Special Report #1 Step by Step Guide: How to do Due Diligence for Tax Liens

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1 Special Report #1 Step by Step Guide: How to do Due Diligence for Tax Liens At one sale that I went to, a new tax lien investor asked do you really have to do due diligence on properties in a tax lien sale? After all if you hold the tax lien certificate, you are in first position to get paid in case of a foreclosure. (This is true in New Jersey, every state is different). I tried to explain to him the importance of doing due diligence on the properties in a tax sale. The only real guarantee that you will be paid on a lien is the property. Therefore, you want to make sure that the property is valuable. One of the risks in tax lien investing is that the property that you hold a lien on is not worth the money that you had to invest. Remember that if the lien is not redeemed you will have to pay 2 or more years of taxes, foreclosure and attorney fees, in addition to the cost of the lien. Most properties will be worth much more than this, but a few may not be. Due diligence for a tax lien sale is more than just looking at the properties that you plan to bid on. You need to know how the property is zoned, as well as what the assessment and annual taxes are. You can

2 find this information in the tax books that are in the tax collector s office. You ll also be able to find out if there is a mortgage on the property. If you don t want to go through the hassle of looking all this up in the tax collector s office, you can buy a subscription to a service that provides tax sale lists. We use Lien Source. They have a yearly subscription fee and you can pay for the individual lists that you want. The lists are delivered in an excel file and contain most of the information that is in the tax books. Their website is Lien Source only covers New Jersey, Florida, parts of NY, and Washington DC, with plans to ad Connecticut, Rhode Island, and Maryland. If you are in another state, there are other companies that provide national lists. There are 2 types of lists that are sold over the internet, the first type is simply the list that you could get from the tax collector, don t pay for this list. You want a list that is going to list all the information in the tax records, including the property address, owner, assessment, annual taxes, property class and zoning, and mortgage information, and amount and type of tax due. You can find a source for lists like this by searching for tax lien lists in your web browser. Most of the sites will let you preview a sample list. This information is your first step to doing due diligence for the properties in the sale.

3 You ll want to make note of the property assessments. Properties with very low assessments are probably not worth very much. You ll also want to check to see if there is a mortgage on the property. If there is, that s good. It s a little extra insurance that you will get paid on the lien. The mortgage company is likely to pay you off before they let the property go to foreclosure. If there is not a mortgage, you better be very thorough in your due diligence, for there is more of a chance that you will have to foreclose on the property in order to get paid on your lien. You ll also want to check what class property it is and how big it is. Is it residential, commercial, farm, or vacant land? Some investors stay away form vacant property. We like vacant property, but you do have to do some extra research to make sure that its buildable, and even then you are taking somewhat of a chance. For example, in the more rural areas where there are no sewers, just septic systems, there is no way to know for sure if a property will pass a perk test. Here s an example of what seemed to be a good buy, but it was an unbuildable lot. If the investor who bid on the property had just checked the zoning he could have avoided this mistake:

4 I was at a sale in a fast growing somewhat rural area that I happened to be very familiar with because my parents live in that municipality. There was a 1.5 acre lot in the sale in a new development of houses all built on 1.5 acre lots. It was a very competitive sale and everything else was sold at premium, everything, that is, except for this particular property. A local investor got this property at 18%. Sound good? Not if you had checked out the zoning on the property. You had to have at least 3 acres to build in this municipality. The builder of this development was allowed to build on 1.5 acre lots if he kept a given number of lots vacant. This was one of those vacant lots and was zoned as un-buildable land. The developer did not pay the taxes to the municipality, why should he pay the lien holder? Sure you can foreclose in 2 years, and then what? There is no incentive for anyone to buy this property from you. And you have to continue to pay the taxes on it in order to hold your lien position. When you re bidding on land it pays to look at the tax map. Look for things like easements and rights of way. It also pays to talk to someone in the zoning department. Find out how many acres you need in order to build in that particular area. How much road frontage do you need and how deep does the property have to be? Usually there is a specific distance that a

