Going to the auction

I attended the St. Joseph County, Indiana tax lien auction last month and came away with a few new properties. I’ll have to wait the year’s redemption period of course, but it looks good for getting title.

This year’s auction wasn’t nearly as well-attended as those of years past, largely due to the economic recession. Local investors aren’t as well-monied as they once were, and real estate people, who had been frequent bidders in the past, are hurting from the poor home sales. Realtors aren’t making any money these days.

The auction was still attended by big-money investors, who spent hundreds of thousands of dollars each that day. One common sentiment at all tax auctions is resentment towards these deep-pocketed people, and sure, when you’re walking into the auction with five grand and they have a million bucks to spend, it’s easy to get discouraged. But this is the wrong approach.

I’ve heard so many people complain that the tax auction should be “for the people.” That there should be a separate auction where locals get priority. That there should be some sort of give-away for low-income bidders. Bla, bla bla. It’s all rubbish and nonsense when it comes down to it. It’s not a social program, it’s a method the county uses to raise money, get delinquent taxes paid, and get abandoned houses back on the tax rolls. That’s it. Turning it into a social program for giving away homes would defeat that purpose.

The fact remains that although there are big money investors, it’s still possible to play with only a few thousand. Your approach just needs to be different. The first thing to realize is that these guys with the golden pockets aren’t usually trying to get title to older inner-city homes, they are only trying to target higher-end, occupied homes and acquire deeds that are likely to be paid off. Their goal is to get a quick ten to fifteen percent return, it’s not to get old houses to fix up and rent out. People like myself, and low-budget people who attend, are going after a completely different market than the out of town investors, so they really present no major threat.

To find out more about how to get title to homes at the tax auction, get my book, “Learning to play the real estate tax auction game” (now available at Amazon).

How much can you earn with tax liens?

Much of my discussion here has been about acquiring the actual title to homes through county tax auctions, and there’s certainly no greater thrill than bidding a couple thousand dollars for a lien and then acquiring a property worth thirty or forty thousand.

But most investors actually go to the tax auction to get financial reward, not property. That is, they bid on property that is likely to be redeemed by the owner, for the purpose of getting the interest and penalties. Here’s how it works. After you get the tax lien at the auction, the owner gets a period of time (usually one year) to redeem their property. When they do, they have to pay back all the taxes, along with penalty and/or interest. You get back your original investment, plus the penalty and interest, which is usually at least ten percent.

Here in St. Joseph County, which is fairly typical, the penalty is 10 percent if it is paid back within six months, and 15 percent if it is paid back after six months but before one year. Besides the flat-rate penalty, there is also ten percent interest on any amount over the minimum bid that you paid for the lien.

Let’s say that a property was listed for a minimum bid of $1,000. That amount represents the amount of taxes that are due. The auction drove the price up to $5,000. Therefore, if the owner pays up within six months, you get a flat ten percent of $1,000, or $100; plus 10 percent per annum of $4,000.

Although ten percent per annum is nothing to sneeze at, especially when CDs at the bank are paying less than one percent, it’s the flat rate that is most attractive. Say for example, you buy a lien for $1,000, and the owner shows up at the county office the next day and wants to pay off their taxes. You still get your full ten percent, even though it’s only been one day. So, the flat penalty aspect of the auction actually has the potential to yield a much higher rate when you figure it on an annualized basis.

To learn more, get my book, “Learning to play the real estate tax auction game” by clicking here or visiting Amazon.com.

More county real estate tax auction strategies

I discussed several effective strategies in my book, “Learning to play the real estate tax auction game” (now available on Amazon.com). One thing to remember is that on the day of the auction, in the heat of the battle, you may not remember all the details of every property you drove by. If you’re following my strategies from my book, you probably drove by a hundred or more houses, and after a while, they all just blend together.

That’s why as you are reviewing the properties, you do two things: You take notes, and you take digital photographs of each one from the outside. Remember of course, you can’t go in these houses, but you can drive by, and if they’re vacant, at least try to peek in the window.

What I do is park in front of the property, take some notes as I observe it, and then roll down the car window and take a digital photograph. The photo isn’t meant to be extremely detailed, but just to give me a reminder of what I’m bidding on later when I go to the auction.

