In the previous three posts for this series—we’ve covered a lot of ground.
Part 1 discussed a bird’s eye view of the tax deed auction, how it works, and where you can access it from the state you’re working on. Here, I introduced you to tax-sale.info, the state of Michigan’s tax deed auction website.
Part 2 was a deep dive into the process of bidding—when to start bidding, if and when you should respond to outbidding, and assessing the value of the properties you want to bid on.
In Part 3, I shared my rationale for bidding on certain properties and using some spreadsheet magic (filters!) to zero in on the properties I consider worth my time.
Finally, we come to the point where we can summarize what we’ve learned from the auction and apply that to find great deals moving forward. But first things first: did I win any of the properties I bid on?
The Results Are In—And They Ain’t Pretty
Auctions are closed after a certain amount of time has passed or a certain number of bids have been made. At the time of this writing, the auctions are over, which means there’s nothing else to do but to find which of my bids won.
The short (and disappointing) answer was that I didn’t win anything. There were a couple of factors involved, as I’m going to discuss below.
Loads of Competition
Obviously, the more desirable a property is, the more competition there will be from other investors you also want to best properties up for grabs. As I described in the last blog post, I look at the spread—the difference between a property’s minimum bid value and its market price—to find those that can give me the biggest possible profit margin. As this is a simple formula, you can quickly filter and sort auctioned properties this way using a simple tool like a spreadsheet, which I explained previously.
That said, I don’t just use the spread to find the most worthwhile properties. I also look at other considerations, such as road access and the general state of its location, to determine whether a property is “worthy” of my bid. But you can be sure that other investors will do the same, so the more appealing a property is—using a combination of spread and environmental factors—the more likely you will encounter competition.
And as competition grows, so does a property’s bid amount. Would I bid more than I should just to outbid the competition? The answer is no, which brings us to the second point.
As a rule of thumb, I rarely bid over 30% of a property’s market value when I’m buying. And tax deed auctions are no different.
The reason is that if I can eventually sell a property at 100% of its market value, I would still get about 70% remaining off it. But as in the nature of an auction where bid amounts get higher and higher as competition intensifies, the winning bid amount is often far too close to the property’s actual market value, which makes the margins way too thin to actually make money from it.
In some cases, some properties sell for even beyond their market value!
Of course, the 10-30% rule that I set for myself is just a super-conservative rule-of-thumb. When you’re bidding at a tax deed auction, you can set your ceiling for whatever you want (see previous blog post), but it also comes down to intention. For example, if you want to use the property for yourself (or you want to develop it), it probably makes sense to bid just a wee bit higher than you’re used to when you’re flipping land. But if you want to maximize your profit margin and guarantee that you’ll make money on the re-sell without doing anything to the property, a low ceiling is more advantageous.
So Where Does That Leave Us?
If you’re someone like me, who is trying to get a property at 10-30% of its market value, all of the auctions I attended proved to be an uphill battle. It’s hard to stick to this kind of ceiling and come out with something to show for it. Unless:
- You bid for more than your ceiling (or don’t set one at all).
- You find a property that nobody is interested in.
…and of course, if your goal is to flip a property for an immediate profit without making any alterations, both of these exceptions would be pretty foolish, in my opinion.
The first is generally up to anyone who’s bidding in a tax deed auction, but the second is a bit tricky. Most of the time, investors—me included—shy away from properties with obvious problems or just aren’t that valuable. And there’s something to be said for these properties, as some of them remain unsold even at auction. But are they THAT bad?
In my experience, unsold properties—i.e., properties that nobody wants—fall into two categories:
- Those with serious usability problems
- Those whose value isn’t apparent at the time it was auctioned.
The first one is pretty self-explanatory. Examples are land situated smack dab in the middle of a wetland area, on a cliff, or those without road access.
The second one is a bit more nuanced. I’ve found that the more rural or remote a property gets, its value (not necessarily its market value, but its demand within the auction) decreases. A possible reason for this is that these properties are a long way from where most buyers are. In my case, I wouldn’t have time to sell such a remote parcel of land to a buyer who won’t likely go out of their way for it unless they really want a plot of land in that particular area (it’s not impossible, but not likely either).
