Every parcel of land and piece of real estate comes with property taxes. When a property owner can’t cover those taxes, after a certain period, a municipality will reclaim the property and put it up for sale. This sale is to recoup what they owe.
An investor such as yourself can swoop in, purchase the property, and derive interest from buying a tax sale home. In addition, you can receive title to the property. Let’s learn how to buy tax-sale homes from municipalities.
Look at Tax Sale Listings
Tax sales are held in every municipality. Review the listings before bidding. See pictures, estimated values, and other information indicated in the ad. Make notes about which properties interest you.
Do Your Research
Whether you’re buying a tax sale home to live in yourself, rent out, or renovate and flip, the reason you’re buying it will guide much of your strategy.
Tax sale homes are bought as-is. It is up to the buyer to research the property. Unfortunately, you can’t inspect your home. You can inspect the photos you have, look at the property from public land, and evaluate the neighborhood and market conditions to determine its value. A quick drive-by inspection may identify red flags or where maintenance is needed.
There Is No Time for Financing
Tax sale homes need to be paid for immediately. It is often required by cash, cheque, or transfer. There is no time to go to a bank to obtain mortgage financing. To be able to buy a tax-sale home, having the funds ready and available is a must.
Before bidding, set a realistic budget. Have the right budget to acquire and own a tax sale home. Not only are there the purchase price, taxes, and fees associated with completing the sale with the municipality, but you also likely have maintenance, renovation, and rehabilitation costs to plan for. Bid too high and overextend yourself; unfortunately, this will leave you with little to renovate.
Always Do a Title Search Before Bidding
A property up for tax sale comes free and clear of mortgage and prior ownership. However, you need to know if there is another claim to the property without a title search. A title search will indicate if there are Crown interests, liens, encumbrances, or other legal issues and interests in the land or house you intend to bid on.
Understanding Capital Gains
When considering purchasing tax sale homes, it’s crucial to understand capital gains tax and capital gains appreciation, as these concepts can significantly impact your investment returns.
Capital Gains Tax is the tax you pay on the profit made from selling an asset, such as a property, for more than its purchase price. When you buy a tax sale home, if you later sell it at a higher price, the difference between your buying price and the selling price is your capital gain. This gain is subject to capital gains tax, which can vary based on how long you’ve owned the property. Short-term capital gains (for properties held less than a year) are typically taxed at higher rates than long-term capital gains (for properties held more than a year). It’s essential to factor in this tax when calculating your potential profits from flipping or reselling tax sale homes.
Capital Gains Appreciation refers to the increase in the value of the property over time. When purchasing a tax sale home, you’re often buying a property at a price lower than market value due to unpaid taxes by the previous owner. This provides an opportunity for significant appreciation if the property is in a desirable location or if you invest in improvements. The appreciation of the property’s value can enhance your potential profits when you decide to sell.
However, the market conditions, location, and improvements made to the property will influence the rate of appreciation. Strategic investments in renovations and staying informed about local real estate trends can maximize your capital gains appreciation.
Understanding these concepts ensures you are better prepared for the financial implications of buying and selling tax sale homes, allowing you to make informed decisions and optimize your investment strategy.
Public Tender vs Public Auction
Most tax-sale homes are sold by public tender, where bids are mailed in by a scheduled deadline. The highest bid wins. Public auctions are another format sometimes used, where bidders bid in person and drive the sales price that way. Inform yourself of the rules of how to bid to buy a tax sale home, and ensure you submit yours by the required deadline.
Bid What You Think a Property Is Worth
People buy tax-sale homes for all sorts of reasons. Whatever yours is, always bid what you think the property is worth. Tax sale homes are purposely undervalued and offered for quick sale. Knowing that others will try to outbid you, anticipate it and submit a bid that the municipality cannot refuse. However, consider a property’s profit potential and ensure you stick to your budget and never overpay.
You’re Competing with Fierce Investors
More and more investors buy tax-sale homes. Don’t be suckered into driving up the bidding price above where you’re comfortable, regardless of whether it’s an auction or public tender. After you set your budget, adhere to it and know when to back out. This is smart tax sale home investing 101.
If You Win, You Pay the Amount Immediately
If you are declared the winning bidder, the amount owing must be paid immediately, or you will lose your deposit. The property will go to the second-highest bidder. Ensure there is no hesitation or issue in obtaining the funds. A bidder must be ready for the auction with the right money.
Wait for The Title to Be Transferred to Your Name
A winning bidder only becomes the owner of a tax sale home once the title is put into their name. Until then, avoid making any definitive plans to start renovations or work. Ensure the property legally belongs to you first.
Know the Risks of Buying a Tax Sale Home
A tax sale home is a liability. Have the finances ready, and be aware that you may walk into a property requiring immediate repairs. It could dramatically increase your costs, not to mention if the previous owner needs to be evicted because they refused to leave. Tax sale homes can be complex real estate investments but highly rewarding after overcoming the initial purchase hiccups.