As you take notes and pictures, you may get curious neighbors and passers-by wondering what you’re doing. If you just try to look like a professional, carry a clipboard or notebook with you, and don’t act suspicious, everybody will just assume you’re taking care of some real estate business and won’t bother you.

At the auction, I’ll have a list in front of me, with each property address, its key number, and a digital photograph. This is important, because the auction tends to move very quickly, and you have only a few seconds to remind yourself of the details on the property before the bidding starts.

County real estate tax auction strategies

I’ve seen beginning bidders go to the county tax auction with one or two specific properties in mind for bidding. In most cases, they’ve driven by the house, maybe peeked inside, and have decided that it would make a good place to fix up to live in or rent out. They go to the auction, equipped with enough cash to pay for the minimum listed bid or maybe a bit more, and fully expect to walk away with the lien. Unfortunately, it doesn’t always happen that way.

That’s why you need a backup. Sure, if you’re looking to gain title to a house for living in or renting out, the auction is a good place to start. But keep in mind, there are a lot of other people going to the auction with the same thing in mind. And what’s even more important to realize is that there will be at least a handful of large investors there as well, with a lot more money than you, looking to snap up as many liens as they can get their hands on.

The odds are, if you go to the auction with only one or two properties in mind, you’re going to get outbid. And if you don’t have a backup list, then you’ll go home empty-handed and disappointed. Don’t get your heart set on any one property. If you can only afford to get one property, then come with a list of at least ten.

Here’s another reason you can’t afford to play favorites when bidding, and it’s not a good idea to wait it out until your favorite comes up on the block. The houses are auctioned off in numeric order. And at least here for the St. Joseph County tax auction, once the auction is over, it’s over. There is no chance to go back and re-bid on ones that didn’t get picked up. Let’s say for example, that your preferred house is way down on the list, and bidding won’t come up until near the end of the auction. You wait all day, your house comes up for auction, and you get outbid! Then what? You’ve already sat through most of the auction, and all of the others that you might have considered have already passed by. You go home empty.

Come to the auction with a list of several possibilities, and know ahead of time which order they will come up on the auction block. That way, you will be prepared, and are more likely to win at least one.

Bank-owned homes at the tax auction

Most of the homes on the county tax auction list don’t have an underlying mortgage. That’s because banks usually take care of the taxes when a home is in its real estate owned (REO) portfolio. That’s just part of the cost of upkeep that is the bank’s burden after they foreclose.

There are a lot of homes on the list that are just transitory. These are good targets for getting the short-term penalty profit, but not good targets for actual acquisition of the title. For example, homes that are listed for sale often “fall between the cracks” and suffer from late payments on taxes, as the owners put off paying the taxes until the sale closes. Banks however, tend to be very good at making money, and very good at keeping the money that they have. All those foreclosed-upon homes in the lender’s portfolio is the same as money, and the bank naturally does not want to let those homes fall through their fingers, and so they attend to matters like paying the property tax. The bank knows that if they do not pay the property tax on their foreclosed homes, they risk losing those homes to the tax auction bidder.

But still, when you look through the auction list, you will see a handful of properties that list a bank or a lender as the owner of record. So what’s up with that? There’s one of two things happening. If you haven’t noticed, there have been a lot of banks closing up shop, being put into receivership, or at least being acquired by another bank. There are cases, especially when the bank is put into receivership, that assets simply get shuffled around so much that they get lost, at least temporarily, and there is a possibility that while everything is being sorted out, the asset gets put on the auction block, gets purchased, and the redemption period comes and goes, and the bank just loses out. Once the redemption period ends, the bank has no more rights than an individual, and yes, they can lose title as well. It doesn’t happen often, but it does happen.

The second phenomenon you’ll notice is that there are so many foreclosures out there, that banks simply have too many. And many of the properties a bank has may be in marginal neighborhoods, the homes may be in disrepair, and the outstanding foreclosed mortgage may be much more than the property is worth. Some lenders may make an active decision to simply abandon the property to cut their losses, rather than paying to maintain an unsalable property year after year.

I’ve seen it happen. I’ve seen properties on the tax auction list, owned by banks, get auctioned off, the bank never reclaims, and the investor gets title to a house that is perfect for a renovation project, for just a few thousand dollars. In general though, when you’re reviewing the tax auction list, be very cautious about bidding on bank-owned properties, because in almost all cases, the bank will still redeem them.