Is It Worth Your Time?
If you’ve spent any amount of time on REtipster.com (the blog, podcast or YouTube channel), you know that my business model revolves mostly around land investing. In a nutshell, I try to find vacant land or land that’s running behind on their taxes, then make a really, really low offer to their owners.
How low an offer? As I’ve mentioned before, this is anywhere from 10% of the property’s assessed market value, or up to 30% if I feel like that certain parcel of land has a lot of potential.
In a tax deed auction, however, this is extremely challenging to succeed at. The inherent nature of auctions makes it difficult to stay within your ceiling (which is 30% for me) because of the sheer amount of competition. Sure, I could always buy land that no one wants and probably resell it eventually, but I won’t get the big numbers I would get from a top-tier property that everybody is bidding on.
With that in mind, is a tax deed auction even worth it?
Do It Creatively
There are a lot of opportunities here, but make no mistake—“opportunity” doesn’t mean a deal.
The first thing to do when you start at an auction is to manage your own expectations. It’s certainly in the realm of possibility to win huge at a tax deed auction, but there will be FAR more strikeouts than home runs.
Instead, you can get creative by using other ways to have a competitive advantage. For example, you might have knowledge or insight about a property that others may not have, which would make a less valuable investment to others who don’t know or see what you do. The assessor’s estimate of a property’s market value is an educated guess but not the gospel truth; if you know the best uses for the property and you’re confident that you can maximize it, a higher bid may be justified.
Not All Places Are Made Equal
As I’ve always pointed out in this series, I’m using the state of Michigan as an example because this is where I live. Like every state, it has its unique quirks that make competition for tax deeds either more intense or less fierce, and some underlying factors may make tax deed auctions either easier or more complicated in other areas.
I’m not saying that definitively—there may be some overlap across states in how tax deed auctions work. A few things may change here and there, but the basic idea of why tax deed auctions are held, how biddings are made, and the taxes and miscellaneous fees that you have to pay are similar in procedure, just different in amounts.
More importantly, the real estate market in every state varies at a certain point in time. Michigan’s, for example, is on an upward trend right now, which makes property values start high due to demand. This means that the competition I’ve shown you may not necessarily reflect the intensity of the competition in other areas, although competition will never be truly absent.
Takeaways—And What’s Next
Even though I knew it was going to be a long shot, it was still a pretty big disappointment for me not to win anything from all the bids I made… but at the same time, it’s not the end of the world.
The main idea here is that, as investors, we really shouldn’t be buying properties just because we can afford to outbid other investors. In hindsight, when I look at the final selling prices, none of the properties at these auctions were terrific deals that I regretted not getting.
I think one of the biggest potential pitfalls here is emotional buying. It’s easy to get sucked into a vortex of a bidding war. I keep thinking to myself,
“What if I add a hundred more bucks? Maybe I’ll get it!”
This is a dangerous and slippery slope. I’m not one for gambling… but I imagine the feeling is similar to gambling is like, because your imagination can really run wild during the bidding process, and there’s probably either a huge “high” (or a feeling of disappointment) when you win… depending on whether the property was actually a great or terrible deal.
What you can do is to try and stick to your ceiling no matter what, by reminding yourself that every extra dollar you bid beyond your maximum is going to eat into your profit margin, because that’s the reality of it, after all.
Finally, I won’t say there’s no opportunity for a tax deed auction. Mine situation was sort of self-limiting, to be honest, due to the way my business model works. But that may not be the case for everyone. As long as you know which properties are worth your time and money, and you can stick to your maximum offer, you may find some diamonds among the rough.
But if you’re like me and just want to get the competition out of the way, you can simply find highly motivated sellers before the county forecloses on their property and auctions them. I’ve written many guides about it on REtipster.com, along with an explanation of how I do my business that I think you’ll find useful.