4 TIPS FOR A FOOL-PROOF REAL ESTATE DUE DILIGENCE CHECKLIST

In the world of investing, due diligence can be described as the collection of good practices related to the investigation of any financial asset. Legendary investors such as Warren Buffett, co-founder of Berkshire Hathaway, are known to spend several hours each day fully engaged in due diligence prior to making any investing decisions.

In any situation involving investments, due diligence is completely voluntary. Despite being highly recommended, not every investor conducts due diligence, and many will only complete cursory evaluations of the assets they acquire. A day trader, for example, will probably not do any kind of evaluation of Microsoft shares beyond running them through a stock screening tool; the reason for this dismissal of due diligence is that day traders typically take market positions that do not last very long.

Understanding Due Diligence

When it comes to property tax liens and deed investing, skipping over due diligence is strongly discouraged. You will never want to ignore due diligence in any real estate transaction, and this is double the warning with tax lien certificate auctions. Investors who participate in deed auctions, which are sometimes referred to as sheriff's sales, are actually engaging in the potential transfer of real property, and this could turn into a nightmare if the highest bidder fails to conduct thorough due diligence on the property, its condition, and encumbrances

Due diligence is a must for investors who bid on tax lien certificates, and it should start at least a couple of weeks before the auction takes place. Investors who plan to bid on actual deeds will have to deal with even more due diligence than those who only want to profit from the interest paid by homeowners who want to hold on to their homes.

There is a subset of investors who willfully ignore due diligence because they are pure gamblers. We are talking about individuals who understand that winning and losing are secondary to actually playing.

You do not want to be among these reckless investors unless you have plenty of capital to lose and law firms on retainer to handle the legal issues that may arise from troublesome deeds and tax certificates.

Due Diligence Checklist for Tax Lien Investors

If you are seriously considering investing in tax liens and deeds, the term due diligence should be at the top of your real estate vocabulary. Knowing what data to search for and how to interpret the information you encounter can make or break your investment.

In addition, performing due diligence keeps you from making mistakes, which can be costly in any kind of real estate transaction. But even though you know you should do your research, where do you start? Don't worry. We've put together a due diligence checklist that will kick-off your research.

We recommend starting your due diligence checklist by examining these FOUR components at the very minimum:

* Property value

* Other certificate holders

* Total roll-up amount

* The aerial view of the land

1. Examine the Property Value

To start examining the value of a property, you will need to find the fair market value. Fair market value refers to the price a purchaser would be willing to pay for that property. Using online valuation tools like Zillow, Redfin, or other similar sites can help provide an estimated assessment of the property's worth.

It is important not to get fair market value confused with the assessed value, appraised value, or potential sales value. The FMV is determined utilizing comparative market analysis, which is what real estate analytics websites such as Zillow utilize. The appraised value is what the property is actually worth after a licensed professional evaluates it. The assessed value is what tax revenue agencies use to calculate property value due, and it is related to land value and historical demand.

2. Identify Other Certificate Holders

More often than not, a property has multiple years of delinquent taxes. This isn't necessarily a bad thing but could be if you don't identify them beforehand. For example, if you bought a tax lien from 2014, there might be other tax liens from the years 2015 and 2016 on the property. As an investor, you will be required to "buy out" the other lien holders if you plan on filing a tax deed application (TDA) to acquire the property.

In addition to others who may be holding previously unpaid tax lien certificates, there may be other encumbrances on the property such as mortgages and lines of credit. In some cases, the Internal Revenue Service may have attached a lien for unpaid federal income or capital gain taxes. There could be mechanic's liens from contractors who were never paid for maintenance, repairs, or improvements. Finally, creditors may have won a lawsuit against the property owners on a simple motion for default.

3. Know the Roll-Up

A roll-up is the sum of all tax liens on the property plus any administrative fees imposed by the county revenue agency. Most investors who are looking only to collect interest on the certificate will get tunnel vision by looking only at the tax owed, but this may accurately reflect the roll-up. For instance, if you purchase a certificate that is close to expiration, a TDA will need to be filed. You can find this information by accessing the county treasurer's page or at the recorder's office.

The roll-up will let you know if it is actually worth to bid on a tax lien certificate and whether the threshold is worth registering for the auction. Once you start looking at a 4% interest situation, the certificate becomes less appealing, and it is at this point when you should start thinking about worst-case scenarios.

4. Get an Aerial View of the Land

Many people shy away from tax lien investing because they're afraid of purchasing a property in poor condition. But using a GIS map, Google Maps, or Google Earth can provide a visual of the land you're purchasing. Checking county records coupled with an aerial view will allow you to see if the property is landlocked or in a body of water (wetlands, swampland, etc), and this will allow you to check to make sure that the legal description matches. You can even use Street View on Google Maps, if available, to get an idea of what the property and the neighborhood look like.

One word of caution about using Google Maps: The satellite views may not be as up-to-date as we would all like them to be. If you are looking at a plot of land located on a flood plain, for example, you should think about when was the last time a storm surge impacted the region, or if it has been affected by accelerated erosion. A combination of active hurricane seasons and erosion could turn dry land into swampland in just a few years. The most dedicated deed investors are known to get recent photos of the properties they are interested in; to this effect, some of them contract the services of local photographers who can fly a drone over the property for fresh aerial images.

These four key components are part of an excellent start to creating a due diligence checklist and every new investor should work on mastering this process. It is nearly impossible to create a plan of attack or develop an appropriate exit strategy if you have not done your responsibility of due diligence.

As previously mentioned, investors who are after deeds will be obligated to go deeper with their due diligence. A thorough title search, for example, will let you know if there is a chance of individuals who could file an ownership claim on the property; think about heirs, banks, creditors, former spouses, gold diggers, and others. Title claims can be more challenging to clear than liens. Potential environmental issues can also create unwanted headaches, and these are easier to spot if you check with the state and county agencies that handle these matters because they are supposed to inform the public about them. Some information on the property owners could also help you guide your investment decision. Suppose you land a tax lien certificate on a property owned by a foreclosure defense attorney, for example. In that case, you may have to deal with legal challenges when attempting to take possession.

You will have to complete the amount of due diligence before bidding on tax lien certificates, or deeds will vary from deal to deal. You can get an idea of how much due diligence may be needed when you evaluate the property description, and this is when Marketplace Pro software comes in handy.

If you are familiar with the Multiple Listing Service platform used by real estate brokerages, you will love the intuitive user interface of Marketplace Pro, which is the first step tax lien investors should take when evaluating investing opportunities. Contact our office today to arrange a free demo of Marketplace Pro; once you get the hang of it, we can start discussing due diligence strategies.