Tax Auction Homes

Checking with code enforcement before getting a tax auction home

There’s a good deal of background research that one must do when trying to get titles to property at the county tax auction. Besides the obvious–first taking a drive-by, and checking it with the city map–another piece of research that doesn’t occur to a lot of people is to check in with the county or city code enforcement department.

Here’s the dilemma. Often, there is no communication between code enforcement, and the county treasurer who holds the auction. So, you bid on a house that is vacant, with the idea that you’ll win the bid, wait out your year’s redemption period, and then have a house to rehab. But during the year redemption period, you are of course, not allowed to enter the house or do any repairs. Meanwhile, the grass is growing, the paint is peeling, and vandals are stripping off the aluminum siding. Code enforcement notices the condition, and sends out notices to the owner of record, who is unresponsive. You, as the buyer of the tax lien, don’t get the notice, so you don’t have a clue that Code Enforcement has an issue with the property. It is entirely possible that Code Enforcement may even issue an order to demolish.

Does it make sense? Absolutely not. Does it happen? Once in a while. The idea of the tax auction is that the treasurer wants to get the properties back into a tax-producing status. It would make sense that there would be some communication betwen the treasurer and Code Enforcement, so that you, as owner of the tax lien, would know what to expect. Now Code Enforcement will come along, having issues and getting no response from the owner of record, will see the property as being vacant, abandoned, and in need of repair, and may issue that demolish order, without ever putting you in the loop, or even realizing that you are waiting in the wings to rehab it.

Political reform at the local level being notoriously difficult, there’s not much we can do about this lack of communication. Never expect a government agency to be efficient! Let’s just assume they’re all morons, and be proactive.

Here’s my advice. When you get that tax lien, immediately give a call to the Code Enforcement department and tell them who you are. They typically don’t have a clue that the home they’re targeting has been sold at the tax auction, so it’s up to you to tell them. Make sure they have your name and contact information, and give them the addresses of the liens you purchased. The Code Enforcement officers are typically reasonable people who will work with you on deadlines, and if they know that you’re in the background waiting to rehab, they will keep you in the loop, and once you’ve explained the situation, will be willing to wait until you’re legally allowed to get on with your work. But you can’t expect their cooperation if they don’t know you exist–so be proactive and give them a call.

Selling on “land contract”

Once you’ve won a real estate tax lien auction, waited out the redemption period, and acquired the title to a house,  the obvious question is, “what do you do with it now that you’ve got it?” First of all, there’s a very good chance you’re going to need to do some renovations before you do anything. But after that’s done, then you do have a few options, all of which revolve around either renting it, or selling it.

Selling a house however, can take many forms. The traditional way of selling a house–getting a real estate agent, listing it on the market, and selling it to someone who is capable of qualifying for a bank loan, is a lot harder than it used to be. First of all, the houses that are typically acquired at tax auction are in marginal neighborhoods and in need of repair, and these are going to be hard to sell on a conventional basis. There is an option though, and it’s called “land contract.” Land contract is simply a seller-finance arrangement, where the buyer buys the house directly from the seller on terms, and makes payments direct instead of going through a bank. Sometimes you may hear this called “owner finance,” or other variations such as “rent-to-own”. The term “wraparound mortgage” is also frequently used, although this term applies only if there are existing underlying mortgages, which in the case of a house bought at tax auction, does not apply.

Essentially, all you’re doing is letting the buyer pay you off in installments. It’s perfectly legitimate and legal, by the way. Land contract got a little bit of a bad rap lately, with sellers selling houses on land contract that were already heavily mortgaged. Sellers then defaulted on their underlying mortgages while still collecting payments from their buyers. This of course, borders on the fraudulent. But, since you don’t have any underlying mortgages, there is less risk for both buyer and seller.

So, if you’re just taking in payments every month, why not just rent it? Well, your cash flow is about the same. The difference is that when you are selling on land contract, your buyer has a greater commitment to the property, since they are gaining an ownership stake. The buyer is also responsible for taxes and insurance, and maintenance as well.  And as an added bonus, you’re charging interest at above-market rates.

There are many buyers out there, especially in today’s lousy economy, who are looking for land contract deals. Credit is harder to get than ever, and so an owner-finance deal is attractive. You as seller do not have to adhere to the same strict credit requirements as a conventional lender. Naturally, you will want to exercise some due diligence, but you can go more by your feelings than will a bank. Expect most applicants to have some spotty credit, and don’t set the bar too high. There are a few investors who set their own personal credit requirements to be equivalent to the bank’s, and they are almost always disappointed. It’s obvious why–if a buyer has perfect credit, they don’t need a land contract deal from you, they can go to the bank directly and get money at a lower rate.

For more information, you can get a copy of my book, “Learning to play the real estate tax auction game” at Amazon.com.

