Introduction to Investing in Pre-Auction Tax-Delinquent Properties
The traditional approach to tax sale investing usually goes like this: research properties for the next auction, acquire necessary investment capital, attend the auction, and bid on the desired properties.
There’s nothing patently wrong with this approach, and many investors build profitable business models with it.
However, this model has caused some investors to ask themselves what they could do prior to the tax sale to maximize their investments.
After all, the auction is the county’s way of dealing with tax-delinquent properties. When investors bid on properties, the situation is out of the homeowner’s hands, and costs increase because of the auction process.
Karl Spielvogel is one such investor who asked himself these questions and decided to formulate a pre-auction tax sale strategy for real estate investing.
After spending time with tax sale attorneys and investors, he created an investment model that centers on finding tax-delinquent homeowners before the auction occurs. Doing so allows investors to move efficiently, cut costs, and boost profits.
Karl was gracious enough to sit down with Brian Seidensticker, CEO of Tax Sale Resources, to outline this strategy for other investors to adopt.
While Karl is based in North Carolina, his strategy translates well nationwide. He’s an expert on pre and post-auction sale investing, and his insights can help you avoid pitfalls in the industry and jump-start your business.
Read on to learn how to implement a pre-auction investment model that puts you in direct contact with homeowners and lets you bypass competing investors.
A Strategic Approach
In the realm of real estate investment, targeting tax-delinquent properties, especially those owned by deceased individuals or defunct corporations, presents a lucrative opportunity.
Instead of waiting for the next auction, you can communicate with the owners before the tax sale. Doing so allows you to reduce costs, speed up the entire process, and generate more revenue.
Because there are risks to any form of investing, this comprehensive approach requires thorough research, persistence, and strategic partnership.
Here are the key points to implementing this approach.
The Owners are the Priority
Karl's model focuses on vacant properties with delinquent taxes, often associated with complex ownership scenarios due to deceased owners or defunct corporations.
While these properties often have complicated ownership situations, multiple liens, and no obvious way to communicate with the owner, you'll find diamonds in the rough this way.
Success in this area involves building out the family tree from the last known owner to find viable contacts. Skip tracing and utilizing social media platforms are essential tools to establish communication with potential stakeholders.
That being said, a wide range of situations can put a house on the tax delinquency sale list, so it’s best to be ready for anything.
For instance, homeowners might go to nursing homes without selling their house or putting it into capable hands.
Likewise, some homeowners spend years in prison while their homes are vacant and neglected. The takeaway here is to approach each situation with a positive attitude.
In doing so, you’ll find a path forward that resolves tax delinquency issues for the homeowner and facilitates quick title acquisition and a profitable home sale.
Find the Three Key Characteristics
While Karl's model applies to a wide range of pre-auction investing situations, there are three characteristics he's always keen on finding together in a property: tax-delinquent, vacant status, and deceased owner.
This profile has consistently proven to be Karl's most lucrative target.
In other words, if a property has delinquent taxes with no one living inside because the prior owner is deceased, chances are you can flip that house for a hefty profit.
An illustrative example involves a property Karl acquired for $35,000.
It was tax delinquent and vacant, with a deceased owner. Following a thorough process, he sold the property for $310,000, realizing a profit of $243,000.
To initiate this strategy, he used a skip-tracing tool to determine the vital status of potential sellers.
His research process revealed both owners to be deceased. Subsequent steps included checking for an estate file and consulting obituaries.
Then, after failing to identify the current owner, Karl went to the funeral home where the last known owners had their funeral service. He skip-traced every person in the funeral book and discovered that the heir's last names differed from their parents because the mother had remarried.
This key piece of information allowed Karl to connect with the heirs, make a deal, and sell the home for $310,000, taking away a profit of $243,000.
Obviously, not every pre-auction tax-delinquent property will fit the bill, and part of a wise tax investor's business model is to adapt to the investments available.
That being said, when you come across the trifecta of delinquent/vacant/deceased, you will know there is potential opportunity.
Build Partnerships and Become the Problem-Solver
Successful pre-auction tax sale investing involves building partnerships with owners or their family members if necessary.
Skip tracing, reviewing social media profiles, and even marriage announcements in newspapers can help you find the right person to contact.
Remember, the property you're looking at is delinquent for a reason, whether it's family members who can't reconcile, a property owner who moved to a foreign country, or bankruptcy. Creating an open-ended conversation with property owners, their heirs, and other interested parties can help you see how to fix the problem.
