How to Make a Profit from Tax Sales

Tax sales offer homes and land for sale at a fraction of their assessed value. It’s not uncommon to see the minimum bid amount for a tax-delinquent property to be 30% or less of their assessed value. It doesn’t come without competition, however. With all sorts of investors bidding, tax sale real estate prices tend to soar fast, especially in an auction scenario.

If you are interested in this category of real estate investing, here is how to make a profile from tax sales.

Balance Expenses with Revenues

To profit from tax sales, one has to compare what they put into the revenue they intend to get from the real estate they purchase. If you are unsure how much revenue you can derive from the asset, be cautious about how much money you will invest.

Carefully Evaluate Tax Sale Properties

As you comb through tax sales listings, carefully analyze each property’s following variables. Check out property values, amenities, and appeal of the specific location and neighbourhood of the tax sale home.

Look at any photos of the property to gauge its condition. While a home inspection is impossible, consider visiting the property in person and observing its condition from a public space, such as the road. Note the assessed value and compare it to what you’re willing to bid on.

Check for Liens

Complete a title search. This will let you know if any liens, mortgages, Crown interests, or legal encumbrances are attached to the property. Once ownership changes hands, these obligations become your issue, which means legal fees and a risk to profitability.

Have the Funds Available

Do not buy a tax-delinquent house with money you do not have. If you overstrain your finances and invest money you do not have, you run the risk of eventually being caught in a scenario where you don’t have any more to put in, and the asset will sit without you being able to do much with it.

Purchase as a Partnership

If you and multiple individuals want to share ownership of a tax sale house, this is fractional ownership. It’s a way to invest money in real estate without assuming all the risk. It could be a way to pass part or all of the maintenance and management to another party.

As Elijah Underwood, Founder of Underwood Law Firm, explains: “Co-investing in tax-sale properties can create unexpected co-owner disputes, clouded title, or deadlocks over exit strategy. When partners can’t agree—or a prior interest survives the auction—a court-ordered partition may be required to sell or divide the asset.”

Budget a Contingency Fund

There may be hidden issues. Keep a contingency fund for additional expenses related to a tax sale house. Once you are the homeowner, this money will be used to conduct a home inspection, make immediate repairs, pay legal fees, and cover other associated costs.

Create a Tax Sale Bidding Strategy

Set a maximum bid for a project to ensure you do not overpay. You set yourself up for failure when you overpay or overpay and win. You’re at risk of not making any profits or far less profit because you put in a level of investment that you shouldn’t have.

Identify Holding Costs

As with real estate, holding costs apply when having a long-term tax sale house. Note these if you plan to rent or sell the tax sales properties in the future, such as the annual property taxes.

Create a Rental Property

A rental property is what many investors try to do with a tax sale investment after they complete repairs, updates, and renovations. Here are some rental ideas that may yield a substantial profit for your portfolio.

Rent the tax sale house as a single unit. Split the tax sale home into two or more units and rent them separately. This also works if one wishes to rent out the bedrooms individually. Renting the unit as a vacation space or setting it up on Airbnb for temporary rentals could yield higher profits.

Renovate and Flip a Tax Sale House

Another approach investors take with tax-delinquent properties is to renovate and resell the house for a significant profit. This involves pursuing value-contributing renovations. Though you can pay a contractor to do the upgrades, in some cases, it may be more profitable for you to do the contracting work if you have in-depth knowledge and aptitude for it.

Analyze Market Conditions

Whether you intend to rent, sell, or pursue another avenue to profit from a tax sale, research market conditions first. Understand demand and appropriate pricing and what opportunities exist for you to profit.