Coach Mitch’s REFLECTIONS™
Needing more clarity, a student recently asked me to quantify what he should be looking for to determine what a good tax delinquent property prospect was.
I jotted down a few ideas.
The biggest idea is that: Every criterion has its range of values, issues and concerns. A good lead takes several criteria into consideration.
Price or FMV:
< $40K lots of houses are free and clear,
< $60K many are free and clear,
$60K > fewer are free and clear,
$75K> few are free and clear.
In each area the properties have a higher potential of being mortgaged above a certain amount. However, as a general rule, percentage wise, there are few properties above $75K that are free and clear AND tax delinquent.
In lower priced areas, fewer homes are mortgaged in the lower price range, i.e. a higher percentage are free and clear. In higher priced areas, that percentage is lower and the amounts are higher; because the banks, in order to be in business, must adjust their criteria to the values of the area, i.e. neighborhoods.
In lower priced areas, the banks must lend to lower priced properties or they will not do any business at all. However, the banks can set a higher minimum mortgage amount where the values are higher.
In very high priced areas like CA and metro NYC, $100K properties can be free and clear because they are the equivalent of $35K properties in FL or AL. Banks often require a high percentage of down payment for higher priced properties and that can mean large amounts of equity.
Exception: 33% of homes of persons 55 and older are free and clear; however, they are not usually tax delinquent. These prospects are good, full price, owner hold paper leads.
Comparing Total Assessed Value to the FMV can be a big factor. If an area is well under assessed, then you must adjust for this fact or mistakenly believe that people are asking too high a price as compared to the Assessed Value. If the area is well over assessed, then you had better know or you will be overpaying.
We can look at property to about $150K and find some that are free and clear or with low mortgages, so that the equity is still significant, about 30% to 40%. These are great $1 Option candidates.
Tax Delinquency Percentage:
Typical = Sweet Spot = 7% – 30% of the total FMV value are tax liens.
If the template is to not go over 50% FMV in price, then, all costs of the property must be within that 50%, not including rehab. The ARV, After Repaired Value, is a different calculation. The 30% maximum in liens allows for a maximum 20% amount to be paid to the owner, totaling 50%. If the owner will take nothing, then the liens can be 50% of FMV.
Tax Delinquency Dollar Amount:
Typical = 7% – 30% of the total FMV value are tax liens,
with an approximate minimum delinquency of $3500,
e.g. $50K FMV w $3500 tax = 7%.
The dollar amounts are also a function of the area and the property value; however, with rents being $500+, prospective tenants know that they need $2000+ to move in. Most everyone can come up with that figure, so a higher, more difficult amount to save is needed.
The higher priced an area, the higher the dollar amount needed for a tax delinquent to be desperate. A tax delinquent that previously had the ability to get a $500K mortgage paid $50K to $60K per year in PITI, Principle, Interest, Taxes and Insurance. That person is not going to be intimidated by a $3500 delinquent tax bill; however $35000 (7% x $500K) is a different matter.
At the low end, though annual property taxes in many states, are about 1% of the FMV, particularly many southern and western states, the population is not likely to have the ability to save or put together $5000. That is why they are willing to sell cheaply. They are living pay check to pay check.
If you can determine their situation, you can determine a buying price. The worse the tax delinquents personal situation, the lower the price. This idea is the same with the higher priced homes; the situation impacts the price. Often, the situation also mandates speed. Even if the tax delinquent had big money, they don’t have it now, however they know that they can come back to prosperity in the future. The tax delinquent just needs to deal with the situation now so they can have a future.
To do quick flips, SFR and duplexes are the best candidates.
Tri’s and fourplexes are next best. Currently, even townhouses and condo’s are decent leads because the housing stock has dried up a bit and in many areas the better deals can be found in the condos and townhouses. People will always consider the best deal, even if it is a condo. Association fees will be where the complex tries to make up a loss so negotiate hard to keep your fees reasonable. This will help in selling. Be really careful with MH’s.
If looking at fourplexes, then mixed use properties can also be evaluated. The downstairs store with the upstairs apartment is a prevalent property type and can be very profitable. The percentage of debt to value should be even better, i.e. lower, because the problems will be bigger, i.e. the Sweet Spot can be 5% – 25%. A tax delinquent owner needing to rehab a storefront knows that a potential retail tenant will demand a much lower rent and will therefore understand a much lower purchase offer.
Is the seller desperate? Y or N?
There is no rule, excepting that we find out if the situation is bad enough for the seller to be desperate.
The out of area owner is often thought to be a good motivated seller lead. This is often true and, just as often, the owner occupant is motivated to move on. Do not pre-judge. Dig until you find the hot button and the level of motivation.
Listen to everything, evaluate and put the data into your mind matrix, to be reevaluated when getting new information. Example: Me: “Why don’t you rent the house?” Tony: “It’s too far away to manage. I have other rental property near me.” This person is not desperate and will not be desperate in the future because he has income. While the tax delinquent property is certainly a nuisance; aggravation is not desperation.
The only real issue is if you feel comfortable putting out some amount for a cash purchase.
For all else, use Coach Mitch’s “famous $1 Option.”™
Q: Is the area someplace that I would live? A: You are not living there, that area already has lots of people who choose to live there; someone will know of a candidate to purchase, especially if you offer a $300 REWARD.
Q: Is a rehab needed? How do I verify the cost and the work? How do I do long distance supervision? A1: Sell AS IS A2: hire a Craig’s List person to clean and only compensate upon seeing before and after pictures, or pay the cleaner a higher amount upon a sale, or add a bonus if they find the buyer. A3: If doing a rehab, hire a reputable retired contractor to be your Clerk of the Works to look over the shoulder of the rehab contractor and report back to you . This is little used concept but one that is valuable, especially if you don’t have the requisite skills to oversee a rehab project.
Q: Can I find a RE agent? A: Of course you can. For the listing, that agent will supervise almost everything – for free. They will love offering their network the chance to do work for you. If you only do PP&C’s, Paint, Patch, Carpet, Cleanup and Curb Appeal, then you won’t be hurt. All these type fixes raise the property value more than they cost to do.
Q: How can I know about the percentage of Assessed Value to FMV? A: Ask the Property Tax Assessor, that’s why G-d invented them.
Q: Can I supervise it all? A: See below
Concerns: Can I really do this?
Q: Can I represent the property properly?
Q: Can I talk to people properly?
Q: Can I think of everything I need?
Q: Can I be a good judge of character so I won’t be burned? ETC.
Q: Can I get the cash if needed?
A1: All good things come to him that tries – and perhaps fails – but tries again.
A2: Yes you can do this! That is why you hired a coach – so the potential of failing will be lessened. That’s a really smart thing to have done – but only if you follow the coach’s suggestions.
I hope this helps,
518-439-6100 until midnight EST