Understanding the root cause of tax delinquency is paramount.
Whether it's an unpaid lien, familial disputes, a deceased homeowner, or judgments against the property, addressing the underlying issues is the key to success.
For example, say there are three siblings who inherited a house from their parents.
Two siblings want to sell the home, while the third wants to keep it - but they're not interested in living in the home or paying for its upkeep.
You can negotiate with the two more reasonable siblings by offering them a share in the investment in exchange for their shares.
Then, you can force a partition sale or let the property go through the standard tax sale process and collect a majority of the proceeds.
Regardless of the specifics, the idea is to bridge the gaps in whatever situation you find. You might become the go-between for estranged family members, a negotiator persuading lienholders to release the home from old debts, or a detective looking for the last living heir of an old homeowner.
Due diligence and partnering with others are vital to successful pre-auction investing.
Remember Financial Considerations
Costs associated with acquiring tax-delinquent properties can range from $30,000 to over $100,000.
For example, Karl recently bought a property for $15,000 with multiple judgments and liens (more on this scenario below).
However, the resale value of the home was $250,000, allowing Karl's team to net about $143,000 in profit.
As a result, it's crucial to accurately assess property value before investing.
Doing so means getting an appraisal for the property, working with a reputable realtor, and bringing a qualified attorney on board to vet your process.
In addition, the property might present opportunities for more profits, such as a lot you can subdivide into multiple parcels of land and sell.
According to Karl, if you're in the pre-auction investment game long enough, profits from your land sales will exceed your tax sales - so keep your eyes open!
Address Judgments
A judgment is a lien against a property from a creditor with a valid claim for payment.
Whether it's an unpaid mechanic's lien or a debt from a long-past lawsuit, a judgment can increase the financial liability of owning the property.
They can also range into the hundreds of thousands of dollars, creating an obstacle for tax sale investors.
Fortunately, judgments don’t have to spell doom for your investments.
For example, Karl recently found a property with two judgments totaling $139,000. Despite this intimidating number, Karl took advantage of the facts: first, judgment liens can’t cause foreclosure, meaning these creditors couldn’t repossess the home to recoup their losses.
For this reason, judgment holders sit in a waiting position, hoping to receive payment from the property at some point.
Second, judgments expire.
Depending on your state, the expiration for judgments is between five and ten years.
Upon expiration, the holder can renew the judgment with the court. However, when a judgment is renewed, it’s removed from the property and only follows the homeowner who originally incurred the debt.
For instance, if a homeowner didn’t pay for a repair, the mechanic’s lien would solely apply to that person when it renews – not their property.
Armed with this knowledge, Karl reached out to both parties with judgments and settled them for a total of $38,000. After purchasing the property, paying legal fees, and addressing the delinquent taxes, the final cost of acquiring the property was about $107,000. Then, Karl sold the home for $250,000 for a whopping $143,000 profit.
So, while the judgments on the property had caused confusion with the property owners and had driven other investors away, Karl saw an opportunity.
Measure the Impact
Beyond the financial gains, investing in tax-delinquent properties benefits the community.
A house that becomes an abandoned eyesore is detrimental to any neighborhood; it reduces the value of surrounding homes, attracts pests and vermin, allows blight, and produces zero tax revenue.
Buying a house pre-auction fast-tracks the recovery process to improve the neighborhood. When tax sale investors do their jobs correctly, the results are overwhelmingly positive: dilapidated homes are revitalized, property values increase, the housing crisis lessens, and municipalities receive more tax revenue for essential public projects.
So, when you’re driving around your community looking for your next pre-auction investment, remember that you’re bettering the lives of those around you while running a profitable business.
Conclusion
In the ever-evolving landscape of tax sale investing, Karl Spielvogel's innovative pre-auction tax sale strategy is a game-changer, offering a blueprint for astute investors seeking to maximize returns.
By redefining the traditional tax sale model and prioritizing direct communication with homeowners before auctions, this approach reduces costs, accelerates timelines, and positions investors ahead of competitors.
Remember, Karl's focus on the trifecta – tax-delinquent, vacant status, and deceased owner – has consistently proven lucrative.
Beyond looking for the trifecta, successful pre-auction investing involves building partnerships, understanding the root causes of tax delinquency, and addressing judgments strategically.
Aspiring tax sale investors who adopt this comprehensive strategy will reap financial rewards and the satisfaction of making a lasting impact on neighborhoods and communities.
