When a person goes shopping for a home, they don’t look at every house in town that’s on the market. They narrow down their search by location, the features of the home, and how they define their “dream home.” Similarly, when performing due diligence, it’s important to only research pertinent properties that represent potential as the specific kind of investment you are focused on. That will save you time, and time is money.
Narrow the Field
Narrowing your search and aligning it with your particular investment objectives is essential, because there are numerous sources of information. Finding and fact-checking the data can be a very time-consuming and laborious process. That why tailoring due diligence to the particular type of tax investment asset you're purchasing is such a valuable thing to do. If you’re investing in hybrids that offer some of the opportunities of both tax liens and tax deeds, then you’ll want to do some of both kinds of research to understand and minimize your risk while maximizing your chances to profit from the investment. So, the first step is to determine which kind of investor you are, and what research is applicable to you.
Tax Lien Due Diligence
You may be investing relatively smaller sums of capital to buy tax liens at auction. You may also wisely be using a diversification strategy where your goal is to create multiple income streams from multiple tax liens. They may be in different counties or states, each with their rules. So, concentrate on researching the information that identifies potential tax lien investments based on your investment budget, where the laws are favorable for tax lien investors, and what rate of interest you can expect to earn on your tax lien investments.
Tax Deed Due Diligence
You’ll likely be paying a great deal more for a tax deed than you would for a tax lien. All the bidders want a chance to own the property, which normally has a market value much higher than the amount of taxes owed on it. How much is the property worth? Based on that value, how much can you expect to pay to win the auction? The delinquent taxpayer may also owe liens to other parties besides the local tax collector. Will you inherit liens against the property? How much will they cost to settle? Where is the property? If you ultimately become its owner and decide to live there, is it where you want to live? These are typical questions that tax deed investors ask that guide their due diligence research.
Other Research for Tax Lien Investors
If your focus is on tax lien investments, chances are low that you’ll wind up with full ownership of the property, but it could happen. For that reason, just in case, you should do a reasonable amount of research into the physical property itself. Find out the legal jurisdiction’s rule for when, why, and how a tax lien holder may end up owning the property. Another reason to check on the physical property is that the delinquent taxpayer’s motivation to repay what they owe may be impacted by the condition of the property and whether or not they live there. If it’s got high market value, they’re likely more motivated to repay what they owe – which is where the interest you’ll earn is generated. But if it was a home they’ve abandoned or that burned to the ground, they may not care about keeping the property. They may not have a motivation to repay their tax obligation, and you may not receive reliable payments of interest.
Further Research for Tax Deed Investors
Similarly, if you are a tax deed or hybrid investor you may have a much bigger financial stake in the investment. That translates into greater risk, which warrants more extensive and in-depth due diligence. You’ll want to know what the process is for transferring full ownership to you, how long that process takes, and what ownership rights – if any – you have in the meantime. You’ll want to know the market value of the property and a cost estimate of any urgent repairs it needs to make it a viable, useful asset. Are there environmental hazards on the property you’ll be responsible for cleaning up before you can lease or sell it?
Does it have a clear title or may others who think they have ownership rights stake a claim to it after you become the new owner? The questions are many, but that’s because the rewards may be great – as long as you’ve done your due diligence.
Degree of Risk & Diversification Strategies
So, before you perform due diligence, pick your investment model and then let that guide you as you construct a model that shows the potential for risk versus the potential for financial rewards. The more skin in the game you have, the more research is justified. Keep in mind that because there are many different sources and types of relevant information, you need to diversify not just your underlying property assets or tax investments. You also need to diversify your research. If you find a property while doing research on Zillow and it matches your criteria, for example, diversify the research by cross-checking it against county property records. If it still matches up, think of where else you can go to further diversify your research. That could include research into the rules that govern your type of investment at the county and state level. Another way you could diversify due diligence is by driving to the property and evaluating it in person.
The Bottom Line
Remember that the goal of diligence is to create a risk model you can analyze. The more you diversify your investment portfolio, the more you can manage risk. The more you diversify the due diligence of investments you intend to add to your portfolio, the more you add another powerful layer of diversification. Don’t go down every rabbit hole where rabbits you aren’t interested in happen to live. Pick your rabbit, figure out your level of risk tolerance and how much money you are committing to the investment, and gather research accordingly. The whole idea is to gain as much due diligence information as is feasible and verifiable. But you also want to do it while investing the least amount of time, labor, and money to find the answers you need to give you investor insight and reassurance.
If you are ready to start your due diligence process, be sure to check out the Tax Sale Resources solution Research. You have numerous filters available when zeroing in on a particular property that fits your model and can assess the property from a high level perspective before purchasing. Tax Sale Resources can handle your due diligence needs to ensure you find properties that fall in your asset class!