but I don’t remember where it came from. There’s four types of KSA’s. The first is the stuff that you know that you know. That’s good stuff. Not only is it not dangerous to you, but that’s also one of your great strengths. You already know that you’re aware of a particular skill set. You are aware that you possess some ability or knowledge. Then there’s the stuff that you know that you don’t know. That’s also pretty relatively safe. Let me give you an example. I know that I’m not an attorney. I know that I’m not a CPA. Since I know that about myself, and I know that I don’t have those skills, I can go hire people to do those things for me. No problem. No questions asked. Do you guys follow me? But here’s where it starts getting sticky.

Where it gets dangerous.

What about the stuff that I don’t know that I don’t know? See some of that stuff can blindside us and often does. And you know the One that’s dangerous guys? That’s the stuff that you don’t know but you think that you do. It can get you in trouble. That can send you to another course at the University of hard knocks. Never stop learning. As soon as you think you’re an expert; look again. I guarantee you can find somebody who knows more than you. To this day I have mentors and coaches. I will continue to have them because that is a huge part of how my business grows. My Mentors and Coaches contribute greatly to how I become more and more successful, year after year.

Financial Due Diligence

To discuss financial due diligence I want to start at the end and work toward the beginning. Here’s what I mean by that. Remember when I said, “We make our money on the front or we don’t purchase the property”? Well, to make our money on the front we’ve got to be pretty darn sure of our exit strategy.

I’m at and discuss exit strategies in great depth so let me not spend too much time on it here.

Working from the back to the front, let’s look at the next logical step. That step is to know all the costs involved with your holding strategy. There are always holding costs. It doesn’t matter if it’s a lien or deed. It doesn’t matter if you are wholesaling a property or if you plan to use it as a rental for the next 20 years. There are always going to be holding costs. Insurance. Utilities. Maintenance. These are some pretty easy normal ones.

How about taxes? Taxes have a nasty tendency of going up every year. For that matter so does insurance. If you’re going to be holding a property for a longer period of time, you’re probably going to be renting it.

For Landlords…

There’s going to be a plethora of costs associated with land-lording. These include: but not limited to:

• The damage that tenants do on properties
• General maintenance – Things wear out.
• Occasional legal fees; evictions, etc.
• Insurance
• Taxes
• Etc

Also, if you’re going to be holding property for any amount of time, you’re going to be using other people’s money. Whether it’s a bank, investors, hard money, or any combination of those, you will have loans. Every one of those folks will want interest and probably points. You need to know all those costs upfront and be able to factor it in.

There IS a Learning Curve

I’m sure you picked tax liens because you thought it was easy. Think again. What happens when the lien doesn’t get redeemed? In Texas, the penalty is 25%. Sounds like a great way to get rich quick doesn’t it? Here’s the truth.

I don’t know anybody who has ever purchased a lien in Texas that had it redeemed.

Virtually all Texas Tax Lien certificates end up becoming deeds. There’s going to be costs associated with maintenance there as well. You will have foreclosure costs and attorneys’ costs. Then you’re going to have to quiet the title To make it marketable. This ALSO has attorney costs and title company costs associated with it.

Front End Costs

Finally, let’s talk about the front end costs. If you’re doing Tax sales Investing correctly, most of those costs are going to be in the form of your time. For example, you need time to do all this due diligence that I’m teaching you. Don’t worry, as we go along I will show you how to do this at lightning speed. After a little bit of practice, I guarantee you’re going to be excellent at it.

In terms of lien and deed sales, you’re still looking at time and money to evaluate properties. You will have to visit the properties. A stay in a hotel may occur while you’re doing that. certainly, you will stay in a hotel while you’re at the county during the auction unless you are local. Any costs associated with traveling to and from, and you can see the list goes on. Anybody who tells you that you can do this business for free is smoking crack. Ok, maybe they are just lying to you hoping that you’re smoking crack.

Legal Due Diligence

And since we just mentioned legal expenses let’s talk about legal due diligence.

