"Buyer Beware" Tax Sale Bidders Often Discount Risk

Last week the county where I live had its annual tax sale. Basically, this consists of an auction-type sale of all the properties that owners had failed to pay property taxes on or those that had fallen delinquent. One thing is very clear, the combination of too much money chasing too few properties is continuing to keep prices strong in this market. People entering this area of investing would be well to remember a fair degree of risk is involved when a person bids on such properties. When you are the high bidder you must immediately pay the amount you bid and then wait for a year while the current owner has total ownership rights to the property. During that time if the owner brings the taxes current including penalties and interest they get to keep the property and the buyer or bidder gets a hefty amount of interest on what amounts to a loan.

While prices have soared at local tax sales several issues exist relating to the learning curve that new bidders may be unaware of, most of this deals with the risk they may be overlooking in their enthusiasm for a good return on their investment. Increasing the risk is the fact that seminars are being held telling people this is a fast and easy way to increase the yield they receive on investments and that if the person is unable or simply does not redeem the property they may get a very valuable property for a fraction of what it is worth on the open market. Unfortunately, this means you will be bidding against people coming from a seminar or investment workshop loaded with fresh knowledge and who are so eager to "get a bargain" that they go plum crazy when it comes to price.

Buyers Seeking Yield Often Throw Caution To The Wind

Of course, the animal spirits at play vary from auction to auction. Sometimes they are driven by a good turnout, sometimes too much money in the economy, the fact people think they stand a good chance at getting a good return on their money, or just greed. While I will not argue that a buyer may get lucky and pick up a gem for below market price it is just as possible they may get far more than they bargained for in the way of grief. 

It is important to remember rules vary from area to area. Today many of these sales are held online. The days of crowding into a courthouse are slipping into the past. Many areas are moving to a format such as that offered by GovEase with the idea they increase efficiency. Years ago, I remember leaving a sale when it became very apparent the bidding was sky-high from the get-go. The combination of QE and low interest rates drove bidders into a frenzy. Their search for higher yield resulted in them tossing caution to the wind.   

It could be argued that an increasing number of these sales taking place online has resulted in speculators with a slew of money, both their own and that of investors, placing high-risk bets in markets they know little about and have had little time to research. With many of these buyers not being real estate savvy and lacking the time to even drive by the property as well as an inability to do the due diligence required they often find that they wind up buying a pig in a poke. In short, many of these people really have no idea what they are buying. Adding to their risk is they often forget just how much prices can vary in different areas, even within a city, location is everything.

Are You Moving That House? Wait, Please Bring It Back

Properties placed in a tax sale often suffer from a number of problems such as pollution issues, flooding, or sewer problems. Also, properties put on the sales block because of unpaid taxes often have a great deal of deferred maintenance. It is important to remember the owner of these properties receives all monies bid in excess of the minimum bid if they do not redeem the property. This means if only 1,500 dollars of tax and penalties are owed on a house and it sells for 40,000 dollars at the tax sale the owner whether the person living in the house or even the mortgage holder has a claim on the overage. 

If the property has enough issues, the owner of title often takes the money rather than redeeming the property. The flaw in bidding too much is that you may not get your ten to fifteen percent interest as promised but may indeed get the property and rather than a gem it might turn out to be a lump of coal. This can be a real problem for buyers from outside the area who can live hundreds or even thousands of miles away. While "Buyer Beware" warnings are issued, complicating the situation is a note that the IRS may also have a lien against the property. My county does not know how this might play out but indicates the IRS may not be in a hurry to sign off and release it.

Most Properties Are In Very Bad Condition

Owners of property that are struggling to pay taxes often have bad credit and other financial problems leaving them stretched to the limit, with this in mind many who cannot come up with a thousand dollars have little ability to raise a great deal more. When a person knows they are going to lose their property, that does not mean they will go gently into the night. Anyone thinking a person having a property taken from them will turn it over clean swept and in good condition may be proven a bit over-optimistic.

As I stated earlier in this article, in the state where I live, the current owner has total ownership rights to the property and a year to redeem the property. During the time a bidder must wait for a Tax deed to be granted some rather ugly events can take place. If it is rented this means they can squirrel away the rents, they can remove or sell off key components of the building such as the heating and cooling system. If a fire occurs if insured by the current owner he or she would receive the money and most likely not repair the property if they were about to lose it. In some cases, a house or building is condemned and demolished by the government and a lien for the cost put on the property meaning the bidder would get an empty lot and a rather large bill. 

Using the example above the property owner behind roughly a thousand dollars in taxes sees five hundred dollars of penalties and auction fees added on are told they will be given a full year to come up with the money plus fifteen percent of the bid. Normally this would add another two hundred twenty-five dollars bringing the total to seventeen hundred and fifty. The problem for such an owner is that if  it brings forty thousand dollars at the sale. Fifteen percent of forty thousand dollars comes to six thousand dollars. This brings the amount needed to redeem the property to seventy-five hundred dollars, an amount totally out of the reach for many of these people. In this high-risk game it would be wise for both bidders and those watching their property being put up for sale to ask, "Do I feel lucky?"

 

(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)