Note Investing Due Dilligence - Gathering Tax Information

In this article I will tackle a relatively simple but important topic, how to best go about gathering accurate county tax data for a collateral property as part of pre-purchase due diligence.  (For a broader discussion of due diligence activities, see my blog post Due Diligence for Notes - Tax and Title.)

Now, one would think that getting tax details on a collateral property would be relatively quick and easy, and it sometimes is, however the issue is that counties are all managed a little differently and so the steps for gathering tax details can vary between them.  If you don't mind spending some money, there are companies which can pull accurate tax data for you.  There are also companies, sometimes the same ones, which will monitor tax status on your collateral properties.  That's all fine and good, but in this article I am discussing how to go about getting it for free.

Let's start with the data points we need to gather:

• Annual Tax - We need to know the amount of tax (and related municipal charges) which was charged by the county in the current or prior tax year.  This number is important in our analysis for calculating holding costs, as well as for projecting rental NOI for the hold and rent scenario.
• Total Taxes Due - This includes unredeemed tax liens as well and unpaid current and delinquent taxes, and should be considered part of our costs in resale and rental scenarios.  In other words, if we take title to the property through foreclosure or deed-in-lieu and intend to hold and rent or sell the property, we will need to pay the taxes due. 
• Years Due - We want to know the tax years which have not been paid.  This is not as important as the first two data points mentioned, but it is helpful in that it can give us additional insight into the behavior and intentions of the borrower.  For example, if we see that there are 5 years of taxes which have not been paid, this could be an indication that the borrower has given up on the property.  The reverse could be true if taxes are paid current, although it is possible that the lender could have been paying these rather than the borrower.
• Unredeemed Tax Liens - It is important to understand if any tax years have been sold as tax liens which have not been redeemed.  Tax lien holders can start a foreclosure process after holding the lien for a period of time (usually two years).  While this is not a common move for tax lien investors, some do it and it's something to keep in mind as note investors.  I will usually redeem outstanding tax liens right away after purchase of a new note to protect my interest.
• Tax Deed Sale Schedule - Some counties don't sell tax liens and simply auction properties for back taxes.  If we are looking at a collateral property with multiple years of taxes due in one of these counties, it is important to know the timing of the next tax deed auction so that we can step in and pay the taxes prior to that date.

Before jumping into how to go about getting this data, let's talk about the different departments one would typically interact with for tax queries:

Tax Assessor - The primary responsibility of the tax assessor is to establish the taxable value of properties.  The Assessors Office also keeps track of ownership changes, maintains maps of parcel boundaries, keeps description of buildings and property characteristics up to date, and analyzes trends in sales prices, construction costs, and rents to estimate the value of all assessable property.   The tax assessors site will typically have this type of information, along with links to tax office and other related sites.

Treasurer & Tax Collector - The county treasurer will frequently be responsible for collection of taxes, but sometimes these duties fall on the office of the tax collector, and sometimes tax collection is split between the two.  It varies county to county.  In some counties the treasurer collects current taxes while delinquent taxes are collected by the tax collector.

OK, now that we know the data points we need and an understanding of which departments we need to interact with, let's talk about the best way to go about getting this data.

Parcel ID - The first thing I usually do is to get the parcel ID for the property.  Most counties can look up taxes using only the address, but before I do an internet search or start making phone calls, I like to have a parcel ID too because it can expedite the process.   homefacts seems to have parcel IDs on their listings fairly consistently so I may start there. 

Internet Search - Most every county has some type of web site.  Some counties, especially the large ones, will have excellent tax sites where one can get all or nearly all of the information we need.  Others may have just a phone number.  I usually start with a search like "Dallas County Tax Collector" (for Dallas) or a similar search for treasurer or property search.  Keep in mind that there are a lot of websites out there that will look like good sources of tax information, but they want to charge you for it.  We need to avoid these and find the actual county website in this mix of results.  The public records section of NETR Online is also a good resource for getting county contact phone numbers and internet links. 

If you are successful in finding the proper county website, the good ones will have a search capability where you can look up tax details by owner name, property address, and parcel ID or tax account ID.  If I am able to find a good county website which has all of the tax details, and I can see that taxes are paid current, I may stop here.  This is sometimes but usually not the case in my experience.

Make the Calls - The problem most people have with calling for tax information is not knowing exactly how to ask for it.  I like to keep it simple and say something like: "Hi, I am calling for taxes due on a parcel."  The response I get is usually something like "Parcel ID?" or "Address?", then we are off to the races...  The clerks who work in these offices are used to these types of calls and don't usually ask why you want the information.  If they do ask, I usually say "I am a lender", which will typically satisfy them.  I want to avoid going into a long story about how I am investor doing due diligence.  It's just unnecessary.

Depending on the information you get back, you may have to qualify it and make sure you are getting the whole story.  You want to understand current taxes due vs. delinquent taxes due.  It is best to get a total for each year that is due and be sure to ask if there are any unredeemed tax liens.   Counties which sell tax liens will often consider the taxes for these years to be paid (and they are paid from the perspective of the county), so the number they provide may not include the amounts due on the certs.  If different departments handle current taxes and delinquent taxes, the clerk will let you know and can usually either provide you with another number to call or transfer you to the proper department.

That's it!  It boils down to good old fashioned detective work in many cases, and it is a process which should not be skipped in your due diligence.  Also, some sellers include taxe due data in their tapes. but don't take their word on it.  In my experience they are frequently wrong about it.  Happy Investing!