Tax Lien Lady's Step by Step Guide: How to do Due Diligence for Tax Lien Sales

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 find this information in the tax books that are in the tax collectors office. Youll also be able to find out if there is a mortgage on the property.

If you dont want to go through the hassle of looking all this up in the tax collectors office, you can buy a subscription to a service that provides tax sale lists with detailed information. We use LienSource. 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 www.liensource.com. LienSource only covers New Jersey, Florida, parts of NY, and Washington DC, with plans to add Connecticut, Road Island, and Maryland. If you are in another state, there are other companies that provide national lists. There are two types of lists that are sold over the internet. The first type is simply the list that you could get from the tax collector - dont 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, mortgage information, and amount and type of tax due. You can find a source for lists like this by searching on the internet with the keywords tax lien lists or tax sale lists. 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.

Youll want to make note of the property assessments. Properties with very low assessments are probably not worth very much. Youll also want to check to see if there is a mortgage on the property. If there is, thats good. Its 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. Youll also want to check the class and size of the property. Is it residential, commercial, farm, or vacant land? For the most part, institutional investors stay away from vacant property because its more of a risk. We like vacant property, but you do have to do some extra research to make sure that the land can be developed, 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.

Heres 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:

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, so 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 youre 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 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. Ive had realtors do due diligence for me and usually they miss the boat. A realtor is looking for a property that they can sell. Theyre 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 off too soon for you to make a profit. Look at the properties from the perspective of a real estate investor, not a realtor. And dont forget to find out if any of the sewer and utility liens have open taxes.

We dont do title searches on properties that are in tax lien sales. But thats because in New Jersey, the tax lien comes before all other liens, except Federal liens like IRS liens. If youre 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 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. Its 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 when you are ready to foreclose.

One type of property that we try to stay away from are those 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. In New Jersey you can check the DEP web site to see if the property that you plan on bidding on has any EPA issues. I would imagine that other states have environmental web sites that you can check before you bid on a property as well.

If you are just starting out in tax lien investing, your safest bet is to bid on residential properties that have decent appraisals. Although in some areas it can be very profitable if you wind up foreclosing on buildable 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. Dont do your do diligence two 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 dont 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 youll 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 three days before the sale.