And since we just mentioned legal expenses let’s talk about legal due diligence. Under the general heading of legal due diligence, you’re going to look at two issues. The first is issues with the title. Then there can be survey issues as well. These are also called boundary issues or encumbrances. Survey issues are issues with the title in that they deal with the legal description.

Title Issues

You need to check any properties you want to bid on to see if there are other liens on those properties. The most common are medical liens and IRS liens. In most states, a lien for somebody’s personal bill is going to get wiped away when you get a deed to the property. But, you definitely need to exercise caveat emptor here and check it out for yourself.

IRS liens on the other hand are usually going to transfer with the property whether you like it or not. That said, the IRS is also really good about working with folks and taking settlements. these sorts of agreements will remove the liens from the property. That’s going to be as easy as a phone call to get the ball rolling.

Survey Issues

In terms of survey issues, nothing, of course, beats a certified survey, by a licensed surveyor. Obviously you’re not going to want to spend $400 or $500 for properties you do not own. yet. I do not know any investor willing to spend that sort of money before ownership. That would be ridiculous. What you’re looking for here are easements, encroachments, and general boundary issues.

If the legal description says lot three and Block two of the Pine Valley subdivision it is easy. You just need to be sure that Lot 3 and Block two actually exist. Typically your county offices will have plat maps or you can double-check this sort of thing. Much of it even lives online these days. Now that’s for “lot and block” legal descriptions. Metes and bounds is a whole different issue.

Unless you understand metes and bounds my advice is this: Do not bid on properties that use those descriptions. If you do you could find yourself purchasing a drainage ditch in the back of a subdivision. Or a lot too narrow to build on. Or some other form of unmarketable property. If the property even exists.

Physical Due Diligence

The next thing you want to do is examine the property’s condition. You don’t need the appraiser to do this. That said, a realtor that can run a comparative market analysis, (CMA) is a plus. You’re gonna need one or two on your team anyway. So, you might want to be thinking about cultivating those relationships as well. Besides, they will come in handy when the time comes to sell the property.

I also know an investor who uses a home inspector regularly. The home inspector does a quick inspection of all properties that they are looking at. it is not a full-blown inspection. The guy does it in bulk for the investor and so the investor gets a really good price. Probably not necessary with tax liens and tax deeds. after all, you will be getting the property at a deep discount. Regardless, you still need to have a general idea of what you’re getting yourself into.

Allow for Rehab

If you’re dealing with tax deeds, you’re going to need a renovation budget of some sort. You definitely want to have a general idea of this on the front end. When I say general, I mean really general, like $5000 increments. The property is going to be a $5000 cleanup or a 10k or 20k light Remodel or a complete rehab at 25k or 30k or 35k. By the way, unless you’re an experienced rehabber or you happen to be a contractor yourself, DO NOT try to rehab.

Well, that’s not exactly true. Some paint, carpet, and light fixtures are OK. Most people can handle that. However, I am going to advise you to shy away from any property that is going to be more than $20,000 to rehab. Do I do huge rehabs like that? Sure I do. In fact, the biggest one to date was $230,000. (To put this in perspective, in Arkansas where we rehabbed the home, the average PRICE of a home is 150-200k.) But I’ve been doing this for 30 years guys, and I’ve also been a builder and I’m also an engineer. Anything over $30,000 you could get your butt in a ringer and get a hard lesson. I want to see you guys making money fresh out of the gate, save the big ones for when you have more experience.

Highest and Best Use

The last thing that you may want to consider is something called “highest and best use”. The highest and best use simply means what’s the best way to use the property. For example, let’s say you’re looking at 1000 acres of scrub brush out in West Texas. It doesn’t seem like there’s much you can do to improve it. However, put a few cows on it and you suddenly have agricultural land. And you don’t even have to provide the cows, you can lease it to somebody or just get the zoning changed.

And speaking of zoning many times you can change the zoning of a house on a busy street. When property changes from residential to commercial it is often worth more money. It can now become such things as a dental office or real estate office or something similar. Obviously, you as an investor must do this with care. And again this is for a bit savvier an investor. As you grow in this business it’s one of those things that you should be considering. And, it is an integral part of physical due diligence.