By Valeri Khromov
One of the best ways to find a possible good deal is by searching through advertised municipal tax sales. Normally there are few of them happening each week throughout the province. You may find a full list of tax sale properties from The Ontario Gazette or through a select few web services that offer, for a membership fee, up-to-date information on available tax sale properties, latest cancellations, and more. All municipal tax sales have to be heavily advertised well in advance in local and provincial media.
There are ultimately two ways by which properties are sold by municipalities: tender or auction. In either case, there is a minimum tender/auctions amount to be bid. This amount is normally reflected in how much money the current owner owes to the municipality from property taxes, work orders, and any additional levies and penalties.
Auction: The least used option, an auction requires the buyer to be present in the room in order to bid, with the sale going to whoever bids the highest price. The key requirement of an auction is the winner must pay in full for the properties on the spot (including any current arreas, or HST, if applicable, etc.) Once the winner is known, the auction is stopped until the transaction is settled. The title is transferred to the winning party right away and the auction then resumes with the next property on the list.
Tender: A more often used method, a tender is clearly advertised with a deadline for bid submissions. All bids may be submitted well in advance by mail (making sure it will reach the municipality by deadline) or delivered in person at your local municipal office. The bid has to be submitted in a sealed envelope that clearly identifying the property you are bidding for. Inside the envelope should be a completed form showing all the details on the property being bidding on, the amount being bid on, and an attached draft for at least 20% of the bidding amount. Normally all the forms, deadlines and any other details are easily available either through specialized web sites or directly from municipalities. All submitted bids are stamped with the date/time of their arrival.
Once all the bids are submitted by a specified time, there is a special meeting scheduled (normally shortly after the deadline) for a public opening of the bids. Once all the bids for a particular property are opened, the highest bid wins. If, by any reason there is more than one winning bid with the same amount, the bid submitted earlier on wins.
If you are the winner the municipality will send you documentation on the final outstanding amount (up to the date of sending) including all the taxes and any other payments outstanding. You then have 14 calendar days to pay the balance (which will be higher than your original bid).
If by any reason the outstanding amount is not paid on time, you will lose your deposit and the runner up’s bid will be considered. Once the winner brings in a draft with the outstanding amount, the municipality transfers the title of the property to a new name as per the buyer’s instructions.
Although it looks like you are buying any other property, for instance from MLS, it’s not exactly the same process. It has its own complications and hurdles to keep in mind.
You have to provide the money upfront, before getting title, rather than the other way around. You also have to deal directly with the lawyer that transfers title to your name. It’s not possible to get an owner’s title insurance on the property at the time of closing the transaction. Normally a lender would like to have some kind of security in exchange for releasing funds but, in a tax sale scenario, security can’t be obtained until title is transferred (which occurs when the money is cleared on the municipality side). That means it’s impossible to arrange mortgage on closing, although theoretically you may talk to banks but given the tight deadlines (14 calendar days only), lack of security and high risk involved, it's highly unlikely to finance at this stage. This means that the buyer has to come up with the full amount to close the deal, one way or another. It could be cash, money borrowed against other properties, or any other type of loan. In general, the municipality doesn’t care how you came up with the money. They only ask for a draft with the outstanding amount only (no questions asked).
The funny part about tenders is that you never know how many actual bids were submitted. There could be many (I’ve seen a few times over 20 bids come in) or just one (yours). Most of the people submit in person right before the tender and you may understand if there is multiple interest or not. But there could be some other properties on tax sale and you have no proven way to know how many bids were submitted. Normally, if that’s a property worth bidding for, there should be some other bids.
For the property to go on tax sale it takes many years of non-payments and actions by the municipality to show their attempts to settle the deficiency, without resorting to an actual tax sale. I’ve spoken to municipal clerks who deal with the tax sale properties. They do contact owners many times through different means and have to go through certain processes to put a property on tax sale.
The way a law sees the tax sale is that although a municipality has to be able to collect money from the residents, it is not in the business of selling their residents’ houses. As such, if an owner brings in the money they owe at the last minute before a tax sale, or even before the title is actually transferred, they can recover their property back. A municipality should make every effort to allow its residents to recover their property back if they pay their dues. That is why it’s very common to see properties from the tax sale lists be cancelled or postponed before the tax sale. In many cases, it’s literally in the last minutes before the tax sale time. That is why I normally don’t bid in advance as don’t want to waste my time and efforts on another last minute cancelled item.