Can you “flip” your tax auction home?

The concept of “flipping” real estate has long been held out as an attractive way to make a quick profit. The idea of course, is to buy a house cheap, do minimal cosmetic renovations, and then sell it for a profit in a short period of time. And for a time, it really worked, but today’s market requires us to take a more long-term approach in most cases. But what about homes you get at the tax auction? The reason flipping doesn’t work so well any more is because the market is flat or decreasing, and the price delta between your buy price and sell price isn’t as big as it once was. But in the case of a tax auction home, your buy price is likely to be very low, so this makes the “flip” at least somewhat more possible.

Before considering flipping tax properties as opposed to using them as longer-term rental units, there are a few things to consider. First of all, you will need to do some repairs and cosmetic upgrades on the property, and you will probably need to do more of those than you would in a traditional market-based buy and sell flip. You’ll spend more time and more money bringing it up to marketable condition. You’ll need to put time and money into it in any case, but there’s a difference in bringing a property up to rentable condition and bringing it up to saleable condition; with the latter being more expensive.

The other consideration is that the properties you are likely to acquire are also likely to be in areas where prices are depressed and the market is slow, and you may find yourself sitting on an empty property for a year or more before you get any legitimate offers on it. If you’re anxious to get some cash flow, you may want to reconsider the buy/sell business model and go with a rental model instead.

For more information, you can get a copy of my book, “Learning to play the real estate tax auction game” (now available on Amazon).

Once you get the title, what then?

Waiting out the redemption period is hard. Nobody likes to wait–I certainly don’t. But after you wait the 12 months, or whatever it is in your county, you file the papers, get the judge to sign the order, and then get the county auditor to give you a tax deed, then the property is all yours, free and clear. Then what do you do?

The first thing is to go look at it. During the redemption period, the only thing you could do was look at it from the outside. If there are people in it, then that’s your first problem to deal with. You have to either let them stay and start collecting rent from them, or throw them out. But, chances are, the property will be vacant. Assuming it is vacant, and probably boarded up, then once you get that title you do have the right to go into the house now. When you do that, bring a copy of your tax deed with you, because chances are, the neighbors will see you breaking down the door, and wonder what’s going on. They may even call the police, and you’ll need some evidence to show that the house is yours now. I’ve always found that driving up in a nice car and carrying a clipboard with papers on it will usually circumvent any question, and people will assume that you’re legit.

Of course, you will have to break down the door. When you get a vacant tax house, there are no keys. Come with some appropriate tools, and once to do gain entry, the first thing you’ll need to do is change the locks. You may also need to do some repairs to the door frame if you had to force your way in.

At this point, you need to be prepared for anything. The house may have been sitting empty for a year or more. There may have been, or may still be, squatters living inside, and if you see evidence of squatters living in your house, it’s a good idea to come with the local police and not go in on your own.

Now of course, is when you take stock of the condition of the interior. Until now, you have only been able to evaluate the exterior, with the interior condition determined only by possibly peeking in through the windows. Chances are, it’s going to need at least some cosmetic repair. The place may look to be in a great deal of disarray, but you’ll be surprised what a few days of cleaning, a few drywall patches and some new vinyl floor tile can do.

Check my book, “Learning to play the real estate tax auction game” (now available on Amazon) for more details.

Do you need a lawyer to handle your tax sale paperwork?

In my book, “Learning to play the real estate tax auction game” (available now on Amazon) I answer this very question. Now all you lawyers out there may take me to task for my answer, but in fact, you don’t always need a lawyer for everything. The process is lengthy, but most of it is just sitting around waiting.

If you buy a tax lien and the original owner pays off the lien, then there’s not that much you need to do outside of cashing the check. But, if you are trying to use the tax auction to actually gain title to homes, there is some more paperwork involved. Here’s where the lawyer decision comes in. There are several forms, and you’ll have to visit several county offices, and the clerks there will not offer you much advice and guidance. They will assume that you know what you’re doing, and government clerks typically have very little tolerance for people filing anything pro se. However, that doesn’t mean you shouldn’t do it–it just means you need to be prepared.

