Investors in every field of endeavor rely on due diligence – which essentially means researching their investment before committing capital to it. But if you are investing in opportunities related to property tax, like tax liens and tax deeds, due diligence is an absolute must. Otherwise, you could inadvertently wind up in an investment that is not what you bargained for and may potentially cost you lost time, labor, and money.
What is the Essence of Due Diligence?
Due diligence research is done to protect yourself, in keeping with the old adage “let the buyer beware.” That isn’t to say that you approach it from a place of fear and insecurity. Instead, you are providing yourself with informed facts and educated reassurances that will help you sleep better at night. Through comprehensive research, you can significantly enhance the potential for you to make smart, profitable investments – while avoiding pitfalls that may remain hidden from the view of investors who don’t do their homework. You’re finding out more about the quality of the property, the condition of the home (if there’s a home on the property), and the value of the location – since location is a huge component of real estate market value. In essence, you are using accumulated or aggregated data to create a profile on the property. You’re filling in the blanks on a jigsaw puzzle to paint a more realistic picture of the property. That is a tool you then can use to vet it and calculate what risk versus reward potential it holds.
Where Do You Go to Find Pertinent Information?
For tax-related investments, you will naturally find a lot of very helpful information on government sites – or at the courthouse. Those are where cities, counties, and tax agencies publish relevant public data regarding properties within their tax jurisdictions. You may find recorded deeds that provide insight into who owns the property, when it last changed hands, and how much the buyer paid. You can look up tax appraisal data that gives you information regarding its tax appraisal value – the value the government uses to determine how much tax the owner pays each year. You might find mortgage info to help you figure out whether the property represents equity. Depending on the jurisdiction, these government entities go by different names or fall into different categories. It might be the County Clerk, The Revenue Commissioner, or the Treasurer. But the idea is to look at sources who make it their business to compile tax data on properties. You can also use real estate databases like Zillow.
Expect Insight, Not Perfection
Keep in mind, however, that none of these resources are perfect. The information may be inaccurate or stale, and it’s not their responsibility to ensure perfect accuracy in order to help you perform your due diligence. So, take it with a grain of salt and whenever possible, cross-reference information to help verify accuracy. But although imperfect, this kind of preliminary investigation can still be quite valuable. It can help you narrow down your search based on what particular kinds of property suit your investment objectives. You can figure out which jurisdictions appeal to you most, by performing due diligence regarding the types of tax investments they offer, and what local or state laws, rules, timelines, and procedures are applicable. All of those important factors can vary dramatically from one place to the next, so research is your best friend when you are strategizing your investments.
Due Diligence at the Desk or on Foot?
You may also want to see the property in person, not just on paper. You’ll also be interested to find out if there are outstanding liens or debts attached to it that may potentially inherit and have to resolve. Maybe the tax records showed a house on the property, but a drive-by reveals that it’s been torn down or burned down. If you want to really get granular, and are willing to pay for it, you could even hire a title company to do a title search or a building inspector or appraiser to issue you a professional report tailored to your needs. In some cases, if you are investing with a view toward ultimately being able to claim the property for yourself as the holder of the deed, that may make sense. Or it may be overkill and unnecessary. You can hire someone to run reconnaissance for you or do it yourself. You can go down all the rabbit holes or just do enough to locate some rabbits worthy of closer investigation. Just be aware that the more research you do, the better your chances are of reducing risk and maximizing rewards – as long as you don’t waste money on research you really don’t need to do.
Hedge funds that do property tax investing sometimes examine tens of thousands of properties each year, just to narrow down their selection and locate a few hundred they decide are good candidates to bid on at auction. From that shopping list, they may end up only purchasing a few dozen tax liens, tax deeds, or similar investments. Of course, they don’t do it by hand. They have sophisticated, automated processes to handle the grunt work. How you approach the due diligence process is a choice you need to make based on your criteria, your investment objectives, your budget, and your bucket list. There are also resources – tax investment service websites – you can subscribe to that do the forensic dirty work and then give you easy access to the kind of information you’re interested in. The key, as one seasoned and successful tax investment specialist put it, is to do something. The only wrong answer when it comes to gathering investment intelligence is to do nothing. Check out the Tax Sale Resources' platform Research for a fast and easy way to get started in conducting your due diligence.