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If you’ve been with me since the first and second part of this post series, you’ve seen how the tax deed auction works. You’ve also seen (or read) me in action as I bid at a live auction, while I also explained my thought process on which properties are worth bidding on, which ones are best to ignore, and what my maximum purchase price is.

One question remains, though: how do I know which properties are worth bidding on in the first place? How do I qualify which ones I should pursue? The process is pretty straightforward, as I will show below.

Obtaining the List of Properties

Again, depending on whether the state is a tax deed state or tax lien state, the process may vary. In my case, Michigan’s tax deed sale website offers all the information I need. I can simply download a spreadsheet that lists all properties that will go on auction and base my decisions from there.

Unfortunately, some states don’t offer this kind of information out of the gate. The first thing to do is to find the tax deed auction website. If the state’s website doesn’t have the interactive feature to just download the list, it can be requested through email or in person a few days before the auction begins.

A spreadsheet will either come in an XLS or CSV format. Microsoft Excel can open both, but XLS is its native file type.

RELATED: Everything You Need to Know About Getting Your County’s Delinquent Tax List

What’s in the List?

The list gives me some important data that can guide my bidding decisions. In Michigan, our list usually includes the lot number (which is not the same thing as the property’s APN). This is how I can find each of the listed properties and get more information about each of them.

Other important data that comes with this list is the minimum bid amount for each property, which is the lowest amount I can buy the property for (if there’s no competition). This figure usually represents the amount of delinquent taxes that the property owes the county plus some additional fees. In effect, a tax deed sale is just the county’s best effort at trying to recoup its lost tax revenue.

In a perfect world, if there were no competition at these auctions, it would be very easy to gain A LOT of free equity on these properties. Unfortunately, there is usually a lot of competition at a tax deed auction, especially for the best properties on the list. This is another consideration when it comes to bidding on tax deed auction, which we’ll cover in another post.)

Another important factor is the State Equalized Value or the SEV. As a refresher, the SEV is based on what the county thinks the property is worth—in Michigan, the SEV is 50% of the property’s fair market value. This may be helpful in the absence of other references.

Some lists also note the current tax for each property. If I do win the property, this amount represents what I should pay in annual taxes. This figure is not future-proof, as it’s only current up to the most recent year.

Some lists also include notes and/or comments, which are often made by a county assessor or employee who took the time to visit the property in person.

How to Filter the List

Obviously, some lists include a lot of properties. Looking at each one of them will take me hours—something that I don’t have. There’s absolutely nothing wrong with doing this, but I’d rather save myself time and instead filter out what I don’t need. That way, what’s left are those properties that actually interest me.

One way to do it is to look at the spread of the property’s value.

Filter by Spread

This is pretty easy to do; simply subtract the property’s minimum bid amount from its market value. For example, a property with a SEV of $25,000 (i.e. – $50,000 market value) and a minimum bid amount of $5,000 will have a spread of $45,000.

Again, note that in Michigan, the market value is 2x that of the SEV. In the example above, you can see that I just multiplied the $25,000 value by 2 and subtracted $5,000 from it, which brings me to a $45,000 result.

Doing this per property is time-consuming. Fortunately, in any spreadsheet, I can use formulas to save some time, so I can just do one formula and then copy it to the entire column or row, and I don’t have to manually calculate every time.

Remember that the spread calculated this way is the maximum possible free real estate equity I gain when I win that property. Of course, this is subject to bids from other investors, so the more they bid, the more opportunity I lose.

With the spread calculated, I can sort the properties by their potential profit margin. I can then set a minimum threshold, for example, $5,000. This means I can eliminate any property whose spread is below the threshold value.

A caveat: this doesn’t catch everything that I want it to. For example, I might miss out on properties with a lot of story behind it. I might also overlook those with no apparent value but may actually be situated in an area with a lot of growth. In any case, this method will only show the most obvious opportunities and save me time.

Filter by Type

The objective is NOT to bid on every type of property on the list. In my case, I’m only looking for vacant land properties, so I can just filter the list down to the property types that I want to buy and ignore the others.

In the case of vacant land, one trick to doing this is to filter the data by addresses, because many vacant lots don’t have numbered addresses yet. I can also simply head over to the comments or notes section and look for comments that indicate the property type.

The problem is that not all lists will have comments on each property. And even in lists where they do, some properties have blank spaces where comments should be.

What I do next is to head to the tax deed auction website and search by lot number. The website offers general information about the property, including a picture or two. In many cases, this won’t tell me much, so I can simply use third-party software like DataTree to dig up more information about this particular property.

RELATED: The Fastest Way to Research Any Property in the U.S.

Queries in DataTree aren’t free, but they offer deeper insight into that property. The market value of a property in DataTree will also be different from the county-assessed values. Inconsistencies with these figures can tell a story of how that parcel has evolved; for example, an empty lot may surprisingly present a huge market value. This happens because its value when it had a house or some structure on it in the past was carried over to its current appraisal.

DataTree is also useful to find what the immediate area of the property looks like. It has several filters, such as flood zones, to see whether the property I want is in a place that makes sense for an investment. For example, do I want to buy a parcel in an area with a lot of restrictions (such as in condo associations, where the only thing I can build on it is a condo)?

Determining Max Bids and Due Diligence

Doing due diligence on any property in a tax deed auction is similar to how I approach every property for sale. DataTree can help a lot in this regard, as I can easily find the most relevant information that I look for in any parcel.

A few relevant things you can look at DataTree’s property detail report include:

  • Acreage
  • Property tax
  • What the immediate area looks like (is it in a flood zone/wetlands/swamp, does it have road access, what kind of properties are built around it, etc.)
  • Previous sale price (which it has sold for in real terms, versus its market value that’s theoretical)

If any glaring issue jumps out, take note of these issues and pit them against the profit-making potential of that particular property. Just keep in mind that other investors have also seen those, so there’s always that risk of competition.

What’s Your Ceiling?

Finally, another way to save time when finding the property worth bidding on is placing a max bid value. I do a percentage-based ceiling (such as 30% beyond the minimum bid amount) per property, but others just set a flat amount. Whatever the case, this lets me save some time trying to outbid the competition for a single property; if they make a bid over my ceiling, I simply move on to the next on my list.

So, did I win any of my bids? You have to check the next—and final—part of this series.

Also, if you haven’t caught up yet, you can read Part 1 and Part 2 before we look at the outcome and the lessons I’ve learned from it. See you there!

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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