One strategy is to hire a lawyer to guide you through the first one, and then use that as a guideline for doing it yourself for future titles. If you’re not comfortable with paperwork or familiar with county government bureaucracies, then this may be a worthwhile investment. As a bonus, if you hire a lawyer to guide you through the paperwork and in the meanwhile, the owner steps up and pays, they also have to pay your lawyer fees. Local statute will determine however, how much you are able to claim for legal fees (including the title search), so make sure that your lawyer’s fees do not exceed this statutory amount, or you will have to pay the difference.

But in the end, it’s all just paperwork, and knowing which forms to file where. There are no court appearances or tricky legal maneuvers required, and in reality, the lawyer’s clerks will probably do most of the work. Once you have the forms from the first round, then it’s just a matter of copying them, plugging in the new information, and filing them on your own, and avoiding the legal fees.

Can you really get title to a home at the tax auction?

That’s the million dollar question on everybody’s mind, and there’s a lot of conflicting information out there. Some “gurus” out there will tell you that it’s nearly impossible, and that almost all the homes get redeemed by the original owner before the redemption period ends. Let’s put the debate to an end and answer this question once and for all.

The way a tax auction works is that you bid on the tax lien, then wait a period of usually one year. If the owner does not pay the back taxes, then you get the title. If the owner does pay the back taxes, they also have to pay you interest and/or a penalty, plus any expenses you incurred (title search, certified mail, etc.). Here in St. Joseph County, Indiana, tax auction investors earn 10 percent if the owner pays in six months, and 15 percent if they pay within a year.

A good many investors aren’t even looking to gain title. Ten to fifteen percent on your money secured by real estate is a pretty good return, and so somebody with a hundred grand could make an additional ten to fifteen thousand (as opposed to the pitiful one percent the banks are paying now). With the stock market in such disarray, it’s attracting more investors.

It is true that many of the houses on the list will get redeemed. Generally, the ones that are in excellent condition and in good neighborhoods, and are still occupied, will be redeemed. Your chances of getting a $250,000 home in the suburbs for a few thousand dollars in back taxes are practically nil. If the owner doesn’t pony up the cash, the bank probably will, assuming there is an underlying mortgage on it.

That said though, the proper way to play the game, if you’re looking for title to homes, is to target the homes that are unoccupied or boarded up, and may be in the city, in more marginal neighborhoods. These are less likely to be redeemed. Many of these properties can be renovated with little effort and transformed into excellent rental properties. Keep in mind, that a house that has been boarded up isn’t necessarily a complete loss. It just means that a big piece of wood has been put over the windows and doors to keep out vandals. The house itself may still be in good shape structurally.

Find out more in my book, “Learning to play the real estate tax auction game” (available on Amazon.com).

Common county tax auction errors

We’re getting ready for the upcoming real estate tax auction here in St. Joseph County, Indiana, and it occurred to me to make mention of some of the more common errors that beginning tax auction investors make. As I outlined in my book, “Learning to play the real estate tax auction game” (available at Amazon.com) the most common error is misunderstanding the nature of the game. When you go to the tax auction, you’re not buying a piece of real estate, you’re buying a lien on a piece of real estate. Now the rules differ from state to state, but here, you need to wait for a year before you can actually exercise that lien and gain title to the property. That means that after you win the auction, you have to sit on the lien for that period of time, and you’re not allowed to do anything to the property, or even enter it, until the time period has elapsed and you have been given title by the circuit court judge. The reasons are obvious–if you enter the property and do repairs, then in the meantime, the original owner steps up and pays the back taxes, you’re out all the time and money you spent on those repairs.

Another common error is confusion over addresses. The list published by the county includes all sorts of properties, including vacant lots. Now in many cases, the property description will actually say “vacant lot” on it, so it’s obvious–but it’s not always so obvious. There are plenty of cases where the tax records indicate that there is a house there, but in reality, it has since burned down or been demolished, and all that’s left is a vacant lot. And what’s even more confusing is that the address listed may be a vacant lot next to a house of the same address. The only way to make sure you’re not getting a vacant lot is to check the local GIS records online, assuming they’re available. Look to see exactly where the key number plot is located–make sure it’s the house you think you’re bidding on, and not the vacant lot next door to it.