It’s important to consider the risks involved in buying a tax sale property:
- It’s not a 100% done deal until the title is actually transferred as the current owner may step in any minute before the title is transferred, if they are able to pay out the dues.
- Property risks: You are trying to buy a very big unknown. Use your own personal judgement to make proper decisions. Until you actually get possession of the property you should try to look from the outside (I always do), and do your own research and due diligence about the home.
- Is the property structurally sound? Is there any evidence of foundation issues, floods, leaks, etc. that may have a big impact on the repair ticket?
- Are there any known issues like fire, flood, criminal activities, or stigmas related to the property?
- Are there any contamination factors? How was this property used through the years? Are there any gas stations, dry cleaners, etc. nearby that may have a contamination impact on the property?
- Title risks: You never want to buy a property with a clouded title (anything on a title that can’t be controlled or predicted such as litigations, someone’s interest, work orders, liens, etc.). When a property goes through a tax sale the title is cleared with one very important exception: ANY Crown interest in the property is not wiped out. What does this mean for you? If there is registered interested on title from ANY Crown corporation, for instance, CRA, it won’t be cleared. In most cases the title issues are pre-negotiated by the municipality because they are aware that no one will bid on a clouded title. They may get a release before listing the property for a tax sale. Always check it out with the municipality. Or, I’ve seen cases when tax sale descriptions have a clause worded similar to “…the crown interest will be taken out of the title”. But there could be a case when Crown interest could be registered literally last minute. It’s a very serious risk to consider. Make sure your check the title with your lawyer not only at the time you find the property but at tender/auction time and closing.
- After closing risks: Once you get possession of the property, no one warrants anything about the property, including possible residents, access/keys, etc. Normally the biggest question is about residents, if any, that may not willing cooperate. In that case, there could be a certain time consuming process to follow to evict or remove them from the property. Be ready to deal with that, if needed.
My Experience with a Tax Sale
I bought a multifamily property from a tax sale about a year ago. I was watching many properties and participated in many tenders and auctions throughout Ontario.
This property in question went all the way to actual tender. There was a mortgage registered on the property but the municipality negotiated to remove it.
The property I bought through tax sale was located a few hours away from my home. The first time I saw the property was on the date of tender, which I attended in person.
There were two other bids and I was very surprised that I got it, as I expected a much higher demand and much higher bids.
My bid was about 40K more than the runner up’s. It’s a pity that I had to overpay that. But who knew what would be the best bid?!
A few days later, I received all the paperwork from the municipality with a deadline to pay out. It took me about 10 days to get together the money to pay and I showed up to the town with the draft. I signed a few papers again, gave written directions on title transfer, and got a title transferred as per my directions.
By the time of purchasing the property, I had a private lender ready to give me money for this project but only if I had title. I had to close it on my own and had a private mortgage registered against the property in a couple of weeks.
It's important to note that it's still possible to arrange owner's title insurance shortly after the purchase. Talk to your lawyer.
Another important thing to mention - Insurance! If you are buying a property you know little or almost nothing about, it’s a substantial risk for you and any insurance company. If the property is substantially vacated (30% or more), you may need to obtain a vacancy certificate. Talk to your insurance broker.
But you may still find yourself without keys, occupied units unoccupied, and with a lot of renovations to get done. In my case, I changed locks, evicted my non-paying tenants, and took full control over the property.
One year later, the property is still under substantial renovations. We have converted units from electric to gas heating, and cleaned up and renovated more than a half of them. It’s currently almost a half full. I know…the holding costs are a killer and vacancy is still very high. But for properties that allow a 35% vacancy to break even, it’s not that bad already. I know there a lot of work to do, but its moving well and I’m planning to keep this property in my portfolio as a nice money cow.
Once again, if you are ready to take the risks and deal with possible issues, a tax sale property may be a very good property to buy.
Valeri Khromov is a full time real estate investor with over 7 years of experience managing multi-million dollar portfolio. He started with investments into single family houses and gradually moved into multifamily properties. Valeri has strong system to find, evaluate and manage challenging projects to generate forced appreciation and built portfolio of well cash flowing properties.