Real estate is one of the most profitable investments. It's a no-brainer and a solid choice if you want to diversify your portfolio. The best part is that while most real estate investments require high capital, average investors still have opportunities. One of these is investing in delinquent properties.

Delinquent houses present unique opportunities for savvy investors. They allow you to own properties at a fraction of their market value. However, before investing, you must weigh the benefits and drawbacks. If you are a new investor, consult a real estate agent in the area for an overview of the market. You can also consult a lawyer for legal issues.

A savvy investor knows that delinquent properties offer discounts, but they must dig deeper to determine their profitability. You are in the right place if you have heard about delinquent houses but are unsure if they're a suitable investment. This guide will cover the good and ugly sides of investing in delinquent houses.

 

What Is a Delinquent House?

When a homeowner fails to pay property taxes, the house is considered tax delinquent properties. The municipality sells these houses in tax sales, where interested buyers bid and the highest bidder wins. The minimum bid usually covers outstanding taxes, penalties, and associated fees.

The bidding process is very competitive, and getting carried away as an investor is possible. As a result, you will have an overpriced property that is harder to sell. For this reason, always walk into a tax sale with a budget of how much you are willing to spend. The amount should be determined after researching the property and determining its worth. After this, add the amount you want to make as a profit and remember to include repair costs if needed.

If you win the bid, you must pay the amount within the stipulated time, which could range from immediately to several days or weeks. In some municipalities, you become the owner outright. In contrast, the original owner gets a redemption period in which they can pay you the amount paid plus interest to retain property ownership.

 

Discounted Acquisition

Tax-delinquent houses are a solid option if you are a buyer looking to own a home at a discounted price. These houses are sold at a fraction of their market value. The municipality is only interested in recouping taxes. While the winning bid will be more than that, it will still be lower than the market value.

 

Motivated Seller

Owners facing foreclosure are often highly motivated to sell quickly. They know this is their last shot (if the property is sold outright without a redemption period). And even if there is, they know they'll incur interest until they pay it. Selling the property before taking it to auction offers them more control over the price as they can negotiate a price they like.

For you, the buyer, buying a delinquent property before it goes to auction allows you to secure a better deal. Bidding wars usually drive the final price up. Moreover, you can inspect the property better and understand its worth.

 

Cash Flow Potential

Even if you don't own the property (in the case of a tax lien), you will still collect interest on the unpaid taxes from the original owner. Interest is usually attractive, even if it is short-term.

 

Potential for High Returns

Delinquent houses are an ideal opportunity if you are rehabbing and flipping houses. Most of these houses are usually not in pristine condition, so they fetch very little.

Once you repair and upgrade them, you can significantly increase their value and flip them for a substantial profit. The only downside is that you will need more money to upgrade.

 

Hidden Costs

The initial discounted price tag can be deceiving. Most delinquent properties are often neglected, so they require extensive repairs. Some of the issues you may face are roof damage, outdated plumbing or electrical systems, structural problems, or environmental hazards.

Unfortunately, you may not know because you can't inspect the inside. These hidden costs can significantly reduce your profit margin.

 

Uncertain Titles

Delinquent properties can have outstanding liens from unpaid taxes, contractor bills, or other debts. If you don't do a thorough title search to uncover these issues, they might arise later and prevent you from taking full ownership.

 

Long Foreclosure Process

Buying a deed at a tax auction doesn't guarantee ownership. Many municipalities allow redemption periods ranging from several weeks to several years. Confirm this before moving through the process, especially if you want to flip the house. This lengthy process can drain you financially because you must maintain the home and pay taxes.