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As a local real estate investor, I come across a lot of different scenarios of why someone owns a vacant property. The most common reason I’ve seen in the last year in the Indianapolis area is that they purchased it at a county tax sale, from somewhere across the country, and now they have no idea what it’s worth, how much it will cost to repair it, or what do next.
On paper, purchasing a property for pennies on the dollar sounds like a good investment. However, it doesn’t take too long for your small investment to grow out of hand, and here’s why.
Purchasing a property at a tax sale and the potential of a financial windfall might make it exciting, however, there are potential risks that need to be considered. A tax sale property usually does not come with a warranty deed. It is usually sold with what is called a tax deed. In most states, a redemption period must pass before the property can be resold with a clean title.
In Indiana for instance, a three-year redemption period must pass before you can sell the property with a clean title. This allows time for anyone with a legal right to the property to come forward and make a claim for the property. If you don’t want to wait that long, you must either “quiet the title” with the use of an attorney or find a title company to issue a “tax sale certificate”.
Both options can be costly. Most investors, new to tax sales, do not realize this and are surprised to find out their investment just doubled.
If you’re able to sell the house within the first years, then property taxes shouldn’t be a big expense. However, if you end up sitting on the property for multiple years then it can add up quickly. I’ve spoken to many property owners who own a tax-sale property for 5 to 10 years without doing a thing to sell it. This can easily add another $2,000 to $5,000 to the cost of the house, depending on the market.
Most of the houses that are sold at tax sales need total renovation. There is a reason why the last homeowner decided not to pay the property taxes and walk away from the property. Without seeing the property or inspecting the interior, the person purchasing the property has no idea what it will cost to repair it. It isn’t until after that purchase that it’s determined that the house needs way more repairs than expected.
In markets where property values can sometimes be less than $100,000, spending $30,000 to $50,000 in repairs makes no financial sense thus making it impossible to sell or “flip” the house to another investor.
As a real estate investor, I am constantly contacted by owners of properties they’ve purchased at tax sales. The seller is hoping to turn a small investment into a big financial score. Unfortunately, that is not usually the case. In most cases, the house is still in the redemption period, which will need to be addressed or it needs too many repairs to make sense. In either case, the seller is now stuck with a property he can’t do anything with without spending more money. Don’t less this happen to you!!
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