REtipster does not provide legal advice. The information in this article can be impacted by many unique variables. Always consult with a qualified legal professional before taking action.
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? Secondly, 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 a year. Others may wait two years. Others may wait five 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.
Disclaimer: The map shown above is a representation of the information I could 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, 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. Some overlap may also apply 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 six 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 end up selling 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 sold far below their 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
In 2020, most tax deed auctions are happening online thanks to COVID-19. 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 be 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. 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.
A Step-by-Step Process to 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. It’s an added step (and cost) you’ll want to keep in mind as you buy one of these properties.
1. 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.
2. When the Auction Begins
When you bid on a property before the auction starts, there will generally be a page on the website where your active bids are ongoing, the status of your bid (whether anyone else has outbid you), and some details about the property itself.
If you’re at all familiar with how auctions work on eBay, the bidding and live auction processes at a tax deed auction are relatively similar.
The way it works is that the “current high bid” is always an increment (in this case, a hundred dollars) more than the previous bidder. For example, if the current high bid is at $7,000 and I bid $10,000, it doesn’t mean that the new high bid is $10,000—it will be $7,100.
In Michigan, you’re allowed to bid up to 30 days before the date of the auction, and your bid won’t get locked in until the action starts (so if you want to back out, you have that option).
On tax-sale.info, which handles most of the county auctions throughout the state of Michigan, each individual county (or sometimes, groups of counties) will hold their auctions on different days throughout late September and early October. So even if you win nothing in one particular auction, you’ll still have a chance to bid at the other auctions happening later in the month.
3. Responding to Competing Bids (or Not)
When you’re focusing on only the best properties at a tax deed auction, there’s going to be A LOT of competition. If you’re only planning to make the minimum bid amount, don’t expect to walk away with any tax deed when the auction is over, because you will be outbid almost every time.
Depending on the website, the live bids may be refreshed in real-time, or you might need to manually refresh the page to see what the current high bid is. In any case, bidding at these auctions also means recognizing which properties are worth adjusting your bids for. Some properties are worth fighting for, but many are not.
One strategy is to look at the assessed value of the property, which is usually a percentage of the property’s estimated market value (according to the county assessor, anyway).
In Michigan, the assessed is 50% of the total market value, so if the competing bids are getting close to (or exceeding) the total market value, most investors will abandon their bidding because there simply isn’t enough value in the deal to justify their investment.
The goal is to be the winning bidder on a property that is deeply discounted and worth far more than the winning bid amount. This kind of excessive value is what every tax deed investor is looking for.
In my case, when I’m looking specifically for vacant land properties, I usually peg the maximum bid price at 30% of the total market value, which is obviously far below the assessed value.
Again, if you’re going to participate in a tax deed auction, it’s a good idea to go into it with a maximum amount in mind—a ceiling number that you absolutely will not exceed under any circumstances.
If your maximum value has been outbid by a competitor (which happens almost all the time, mind you), it’s important to NOT get carried away in the emotion that auctions are famous for. This is how people start making dumb financial decisions that come back to haunt them. It’s much easier to avoid these when you have a pre-defined maximum bid amount in mind for each property.
Assessing the Accuracy of the Total Market Value
On Michigan’s tax deed auction website, the information for the property includes the assessed value and the total market value of the property.
You don’t need to take this as gospel truth, however. You can cross-reference it with other tools, like Zillow, and run comps on similar properties in the area. You will most likely find that the total market value of the property is different (usually less) than the one you see on Zillow, so you can use this information whether to increase your bid or let it go.
4. After the Auction
When the auction is finished (they typically begin at 10:00 am and finish at 7:00 pm the same day), all bids are locked and closed, and you will no longer be able to modify your bids.
If you lost a bid on a property, you will see how much it has sold for, including how many people viewed it (note that the number of views doesn’t mean unique views or how many have bid on it—it’s just how many times that property was loaded into a browser).
On the other hand, if you are the winning bidder, you’ll be expected to fork over the money immediately in exchange for a tax deed from the county.
Analyzing the List of Properties
Before we jump into the results of our bid, the question most of you ask is: 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’ll show you below (and in the video above).
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.
What’s on 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, assuming 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 at tax deed auctions (which we’ll cover in another post).
Another important factor is SEV. 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 some 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.
1. 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, 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.
2. 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.
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 the 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 out 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:
- 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 item on my list.
The After-Auction Report
When all’s said and done, auctions close either after a certain amount of time or a certain number of bids. When the auction is over, there’s nothing else to do but to find which of my bids have won.
Unfortunately, the short (and disappointing) answer was that I didn’t win anything. There were a couple of factors why this happened, as I’m going to explain 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.
While I do look at the spread to find those that can give me the biggest possible profit margin, I don’t solely rely on it. 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, 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? A.K.A., My Takeaways
If you’re someone like me who’s 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.
- 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.
With that in mind, is a tax deed auction even worth it? Here’s what I learned.
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 of 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.
But in a tax deed auction, this is extremely challenging. 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.
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 pointed out, 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. Some underlying factors may also 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.
So… 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.
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 it because your imagination can really run wild during the bidding process. Plus, there’s probably either a huge “high” when you win (or a feeling of disappointment when you don’t), 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. Remind 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. My 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.