Municipalities across Canada use tax sale auctions to recoup property taxes and sell off properties at a discount to interested investors. While tax sales are a great strategy to invest in real estate and earn what can be a massive return, there are risks. Tax sale auctions can be intense scenarios where investors bid against one another and drive up what’s initially a heavily discounted property to sometimes hundreds of thousands of dollars more in value.
For those interested in participating, here are the best practices for tax sale auctions to remember.
Attend as an Observer
Many tax sales and auction experts will tell you to attend an auction as an observer first. You learn the rules, bidder behaviour, and pricing trends this way. This prepares you for future participation.
Don’t Bid without Due Diligence
An investor can make a costly mistake bidding on a property they have not thoroughly researched. Always do your due diligence and get as much information as possible about a tax sale property before the auction.
Location Means More Than Price
A property in a desirable location can be knocked down if it no longer serves the area, and a replacement can be constructed. Location influences market demand and appreciation potential. Avoid bidding on cheap properties in declining or dangerous neighbourhoods.
Sort Through Public Research
Look up a property listed for auction. Find out prior ownership, how the land is zoned, and evaluate potential liabilities. To do this, look at local property records, online databases, publicly available legal documents, social media, and online searches.
Research the Auction Rules
Auction rules should be posted publicly. However, if they are not, inquire about them. Understand how tax sale auctions in your area work and what is expected of you as you bid on tax sale homes.
Bid According to What’s Most Profitable
Investing in tax-sale homes is all about profit. Consider for yourself what’s most profitable and how to maximize ROI. When bidding, the higher you bid, the more money you invest and your profits are bitten into. Be careful not to overbid. Always stick with data and numbers, not emotion.
Come in with Strong Finances
There is no financing a tax sale real estate investment. No mortgage. No loan. A bidder must arrive with the money in hand and ready to put it to use. If there is a point in which you realize you’re over-extending yourself, only come in and bid with the money you have. Do not put yourself at financial risk.
Bid According to Your Budget and Future Costs
Set a clear budget as a financial plan to ensure discipline in your bidding. Also, be aware that additional costs may be past the tax sale auction, such as property repairs, legal fees, and similar expenses. Incorporate this risk into your budget.
Visit the Property Pre-Auction
While you cannot go inside a tax sale property, you can view it from the public road. This will tell you about its condition and location. Try to see what you can see about potential structural damage, the quality of the neighbourhood, and indications of future appreciation.
Run a Title Search Before Bidding
Run a title search to find out if there are any mortgages, liens, or claims against a property you want to bid on. Typically, mortgages and claims are removed when a municipality takes a property. That said, if any remaining interests, such as Crown interests, are involved, a title search will let you know.
Register Early for a Tax Sale Auction
Most tax sale auctions require registration. Ensure you register early to meet the deadline provided and comply with all procedural requirements. They may require an ID and proof of funds before you are allowed to bid. Arrive early so you can do this and get settled to bid.
Start Bidding with a Low Yet Reasonable Amount
Do not lay down your highest bid using the word ‘go’. Start bidding at a low but reasonable rate. Test the waters to see if other interested parties are in the tax sale home. This way, you may save thousands of dollars if there is less interest than anticipated.
Avoid Emotional Bidding Wars
It has already been hinted at in this article, but always avoid emotional bidding wars. Involving emotions in bidding can prove deadly to profits. Let other bidders run a tax sale of the home’s value. Bow out when it hits your maximum bid limit, and don’t feel bad about saying no.
Seek Out a Real Estate Tax Sale Lawyer
A tax sale lawyer can assist with preparing any documents, providing tax sale advice, and ensuring that what you hope to do with a property is feasible. If you’re seeking advice, seek a lawyer with experience in tax sales and real estate.
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