***Don't Invest in an Insolvent Community

How solvent is the community where you are planning to invest in real estate?

Some cities, counties, and states throughout the United States are incurring revenue shortfall. The results are usually the same: higher taxes and cutbacks in schools, libraries, street repairs, fire and police, and social services.

If you see those trends, beware. Sometimes communities that expect rapid growth float bonds (borrow money) to pay for new streets, roads, sewage facilities, parks, libraries, schools and fire stations to support development and an increasing population. Over time, the bonds will be paid off by taxing all the residents in the new developments. As long as growth continues as expected, financing improvements with bonds doesn't create a problem. However, if growth stalls or the local economy falters, residents and investors may end up with a serious problem.

Since state and local governments can't borrow with the same reckless abandon as the federal government, at some point - sooner rather than later - someone’s got to pay. And as likely as not, that someone will be you. Property tax rates will go up. You will pay more for less. (If you already own property in the community, monitor trends and statistics so you will be aware of future tax upsurges as early as possible.)

So be sure to find out the financial condition of the community. Does it balance its books? Or is it headed toward a financial crunch? As an added precaution, ask your Realtor or the city treasurer's office about the level of the community's bonded indebtedness. Bear in mind that under the seller disclosure laws in most states, sellers must share such knowledge with potential buyers. But as a buyer, it is part of your due diligence to investigate and know. It is also important to attend and/or monitor the outcomes of any public hearings where tax and service issues are discussed or decided upon.

After the Colorado oil bust stalled growth in that state back in the early 1980s, new developments and communities went bankrupt. Some owners of $100,000 houses were getting property tax bills for as much as $12,000 a year. Most owners didn't pay. They just walked away from their houses. Lawyers for the tax authorities, mortgage lenders, and bond holders were left to litigate over the remains.

The Colorado experience was extreme. But it illustrates a basic rule: Understand the risks of buying investment properties in a community that extravagantly spends more than it takes in. And remember, as a wise investor, it is up to you to know.

To learn more about finding the right community for your property investments properties, be sure to read Dr. Eldred’s book The 106 Common Mistakes Homebuyers Make (and How to Avoid Them).

Gary W. Eldred, PhD, has been involved in hundreds of real estate transactions as buyer, seller and consultant. He is author of many best-selling books on real estate. Dr. Eldred created The Real Estate Investor Training Program for Trump University.