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Years ago, I heard about a supposed opportunity to buy deeply discounted real estate at something called a tax deed auction.

The problem is, there aren’t many guides, videos, or clear instructions on the internet about how to do it and how much legitimate opportunity there is. In this blog post, I’m going to try my best at changing that.

What is a Tax Deed Auction?

First things first: what is a tax deed auction and how does it work?

In the U.S., everyone who owns real estate needs to pay property taxes. These taxes are due in regular intervals each year, and if a property owner fails to pay their taxes, the county will eventually seize the property in tax foreclosure.

How long will the county wait before seizing the property? It depends on the state. Some states may wait 1 year. Others may wait 2 years. Others may wait 5 years, but it will happen eventually.

Not long after the county takes possession of each property, its objective is to re-sell the property at a public tax auction, which is open to any real estate investor. The purpose of this auction is to allow the county to recoup the tax revenue they’ve lost.

In tax deed states, each property starts with a minimum bid amount, which is usually based on the amount of past-due property taxes, plus some administrative fees. This minimum bid amount is typically far below the property’s actual market value, and this is where the opportunity lies.

Tax Deed State vs. Tax Lien State

Not every state handles its tax sales the same way.

A little less than half of the states in the U.S. are tax deed states. A little less than the other half are tax lien states. And a few states, like Florida, are BOTH tax deed and tax lien states.

So what does this mean?

While both kinds of states allow the sale of tax delinquency, there are subtle differences between the two. In general, both types sell to investors via a public auction. However, in a tax deed state, the investor is bidding for the title—hence ownership—of the property, while in a tax lien state, the investor is bidding for a rate of return.

Here’s a handy map to know which states are tax deed states, which are tax lien states, or hybrids.

AL AK AZ AR CA CO CT DE FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY DC

Disclaimer: The map shown above is a representation of the information I was able to find and interpret through many hours of research. While I believe the information is fairly reliable (I did include links within each state, so you can see my sources), I cannot guarantee its complete accuracy. Many states change their laws and statutes from year to year, so before you dive into the pursuit of tax deeds or tax liens in any particular state, be sure to verify the information above before you get too far along in the process.

Michigan—where I live—and where I attempted to find properties to buy—is a tax deed state.

My findings from this process will apply largely to tax deed states. There may be some overlap that can also be applied to tax lien states, but for the most part, tax lien sales follow a different process altogether.

What Time of Year is the Tax Deed Sale?

If you want to buy properties at a tax deed sale, the first step is to understand what time of year the auction is held. In Michigan, tax deed auctions usually happen between September and October… which is about 6 months after properties are foreclosed on from the previous year of tax delinquencies.

Expect Fierce Competition at Tax Deed Sales

Because of the way these auctions are designed, the minimum bid amount is somewhat immaterial. Because these auctions are open to public bidding and many other investors do show up and bid on the properties, it’s rare that a property will actually sell for its minimum bid amount (and if it does, it’s probably not a great property in the first place). In some cases, a property may send up selling for well-above its market value.

Conversely, you can also find some properties with very little competition. These are the situations where you have the potential of finding amazing deals, as you have the potential to buy properties at a very low price.

These are few and far between, though. Many investors are drawn to tax deed auctions because of the opportunity to buy properties that are sold for far below its market value than they would be otherwise. You can expect fierce competition, but I’ll show you how it works to get your foot in the door.

Tax Deed Auction Due Diligence

Note that in 2020, most of these tax deed auctions are happening online, thanks to the COVID19 pandemic. In years past, you would have to attend these events and bid in person, but since in-person gatherings largely haven’t been happening in 2020, these auctions generally won’t happen unless they occur online. Now, you can simply log into the appropriate website where these auctions are being held.

In Michigan, as of 2020, these auctions are being hosted at tax-sale.info. Each state will have a different website for their tax sales (and sometimes an individual county will have its own website), but for the sake of simplicity, let’s use Michigan’s website as an example—the general principle is the same anyway.

To start, you have to register on the website. In most cases, you’ll need to supply them with your credit card number (or another ready source of funds), so they can hold a certain amount of cash ready for when you’re bidding. In our example, it’s $1,000—this money isn’t going to be spent on anything just yet, but there is a “hold” placed on these funds, so they’re ready to go if you win any of these properties.