Tax liens in Illinois paying 36 percent?

There is a lot of excitement in the tax lien community over investing in Illinois, because there is a potential for a 36 percent return. Illinois is a tax lien state, which means you buy tax liens at auction, but it works a little differently there. Here in Indiana, for example, the interest rate is the same, and you bid based on a starting amount equal to the back taxes, and highest bidder wins the lien and the right to collect interest on the amount paid.

But in Illinois, it works backwards. Instead of bidding based on the amount of the back taxes, you bid on the amount of penalty you are willing to receive, starting at 18 percent and going backwards. The 18 percent is good for six months, which makes the maximum potential 36 percent a year.

Now this is quite a bit more than the ten percent you get here in St. Joseph County, so why aren’t I running across the border every year? Because everything is not as it seems. At first glance, it looks like you’re going to go to the auction, and walk away with 36 percent on your dollar. In reality, almost nobody ever gets that. That’s because you’re bidding on the percent return. The bidding starts at 18 percent, the next bid might be 16 percent, and it can–and often does–go down to the single digits. It can get very competitive, especially in Cook County (Chicago).

If you attend one of these auctions, you may even see the bizarre occasion of a zero bid. Zero!? Why on earth would anybody place a zero bid at a tax lien auction? The theory is that doing so prevents anybody else from outbidding you, and you have a claim on the lien in the event that the property is not redeemed, and you will gain title. This strategy is sort of like playing the lottery–if you buy enough liens at zero percent, eventually a few will fall through and you’ll get title. Ultimately though, it’s tying up a lot of money in the meantime. The fallback of getting some interest on your money in case the owner redeems is a better position in my opinion.

Tax auctions better bet than “dollar home” programs

Some communities around the country have highly-touted “dollar home” programs, designed to get older, mostly abandoned homes back on the tax rolls. In theory, it’s a great idea, but in practice, it often doesn’t work very well.

Here’s an example. Here in South Bend, Indiana, the city, under the guidance of our Mayor, implemented a dollar homes program a couple years ago with much fanfare. Many other cities with blighted areas have tried similar programs. For the most part, it was nothing more than political grandstanding, and it was designed from the very beginning to fail. In fact, very few of these programs have ever worked. Here is the problem. The South Bend dollar homes program set aside homes in blighted areas, in neighborhoods where homes are sitting on the market for over a year and selling for maybe $30,000 to $50,000. That in itself is not bad, these areas are where there needs to be programs like this. But the requirements were very stiff. The buyer was obligated to put $70,000 in repairs into the dollar home within five years, and was obligated to prove to the city that they were creditworthy enough to obtain the financing to do so. This requirement did two things: First, it eliminated virtually everybody that wanted a dollar home right off the bat, because of the stiff credit requirement. Second, it made it financially impractical, even if you could get the credit. Why put $70,000 into renewing an old home in a broken neighborhood, when for the same money, you could get a home already in good condition for the same price elsewhere? And what’s more, there is no way that a home in the targeted neighborhood would ever be able to be re-sold for enough money to recoup the money spent.  It’s interesting to note that although several people applied for the Dollar homes program here, not a single person has ever qualified to get one.

Although it’s a longer-term play, obtaining a tax lien certificate at the annual auction is a much better strategy. You will of course, probably have to put money into repairs, but nowhere near the impractical $70,000 figure cited in the silly dollar homes program. There is no timeline requirement for putting in any certain amount of money into the home once you have acquired title, all you have to worry about is complying with the local code enforcement department. You do of course, have to be willing to put in some time. You have to wait for the auction in October, then wait another year to sit out the redemption period. Then it will take another month or two to complete the paperwork. But, in the end, the house is yours, with no extra requirements.

You can find out the details of how to participate in tax auctions, and how to obtain tax lien certificates, in my book, “Learning to play the real estate tax auction game.”

How long do you have to wait after the auction to get your title?

The answer is, as is almost always the case, “it varies.” It depends on your own state’s statute. Here in Indiana, it’s one year. What that means is, after you have won the real estate tax lien at the county auction, if the owner doesn’t pony up their back taxes, penalties and interest within one year, then you get title to the house. But there are some exceptions; if the lien is not sold at auction, here in my county (St. Joseph County), a second auction will be held, and then the period of redemption  is only four months.

A blog entry on “Blog the Rockies” talks about tax liens in Boulder County, Colorado, where the period of redemption is three years. Of course, if you’re interested in gaining title to homes, then three years is an awfully long time to wait, but this is one of those regions where very few homes actually switch title to the investor. In almost every case, the investor isn’t going for title, but going after the 11 percent interest they will earn between the auction date and the day the original owner pays their delinquent tax bill. So–you’re not going to be able to pick up title to a house for five hundred bucks in Boulder County, but still, eleven percent interest isn’t chump change, either.

