separating land from houses

When it comes to the land investing strategy, there are a couple of “list-sorting” questions I've heard again and again from the readers of this blog, so I'm going to answer them once and for all in this article.

These questions typically come from investors who are trying to get a delinquent tax list from the county, and they usually go something like this…

Question 1:
How can I get a list that ONLY includes vacant land (without any houses, apartments, commercial buildings or other properties I have no intention of buying)?

Question 2:
When I get my list, how can I know ahead of time which properties have any liens or mortgages on them (and how can I eliminate these recipients before I send out my mail)?

Luckily, the answers to these questions go hand-in-hand with each other – and its good news on both accounts.

foggy woodsWhen you get your hands on your county's delinquent tax list, you'll find that by default, MANY of the properties on this list will automatically be land (not houses, not multi-family apartments, not office buildings) and it's not a coincidence. In some ways, it's almost like the delinquent tax list was designed specifically for the purpose of land investing. Here's why…

In the United States, the vast majority of houses (and other properties with on-site “improvements”) have mortgages on them. This doesn't come as a surprise to most of us, because most folks don't have enough cash on hand to buy a house without a mortgage.

Something most mortgage lenders have in common is – they require their borrowers to maintain a property tax escrow account as a way to ensure their property taxes and hazard insurance are paid current.

A property tax escrow account is generally a good thing for both the lender and the borrower. It ensures that these necessary costs don't fall behind and the property (i.e. – the borrower's asset and the lender's collateral) isn't at risk of being seized by the county in tax foreclosure.

Keeping these property taxes paid current is of great importance to both the lender and the borrower because if these properties ever become so far delinquent that the property is seized by the county, both parties are in big trouble. The lender will completely lose access to their collateral, and the borrower will completely lose their asset (and all the principal payments they've made to date). In short, it would be a pretty big disaster for everybody.

Even in the rare cases where a property tax escrow account isn't required, the lender is STILL going to closely monitor the status of these property taxes to make sure they don't go delinquent. Given what's at stake with their collateral, it's only prudent for them to mitigate this risk.

Land is Different

landmassVacant land is a different animal. As a matter of policy, most mortgage lenders won't lend money on land UNLESS the borrower has a specific plan to develop the property immediately (in which case, the property wouldn't be classified as “vacant land” anymore).

As a result, the vast majority of vacant land in the U.S. is owned free-and-clear with no mortgage lender involved. Since most of these undeveloped lots are owned free-and-clear, these property taxes aren't being maintained through an escrow account, and the tax situation isn't being monitored by a lender.

The net result is that these owners are at a MUCH higher risk of falling behind on their property taxes and it's not because the taxes are too expensive. Most of the time, it's because these owners simply forget about their taxes (it literally falls off their radar) or because they're tired of paying taxes for a property they never see and never use.

When this happens (and it happens a lot), these properties get added to the county's delinquent tax list.

Most people think differently about houses – usually because they're forced to (because of an escrow account). The net result is that most houses will never end up on a delinquent tax list, but MANY vacant land properties will.

Automatic Separation

The good news is – if you're concerned about getting a delinquent tax list that is chocked full of houses and other property types you don't want – you can be reasonably confident about a couple of things:

  1. MANY delinquent tax lists will automatically have a very high concentration of vacant land.
  2. Almost all (i.e. – well over 95%) of the properties on these lists, regardless of the property type, will be owned free and clear by their respective owners.

Since both of these factors are at work in the delinquent tax lists I get from the county, I rarely go through the motions of separating the vacant land from the houses. Instead, my primary concern is simply that I'm working with the delinquent tax list, to begin with – because this largely takes care of both issues by default.

About the author

Seth Williams is the Founder of REtipster.com - an online community that offers real-world guidance for real estate investors.

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