Two Approaches to Investing in Property Tax Sales in LA

There is basically two types of investors when it comes to purchasing property at the tax sale, it is important for you to indetify which type you are and to then act accordingly with the best strategy for that type.

Type 1: An investor seeking a high return on cash money: When you purchase a property at a tax sale you will receive 5% instantly plus 1% a month for the first 3 years. If the tax sale amount is $10,000 and the property is redeemed 3 months later you would make 5% + 1%,1%,1% = 8% or about $800 . If they wait 1 year to redeeem the property you will make 17% or $1700 in this example. Where else can you make 17% in 1 year on a very low risk investment? Typically the investors who use this approach will target properties that have high tax amounts and will be most likely to be redeemed. They will typically invest a large amount of money. When it comes to bidding down the percentage of ownership, they are usually ok with taking 1% as they feel confident that the property will be redeemed. Their biggest risk is if the property is not redeemed after 3 years and the value of the property is less than what they have paid in taxes + court costs. This type of investor's main goal is to make a great return on his money.

Type 2: A speculator hoping to acquire property for a cheap price:
I call this the "hitting a home run" approach and this is the strategy I use to invest in property tax sales. Since I do not have tens of thousands (or even hundreds of thousands) of dollars, I try to target properties that have between $250 - $750 worth of taxes owed and that are less likely to be redeemed. My logic is the more properties that I get the better chances I have of one of the properties going 3 years so I can potentially own the property. While it is great to earn 1% interest a month, if you are only investing a couple thousand dollars a year then you really not talking about making a lot of money from redemptions. For us, the big payoff would come from taking ownership of a property. The key here is make sure that the value of the property you bid on far exceeds the amount of taxes you will be paying over 4-5+ years plus legal/court costs to sue to quiet title and take ownership. Do your research before you bid and make sure the value is there! Also take into account unforeseen problems, for example if there is an improvement on the land (house) you have to assume that the inside is in terrible condition (or will be in 3 years) and it will take a lot of money to fix it up or the value will be a lot lower than you had originally thought. As a rule of thumb I try to determine a value based on just the land and not put too much value into the structures as you have no idea if it will even be there much less the condition it will be in if/when you get it.