Find out more in my book, “Learning to play the real estate tax auction game: The best recession-proof real estate investment you’ll ever make”, now available on Amazon.com or by clicking here.

“Learning to play the real estate tax auction game” now available!

My new book, “Learning to play the real estate tax auction game” is now available. This is the definitive guide to tax lien auctions–documenting my own experiences in the field, my successes, and detailed, step-by-step information on how to make big returns in the real estate market.

The book, priced at just $15.95, is a great first step for those of you who want to get high returns on your money, or get title to houses that you can live in, re-sell or rent out. Read about how I helped someone get clear title to TWO houses for just $3,000, and how today, he rents one out and lives in the other. Read about how I was able to buy a house for $235! And–read about some of the facts and fallacies about this fascinating business, and what to watch out for.

One of the main things I want to point out in this book is that this isn’t just a business opportunity for the wealthy. I’ve seen plenty of people go to the county real estate tax auction with just a couple thousand dollars, and walk away with title to one or two houses. Sure, there are people with more money than you who will be there–but Learning to Play the Real Estate Tax Auction Game will show you how to sit at the same table with the big guys and come out ahead at the end of the day.

Early feedback shows this guide to be both informative, and a fun read as well. You’ll learn everything you need to know to go into this business, even if you’re low on cash. And you’ll get a chance to read accounts of my own experiences in the business–and a look at my own philosophies of business and wealth-building. Order a copy of Learning To Play the Real Estate Tax Auction Game today for just $15.95, and learn how to grow wealth during the recession!

Investing on a slim budget

There are two types of people that go to the county tax auctions, and there is always some unfounded resentment. First, there are big investors. They have deep pockets, and they will typically bid up the price on higher-end properties, and walk away with dozens of liens at the end of the day. I’ve seen these people spend upwards of a million dollars at a single auction. Their goal is to invest for the purpose of getting financial return–that is, they don’t want title to houses, they are targeting houses that are occupied and the owners of which are likely to pay back the taxes and the substantial penalties. It’s a darn good investment, especially when banks are paying two percent on CDs!

On the other hand, there are small-timers who also attend. People who want to get just one or two properties. They’re not interested in getting interest, they want title to an actual house, either to live in or rent out. Now this latter category of person is no less worthy than the first category, but sometimes there is some resentment, which comes mostly from misunderstanding. I’ve heard a lot of these small-timers who attend county real estate tax auctions complain about the deep-pocketed investors taking all the properties, and mistakenly believing that they don’t stand a chance of getting anything. Nothing could be further from the truth! It’s just a matter of coming prepared, and waiting it out. You don’t have to have big money to play and win at this game. Here’s a few tips: Don’t walk away mid-auction in frustration. Come prepared with several properties to select from in case you get outbid on your first choice. And most importantly, remember that the guys out there with the big money are no better than you are.

There are a lot of houses out there that will slip through the cracks, that the big-time investors will not target. Remember, they’re looking mostly at high-end properties that probably will get redeemed before the end of the year anyway, so you are really targeting different areas. You want title to the house, so you are targeting a whole different category.

Come with as much money as you can muster, but don’t be intimidated because other people have more than you. All it takes is a couple thousand to win a good bid–and if you read my book, you’ll see that I got one for just $235!

County tax auction profits

Hi everybody. Dan Blacharski here. I am the author of “Learning to Play the Real Estate Tax Auction Game”, which will be available shortly on Amazon.com and also through this site. In the book and within the entries of this blog, I will share some of the secrets of this opportunity, and why RIGHT NOW is the best time to take the leap and get into county real estate tax auctions.

A short introduction to real estate county tax auctions: Every county in America depends on property taxes to fund necessary services. When property owners fall behind on their property taxes, or when they abandon their properties, the county doesn’t have enough money to fund those services; as a result, they seize the properties for delinquent taxes (by putting a lien on them), and then auction those liens off at a public auction. When you win a bid at a tax lien auction, you own the lien. That means when and if the owner pays the back taxes due, they will also have to pay a substantial penalty and interest, which goes to you, the investor. It is very common to get returns of 10%, 20%, 30% or more. On the other hand, if the property owner does not repay the back taxes within a prescribed period of time, then the county assigns title to the property to you, free and clear. Either way, you can’t lose.

Investors use this auction technique in two ways. Some investors simply go into it for the financial return, banking on owners paying up their taxes to avoid losing their homes. Other investors, like myself, focus more on properties that are vacant or abandoned, which are unlikely to be redeemed by the owner–and are able to gain title to properties very inexpensively. In a later entry, I’ll describe how I helped a friend of mine gain title to two homes he won at auction for a total of $3,000; now he is living in one and renting out the other.

Look for more information here about the specifics of how to participate safely in this opportunity, and how to make big money through real estate tax auctions during the present recession.