5 building has to be from the road or from the property line. Remember part of your due diligence is finding properties that are worth bidding on. I ve had realtors do due diligence for me and usually they miss the boat. A realtor is looking for a property that they can sell. They re looking for something with resale value, which is good. But more often than not, the really nice properties are going to pay too soon for you to make a profit. This may be different in other states, but in New Jersey, many liens redeem right away, and this reduces your profit. I look for properties that are run down and ill kept, but in a nice neighborhood. If the property is not being taken care of, the chances are better that the lien is not going to be paid of too soon for you to make a profit. Look at the properties from the prospective of a real estate investor, not a realtor. And don t forget to find out if any of the sewer and utility liens have open taxes. We don t do title searches on properties in that are in tax liens sales. But that s because in New Jersey, the tax lien comes before all other liens, except Federal liens like IRS liens. If you re in another state, make yourself familiar with the lien and foreclosure laws. You might want to do a search on a property before you bid on it at a tax sale. In New Jersey there is a lot

6 of competition for liens and you would have to spend a lot of money to do a search on every property that you want to bid on. It s just not cost effective to do title searches before you bid at a tax sale. It is advisable, however to do a title search on a property before when you are ready to foreclose. One thing we try to stay away from are properties that have come out of bankruptcy, or properties that we find out may be going into bankruptcy. The only way we know about this is by asking the tax collector. Tax collectors in the smaller municipalities in New Jersey usually know a lot about the properties. If there is more than one year of taxes and utilities owed on a property, that should throw up a little red flag and you should ask the tax collector about it. The other thing that we are weary about is the possibility of any EPA issues with a property. That keeps us away from certain commercial properties, like gas stations and auto shops, and vacant land that is near a dump site, or land that used to be a dump site. If you are just starting out in tax lien investing, your safest bet is to bid on residential properties that have

7 decent appraisals. Although in some areas it can be very profitable if you wind up foreclosing on builda ble land, you need to be extra diligent with your due diligence. There is one more thing that you want to keep in mind when doing due diligence on tax sale properties. Don t do your do diligence 2 weeks before the sale. Wait until at least one week before the sale. Three days before is even better. The reason for this is that at least half of the properties that are on the original list are going to be paid by the time of the sale. At many of the sales in New Jersey the tax collector will allow payment right up until the sale. You don t want to waste your time doing due diligence on a lot of properties that are not even going to be available. The longer you wait the more properties will drop off the list. Of course you will have to take into account how many properties there are to begin with. If there are a few hundred properties you ll want to get started a week before. But if the list is small 150 properties or less, I would wait a little longer and start my due diligence 3 days before the sale. Once all of your initial investigating is done you can use the following check list to get ready for the sale:

8 Three days to one week before the sale: Call the tax collector and get a copy of the updated tax sale list and verify the time and the place of the sale. Also verify the tax collector s business hours as you may have to visit the office or talk to the tax collector again for further information. Here are the specific steps you ll want to take: 1. Find out if there are any prior liens on any of the properties. It is proper tax lien etiquette not to bid on some one else s prior, so you can eliminate any properties that have prior liens. (If you don t know what a prior is see the glossary of terms on my website). 2. If the list is a long one, determine what geographical area you want to concentrate on and stick to that. 3. Eliminate properties that are paid from your list. 4. Get all the pertinent information from the tax office if you don t have it already from a tax sale list subscription service. (i.e. assessment, annual taxes, mortgage info, property class, and acreage or lot size). 5. If you are not real familiar with the municipality, go to the tax collector s office and

9 look at the tax map to learn where the addresses are, or you can map them on map quest. 6. Try to look at all the desirable properties no more than 3 days prior to the sale. 7. If there are sewer liens on the list, check with the tax collector to see if they have any open taxes. Even though last years taxes are paid, current taxes may not have been paid. If taxes are current, find out who pays the taxes, the homeowner or the mortgage holder. 8. Find out what forms of payment are accepted, and if the tax collector will allow you to go to the bank after the sale. Some tax collectors will not give you time to go to the bank after the sale, so you ll have to have an acceptable form of payment with you. Most tax collectors will only accept cash or certified checks made out to the municipality. 9. You will need to determine which properties you are interested in and how much money you will need to purchase the liens that you want. Assume that you will have to pay premium (in states where premium is bid) and determine just how much you can pay for each property and still make a decent return on your money. I have tax lien software developed by DataVentures Investments LLC that does this

10 for me. It also keeps track of all my liens, and does much more. One day before sale: You will need to go to the bank and get the cash, and/or bank checks in the amounts that you need for the sale. Not all tax collectors will give change at the sale so I like to take bank checks in different denominations along with some cash. With the tax lien software program I have, I can generate a bidding form that will indicate which properties I want to bid on and just how much I can spend in premium on each property. This program is not available for sale yet but if you would like to know more about it you can send me an at joannemusa@taxlienlady.com.