Doing Your Due Diligence
This is the sixth installment in a series of Rich Dad Education articles on the topic of tax liens and deeds. Tax liens and deeds are just one of the many subjects covered in Rich Dad Education’s Elite Training. Rich Dad Education’s Elite Training classes have been designed and are taught by experts and offer students of all experience levels an opportunity to dive into the investing world in a quick, efficient, and profitable manner.
In recent articles in this Rich Dad Education series, the differences in the auction format, redemption period, and other aspects that differ from state to state have been discussed. While there may be different rules, procedures, and offerings from state to state, there are many aspects in your approach to tax liens and deeds investing that remain constant. First and foremost among the constants in your tax liens and deeds investing is due diligence.
Due diligence is a popular phrase in real estate investing and simply refers to the care you should take before committing to any investment. While tax liens and deeds investing is widely regarded as an extremely safe and conservative investing strategy, there are still steps you need to take to ensure that you are protected.
Protecting Your Investment
While perhaps the least exciting step, doing your due diligence is arguably the most important task in the tax lien and deed investing process. While tax deed investments are normally higher as they are directly acquiring title to the property, both tax deed and tax lien investors should approach their due diligence in similar manners due to the potential liabilities that may exist once you acquire the property. While the vast majority of tax lien investments simply result in the payment of your investment with appropriate interest, the savvy investor makes sure to conduct their due diligence to ensure that they are not potentially inheriting a property that is worthless or has far too much liability to make it worth the small risk involved. Remember to never buy a tax lien on a property that is not worth the investment as the property is the security on your tax lien purchase
Here are just a few items that you should be sure to investigate as part of your due diligence process.
Determine the Property Value – Future Rich Dad Education series will include in-depth articles on how to calculate property value, similarly to the Rich Dad Education Tax Liens and Deeds Elite Training. A quick shortcut you can use for smaller tax lien investments is to look at the tax assessment data used by the county as this gives you a ballpark with what you are working with. If the information is not available online, then contact the tax assessor’s office.
Determine Zoning Restrictions – This is especially important for vacant lots as zoning laws could lay waste to great plans you may have in store for your newfound land.
Physically View the Property – This is an essential step on larger purchases as it will be required to help determine property value. View the property to assess the condition of the home and to ensure it is even there! Being able to visit the area is a huge advantage but you should at least find a service that offers satellite photos of the area if it is for smaller investments.
Environmental Risks – For commercial properties you may inherit substantial liability for previous environmental contamination.
Utilities – Are water and electricity accessible? If not, how close are the nearest utility sources? If they are not available, is the city or county going to be expanding to that area soon?
Bankruptcy – Determine if there is a pending bankruptcy associated with the property and its current owner. If there is, simply move onto the next potential investment.
Other Property Liens – While your tax lien will take precedent in most cases, find out if there currently are other liens on the property. If you find the property currently has liens against it and are not sure how that applies to the specific jurisdiction, it may be wise to consult an attorney to help answer applicable questions.
This is just a small sample of elements that should be included in your due diligence checklist. While performing your due diligence can take some time, it is time well spent as it can protect you and weed out potentially risky investments. The next Rich Dad Education article on tax liens and deeds will explore the most common mistakes tax lien and deed investors make.