Buying property through tax sales

Paying next to nothing for a fabulous property sounds so enticing, but in reality it’s virtually impossible (this marketplace is now so competitive and filled with Internet savvy buyers). Still, tax sales continue to draw interest and attention because, let’s face it, who isn’t enticed by the tale of a waterfront property on sale for $60,000 in an area where cottages are selling for $250,000?

Despite promises of cheap land, it’s easy to lose your shirt in a tax sale property. Here’s a few tips for those considering a tax sale purchase.

What is a tax sale

“I’ve heard hero stories about people making huge profits buying and flipping tax sales properties,” says Michael Currie, owner of the Fort Nova Group, a real estate investment and education company based out of Nova Scotia, and an experienced landlord and real estate investor. Fact is some real estate investors swear by tax sales. And when a Markham, Ont. home worth $650,000, is auctioned off for $350,000, who can blame them? It’s the allure of finding a diamond-in-the-rough. But with a few mis-steps and you could be the proud owner of an unsellable property.

In its simplest form: a tax sale is when a property is sold by a taxing authority, such as a city’s tax department, or by the court, as in a Sheriff’s sale, to recover delinquent taxes or other debts levied against the property. That means if an owner of a property neglects to pay their property taxes or utility bills, the city or courts can seize and sell the property in order to recoup their lost revenue. (A great primer on tax sale definitions can be found on the Cornwall Municipality site.)

The sad truth is that most of these properties suffer from a multitude of problems. For instance, many land-only sales are for properties with no road access and no rights to road access, which seriously impedes the property’s use and value. If the current owner didn’t pay the tax or utility bills, you can bet the home is run-down, at the very least, or falling down.

Currie learned this first-hand after attending the recent Digby, Nova Scotia ax sale. On the day of the public auction, he learned that all of the properties he’d short-listed had been redeemed. “But I wanted to buy something, so I started re-evaluating the list,” says Currie, “that’s when I almost made a mistake.” A property with an old house came up for sale at $2,539. “At that price, I figured how bad could it be.” At the last minute, Currie had second thoughts and didn’t put in a bid. After the auction, he and his wife drove by the house—and immediately realized how fortunate they were. The small house was on a small lot surrounded by more abandoned homes. It would’ve been a nightmare to sell or rent. “The value was very close to zero,” says Currie. “I’m glad we didn’t get it.”

Even if the property has inherent value, you can end up inheriting significant problems, so due diligence is absolutely necessity when it comes to a tax sale (more on that below).

Are tax sales guaranteed?

Even if you win a tax sale bid, you’re not guaranteed ownership of that property until the six to 12 month redemption period has passed (the length of period is based on the tax sale rules where you live). During that time, the prior owner could pay off the debts owed on the house and reclaim full-ownership of the property. You’ll be refunded your money (plus interest up until the date of redemption) but you’ll be out an investment property.

Tender vs. auction

There are two types of sale methods when it comes to a tax sale: public tender and public auction.

Sale of land by public auction: To make a bid on a property at a public auction you have to be physically present on the tax sale date at the designated auction site. The advantage is that if you bid on a property and someone outbids you, you have the opportunity to bid again. In the end the property will go to the highest bidder.

Sale of land by public tender: In this type of tax sale, buyers are required to put in an offer on a property using a sealed envelope. The envelope must contain an official offer as well as a bank draft or certified cheque for at least 20% of your final offer. So, if you’re offering $100,000 for a tax sale in the Kawartha Lakes area of Ontario, you’ll need to include $20,000 in the envelope.

Just like an auction, the highest bidder will end up winning the sale. Unlike an auction, buyers have only one shot at winning the tender. However, you don’t actually need to be present for the opening of the tendered bids (in most places, tenders are opened on the tax sale date at 3pm).

The importance of the minimum tender amount

Whether it’s auction or tender, tax sales work the same way. Weeks or months prior to the sale date, a list of tax sale properties is made public along with the property’s legal description and the minimum tender amount (also known as the Cancellation Price). This amount is the total of all tax arrears owing up to the first day of the advertised tax sale and includes penalties, interest and all reasonable costs incurred from the time the municipality registers the property for sale (known as a Tax Arrears Certificate). The minimum tender amount is important because it’s the lowest you may bid on the property—and any bids that do not meet or exceed this amount will be rejected.

If you win the tax sale bid process the minimum tender amount must be paid, in full, immediately using a credit card, debit, certified cheque or bank draft, says Currie. Failure to do so can result in a forfeit of your bid and the property is awarded to the next highest bidder. “The balance must then be paid within three business days,” says Currie.

Due diligence required

Unlike other forms of real estate, a tax sale doesn’t allow potential buyers an opportunity to view the property or structures before the sale. Still, that doesn’t mean you shouldn’t gather as much intel as possible.

Title search: First, consider paying $25 to $80 for a title search. This report provides a synopsis of all records on title for a particular parcel of land, as registered in the Land Registry Office. A title search can reveal vital information about the property, such as who owns it, what mortgages are currently registered against the property, any easements or restrictive covenants that may affect the land and if there are any surveys registered on title.

Execution search: Next, get an execution search, which provides details of any court judgements against the property owner. If the order involves the “Crown” you will want to steer clear from the property. That’s because a Crown interest on a property does not disappear once a property is sold, but remains with the property, even after new ownership. For instance, if the owner owes $60,000 in income tax, and the Canada Revenue Agency was successful in putting a lien on the home, then the purchase of the property will mean you are now responsible for paying that $60,000 CRA debt. Crown interests can include judgements from: CRA, the Income Tax Act, the Retail Sales Tax Act, the Minister of Finance, the Business Development Bank and the Farm Credit Corporation.

If your title and execution search bring up nothing alarming and you’re still interested in the property then the next step is to analyze the actual property, itself. You can use Google Maps to get an initial glimpse of a property, but seasoned tax sales bidders don’t rely on this geo-mapping technology.

See it for yourself: Once you’re satisfied that a title and execution search brings up no red flags, then it’s time to conduct a visual inspection. Initially, you be tempted to skip this time-consuming step. Why bother given the satellite imaging technology, such as that used by Google Maps, at your fingertips. “Don’t,” says software developer and land investor Robert Devenyi, 34. “Never buy a property sight unseen unless you have a very solid reason.”

Jeff Oberman, owner of OntarioTaxSales.ca, a privately-owned corporation that facilitates tax sales, agrees with Devenyi. He says Google and other geo-mapping systems often average out house numbers or property coordinates, so their maps can be inaccurate. “We’ve seen maps that are three years out of date and we’ve seen maps where the wrong piece of property is shown.”

Also, by doing a visual inspection you get a better idea of the types of problems that could be inherited with the purchase. For instance, squatters may have taken over and set up camp in the house? Or the back corner of the lot could’ve been turned into an illegal dumping ground for old oil tanks (a big deal considering the contamination). While it can seem tedious, your best bet is drive to the property and visually inspect as much of it as possible.

Property Value: If you’ve gotten to this point and you’re satisfied with what you’ve seen (and read) then the next step will be to assess the property’s value. You can do this by checking real estate listings or by calling a realtor and asking for recent market comparisons for sold properties. Just be sure you’re comparing apples to apples.

To read more, go to Ontariotaxsales.ca for a great how-to-buy primer on buying tax sale properties.