For a tax sale, bidders come from all over the region and some further to buy tax-delinquent properties at a bargain. Tax sales are held across Canada and can prove to be a very profitable form of real estate investing when done right. Making money from tax sales can come from various means, such as renting, renovating, and re-selling, or even simply sitting on it and letting it appreciate.
Here are a few of the smartest strategies to use to keep a tax sale investment profitable.
Don’t Purchase Into the Minimum Bid Amount
Tax sales occur when property owners have failed to pay their property taxes over an extended period. The government auctions off the property to recover the debt and advertises a minimum bid amount. This amount is unlikely to be the final sales price. If you submit a bid too close to the minimum, expect to be outbid by others. Do not use the minimum bid as a marker for your bid.
Stay Within Your Budget
The municipality has a minimum bid, and you, as the bidder, have a maximum bid. I know what that is. Set a maximum bid amount to avoid overbidding, emotional bidding, and bids that erode your profit margins. It would help if you had discipline in any tax sale auction or public tender environment. Stay within your budget to avoid overextending and making it harder to make money from a tax sale.
Secure Responsible Financing
You have to put yourself in a strong financial position to make money. Any financing you obtain should be accessible and fair. Many tax sales require full payment on the day of, and then there are additional costs, such as repairs. Budget accordingly and have the funds ready. Explore financing options for the after-sale costs, such as short-term loans or working with an investment partner.
Know the Rules of Your Local Tax Sale
Check the guidelines that govern the type of tax sale your municipality has.
This is important because there are ways a bidder can lose their deposit or make costly mistakes when they need to follow bidding rules, redemption periods, and general auction procedures. The more information you have on your local tax sale, the better.
Develop a Strategy for Bidding
In a public auction, you can make multiple bids, so consider starting with a fair low bid relative to value and moving up in increments as needed. You only get one bid with a tax sale by public tender, so you must be more strategic. Make decisions on how much to bid strictly on a data-based basis, evaluating bids according to criteria for making the most money from the sale.
Let the Redemption Period Pass
Only be too keen to renovate or invest more money in a tax-sale home once it is yours. Some jurisdictions offer a redemption period, allowing property owners to reclaim their former property by paying the taxes within a specified time frame. Any money you’ve invested in a home during a redemption period could be lost if the prior owner reclaims it. Always wait.
Carefully Evaluate Tax Sale Property Listings
View the most recent tax sale property listings. Evaluate each based on what you believe to be potential profitable investments. Be objective. All land holds value, but only some tax-sale properties will yield a profitable return within your desired time frame. Have an exit strategy in mind regarding how to make money from a tax sale, and use it as the lens through which you judge listing.
Assess the Market Value of a Property
Use comparable sales data to determine potential resale values. Review recent sales of similar properties in the area to evaluate a property’s actual worth accurately.
Then, account for future appreciation based on market trends and neighbourhood developments that could impact property value over time.
Research Property Conditions
A home inspection is not possible with a tax sale. However, you can visit the property from the public road and examine the exterior from afar and the land itself. Assess the condition and location. If the exterior is in poor condition, you will await unforeseen expenses and repairs.
Conduct Property Due Diligence
Check outstanding liens and encumbrances through a title search. Most liens are wiped away after a tax sale is initiated, including most types of mortgages. Any liens that remain, however, will be your responsibility and will be transferred to you after purchase. Avoid any hidden liabilities by verifying lien statuses. If there are liens, decide if pursuing that property is worth it.
