Tax Resale Auctions

[houstonmacbro]

I am on the list to receive emails from several large law firms announcing tax sale properties. I always look through them and wonder if it is really possible to buy property at tax sale prices. I have heard both sides of the argument, with some people claiming the property is not always free and clear (of legal issues) and others that have claimed it works.

What are your thoughts?

We're not talking about dropping a pile of money here ... I'd be looking at $1,000 properties or less.

Would I get hopelessly outbid by greedy developers, or is it pretty easy to snap those properties on the courthouse steps. I know about the original owner's rights of redemption also.

Edited March 4, 2008 by houstonmacbro

[BryanS]

In my never ending quest to find investment opportunities, I have also looked into tax deed sales. Once I found out how it worked, in Texas, I quickly started looking at other options. It comes down to tax deed vs. tax lien sales. I am going to do my best to describe how I think it works, based on my limited research... please feel free to correct me.

Scenario

A 100K single family property goes to auction. For simplicity, assume the taxable and market value of the property is 100K. Assume the delinquent property owner resides on the property and it's their homestead. There are 6K in back taxes.

Tax Deed Sale (Texas)

You go to the court house steps. The opening bid is 6K. We have a bidder. The auction continues. The property gets bid up to 75K (69K + 6K for the back taxes). Sold! Congratulations you now "own" the property (but not really... yet). The delinquent property owner has two years to redeem the property, at a 25% penalty, paid to you, on your investment. So, the delinquent owner, in this example, would have to pay you 75K plus a 19K penalty (i.e. your return) to keep the property. The delinquent property owner needs to come up with 94K to keep the house - and they have 2 years to do it. If the delinquent property owner could not come up with 6K in back taxes... there's probably little chance they're going to have the resources to come up with 94K. So in many cases, when the property goes to auction, chances are good you'll end up with a vacant property (hopefully!). You can start your renovations... but the person who lost the property still has 2 years to redeem it... you have to wait 2 years to obtain clear title.

So let's assume the delinquent property owner gives up and walks away. You bought the place for 75K. You put in 15K to renovate the place. You're at 90K. You have to wait 2 years to obtain clear title... So you'll have to pay at least one more year worth of taxes... 3K more... so now you're at 93K. You sell the place for 100K. So your 93K investment yielded a 7K return or 7.5%. A good no-load mutual fund can beat that.

Tax Lien States (e.g. Florida)

Same scenario. This time, only the 6K in back taxes goes to auction. The starting bid is a 16% return/penalty on only the back taxes. Auction starts.. the bidding goes down to 12% on 6K in back taxes (you're bidding down the penalty rate against other bidders). Congratulations. You now have a tax lien on the property. The delinquent property owner has six months to pay you back 6K + a $720 (12%) penalty. Guess what? There's a good chance the property owner can do this... and everybody wins. The taxing municipality gets their taxes, the home owner keeps their house, plus you got a 12% return on your investment - and you didn't need a huge amount of capital. If the delinquent home owner, in this example, doesn't come up with the 6K + penalties - you get title to their house. You sell it for 100K. Now look at your return: you invested 6K, you made 94K.

I wish Texas was a tax lien state... =( then we could all be loan sharks.

Edited March 4, 2008 by BryanS

[houstonmacbro]

Thanks for those examples. I think the list I am on is tax lien sales. I get it from Linebarger and also another law firm (Perdue I think). Anyhow, have you actually done either of these? Has it worked for you or is this all in theory...?

[BryanS]

Thanks for those examples. I think the list I am on is tax lien sales. I get it from Linebarger and also another law firm (Perdue I think). Anyhow, have you actually done either of these? Has it worked for you or is this all in theory...?

I've have done neither of these, but if Texas were a tax lien state, I would do this in a heartbeat. Basically, in Texas, the property goes to auction and it floats to market value, by definition. Yes, you're buying the property at less than its taxed/market value - but it is also damaged goods (so this is factored into your "discounted" price.) And, you need large amounts of cash. I don't see how small investors can really take advantage of the situation (vs. full-time, deep pocket flippers that have full time jobs buying/fixing/selling tax sale properties). Same thing with foreclosures, short sell properties, etc.

Some states will let you bid out of state on tax liens... but I won't do that simply because I would never want to own or be involved with a property that I could not see first, plus all the legal issues that may not be obvious to someone who does not reside in the state where the property is located.

EDIT: Also note, my examples basically illustrate why tax liens are better than tax deed sales. The actual details will vary, greatly, from state to state. For example, in Texas, it is 25% on the first year, plus, I think, 25% on the second year (or the penalty may only apply to the back taxes only - you'll need to dig deeper). In FL, the homeowner may have 1 year to pay back the taxes, penalties, homestead vs. non-homestead redemption periods, etc, etc...

Edited March 4, 2008 by BryanS