The website will also ask for your titling information, so they can immediately deed these properties to the correct owner if you happen to win one. By default, you’ll get the deed for the property on the day you win it at auction. You can refer to the auction website’s FAQ section for more information about this.

Do Your Research Before Bidding

Before you begin bidding, it’s essential to research the properties you want to bid on. You can download the lists of the properties going up for auction beforehand and filter all the properties that make sense to you.

Since there are several types of real property in these auctions, the kind of information you’ll need to collect from your research varies, too. For example, when I want to buy vacant land, I would look for its size, road access, special features, and problems—this last item is important, as many properties that end up in a tax deed auction have issues in them (these problems may by the whole reason they fell into tax foreclosure in the first place). This gives me an idea of whether somebody can find the property useful, so I can quickly flip it for a profit.

This part is pretty tedious and time-consuming—it can take a few hours, and if I’m looking at houses, it can take even longer. In my case, I have an assistant who does the legwork by compiling all the information I need—the type of property, county, minimum bid, and so on—so I can zero in on the properties I have a shot at.

A third-party service like DataTree can help immensely when gathering information for these properties. Note that there might be some discrepancies with the information—such as area or size—that DataTree collects versus what the county knows, so it’s a good idea to cross-reference either figure to come up with a more precise one.

Look at the SEV (State Equalized Value)

Apart from the minimum bid amount, the auction website also lists a figure called the SEV, which stands for “state equalized value.” In layman’s terms, this number is approximately 50% of what the county thinks the property is worth.

Depending on your state, they may or may not use 100% of the SEV as the benchmark; in Michigan, for example, the state only figures 50% of the SEV, even when it’s displaying the full price. They usually arrive at this number by an educated guess, typically by running comps. Remember, though, the state is not an appraiser, so don’t take this figure at face value, but in the absence of any other information, this number can suffice for now.

How to Start Bidding

In general, the tax deed auction website will list a county where a property is being auctioned, but at times it will feature two or more counties. You can find the type of property you want for the counties in the auction (such as a house or land) and do the appropriate research.

At this point, you can strike out some of the properties you encounter. For example, you don’t need to list properties with a lot more problems than you’re ready to address or those with missing information. In general, you should try to find the properties whose SEVs (or actual market value) far exceed their minimum bid price.

If you win one of these properties at auction, you’ll essentially get a quit claim deed from the county… which is interesting. By definition, a quit claim deed doesn’t offer any guarantees that you’re getting a clear title to the property (it’s basically the worst type of deed you can get from a seller). But on the same coin, a tax deed sale clears any lien or ownership on the property, so in a way, buying a property at a tax deed sale simultaneously eliminates any other owners or lienholders of record (with a few exceptions).

In the eyes of most title insurers, a tax deed sale will require a quiet title action to clear the title properly… so it’s an added step (and cost) you’ll want to keep in mind as you buy one of these properties.

Let’s Bid!

As for your maximum bid, you should look at each individual property and understand how much you’re willing to pay for it before the auction starts. There’s some guesswork involved in this, especially when you’re trying to estimate how much the property is actually worth.

In Michigan, you’re allowed to bid either before the auction or during the auction itself. Watching prices and bidding go up in real-time, however, allows you to react quickly. You can see how high a specific property is going up in value and how much competition you have, and maybe even have an idea of your competitors’ behavior regarding a given property.

On the other hand, if you’ve already decided on your maximum bid, you can simply bid that amount and be done with it—and if someone else outbids you, you can move on to the next property on your list.

When placing a bid this way—keep in mind that once the auction starts, your bid amount will be locked in and you’ll be committed to paying that amount if you end up winning. Needless to say, make sure that you can actually shell out that much money if your bid wins because you cannot take it back once the auction starts.

What’s Next?

This is a good launchpad for a tax deed auction so far, but we’re not even scratching the surface yet. In the next blog post, I’ll show you how the process really works by taking you along for the ride. Watch out for Part 2 in this series!

About the author

Seth Williams is the Founder of REtipster.com - an online community that offers real-world guidance for real estate investors.

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