The Possible Gold Mine Known As Tax Delinquent Properties

[Parker Sanburn]

Hi everyone! Im 23 and just getting into real estate investing, and wanted to find the cheapest way to start accumulating wealth and I think I may have found it. 

The state of Alabama purchases the delinquent taxes from the county once they dont get sold in a tax sale so that the municipality can pay their employees. These properties or parcels of land just kind of get tossed to the side to be forgotten. These properties are usually not in the best condition because generally someone hasnt been living in it for years, but you are able to apply to purchase these houses and land from the state for painfully low prices! Some people offer as low as $100 and the state will accept it, giving them either the tax certificate or the tax deed (depending on the timeframe). Then after 3 years of possession, the title will quiet and then the title can be insured upon, or you can look to the previous owner and see if they will sign over a quick claim deed for a couple hundred bucks. Then you own the house! crazy right? 

So my idea is to search and find these somewhat worn houses and apply to buy for around $500-$1,000 and get the deeds and then turn around and sell it to one of those "We Buy Houses For Cash" businesses. I wanted to do this because banks wont lend to anyone wanting to buy a place doesnt have title insurance, but since these people pay with cash, the insurance wouldnt matter! I read that those people generally offer around 70-80% the marketable value, so I could potentially pay $900 for a house worth $60k and sell it to them for maybe *hopefully* $25,000. Then just repeat this process until I have enough money to put down on a commercial real estate property to start acquiring equity. 

Let me know what you guys think! All help is greatly appreciated and encouraged 

[Joey Hurlocker]

Hi Parker! I would be highly cautious with your proposed course of action for a variety of reasons:

1. Properties not purchased in tax sale are properties that other investors did not want, even though tax sales are likely sold under market rate. These often come in the form of unlivable homes or unwanted land. It is easy to find yourself in a position where the cost of clearing the property is greater than the land itself. 

2. In the case you did receive a home that was livable, you would need to maintain this home and pay property taxes on it for 3 years under your current configuration. Generally people pay a quiet title agency, which costs money.

3. In markets where the home prices are $60,000, it is difficult to restore a home from nothing and flip any profit. Say the ARV (After Repair Value) is $60,000. In an ideal situaiton, the house you are proposing to buy will likely cost over 30k in repairs (If you don't believe me, check out the house flipping threads). Using the most generous investor, you are going to receive 60% in a market like Alabama. So the maximum offer would be 6,000=(60,000*0.6)-30,000. Now, this is assuming that they would like to purchase a property with such extreme repair needs. After title clearing, purchase of property, excess fees, your profit quickly shrinks to several thousand dollars. This is, in many regards, the best case scenario.

There is certainly nothing wrong with entering distressed markets, but distressed markets are also highly vulnerable investments. For an early investor, this isn't the wrong place to be. But, flipping a quick buck in property is always a little harder than it seems.