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A Guide to Tax Delinquent Real Estate Investments

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Published
09/30/2024

If property taxes go unpaid for three years, the municipality will likely claim the real estate and put it up for a tax sale. This guide to tax-delinquent real estate investments delves into the ins and outs of these properties, outlining how to turn a profit investing in a house or parcel of land that's been put up.

Tax-delinquent homes can be suburban residential houses, rural properties, townhouses, vacant or undeveloped land, commercial and industrial lands, cottages, farmlands, waterfront properties, or anything imaginable.

As this is not a traditional real estate sale, there is a lot to learn about this approach to investing.

 

What a Municipality Charges Is Small

A municipality wants a quick sale. They price these houses accordingly. The minimum bid amount may be 30-40% of a property's assessed value. The bid amount covers taxes, penalties, interest, and reasonable costs related to the home. All of this is what you pay as the highest bidder at a tax sale.

 

Profit from Tax Delinquent Houses

Investing in tax delinquent properties can be rewarding with the right approach. One idea is to resell the property as it is, making only small repairs to attract buyers. This quick method can bring profits at minimal cost.

Another plan is to renovate and upgrade before selling. This takes more time but can lead to higher financial returns after the work is done. If you want ongoing income, let the former homeowner stay on as a tenant and pay you monthly rent. This setup provides steady cash flow while allowing someone to stay in their home.

 

Tax Delinquent Properties Come As-Is

There is no guarantee that a tax-sale house will not be in disrepair and require significant renovations. The state of these homes varies quite a bit, so most investors reserve funds to complete repairs and renovations after inspecting the property.

 

Title Search for the Property

Mortgages and claims are stripped from a property when it's sold at a tax sale. If there are Crown interests, those stay. This is why completing a title search before bidding is highly recommended. This will give you a full view of what party, if any, has a claim on tax-delinquent real estate.

 

Auction or Public Tender

To secure a tax-delinquent real estate investment, you must be the highest bidder in a public auction or public tender. An auction is run as one might expect. Public tenders are completed by mail. It involves submitting a single bid with written documentation and a deposit.

 

Have the Full Amount Prepared

There is no mortgage or financing for a tax-delinquent house. You must arrive with the funds available and ready to close the sale on the same day as the auction or public tender deadline.

 

Research the Property Value

Understand how much the property is worth. Research the neighborhood. Carefully evaluate a real estate piece before investing in it. Not every tax sale house is a winner.

 

Budget Appropriately

Of course, competition will increase the bid. The minimum amount likely won't be the final amount a property is sold for. Budget intelligently and do not overbid. Many get caught up in the emotion of trying to be the winning bidder, and they may get stuck with a property they paid too much for.

 

Municipalities Make the Rules

Tax sales are guided by the local municipality, not the province. Each city sets its own rules, which means how a tax sale is run in Ottawa could be significantly different from how it is run in Hamilton.

 

There Are No Returns

Tax-delinquent property is purchased as-is with no returns: no warranty or refund. After your name is registered on the property, you can only return it to the municipality if you find something you like on the premises. It's yours.

 

Prior Homeowners Can Regain The Property

Until homeownership is fully signed over to you, the prior homeowner can still legally step in, pay the fees, and return the property to them. This is only allowable if it occurs within the grace period.

 

Complete a Home Inspection

Until you are declared homeowner, you have no right to a home inspection or to trespass on the property. When the property is fully in your possession, have a home inspection done immediately. This will assess its condition, access, and suitability for your intended use.

 

Pursue Legal Routes for Vacant Possession

If the prior homeowner refuses to leave, do not force them out illegally. Talk to a lawyer and pursue the legal route to evicting the person.

 

Profitability Is Not Guaranteed

Just like any other type of investing, not every tax-delinquent real estate is profitable, and not all will return. Investors should do their research, define their risk tolerance, and understand their personal investing goals before bidding.

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