Tax Sale Auctions: Good or Bad?

Question

I am interested in learning more about tax sale auctions. What are the advantages? What are the things to look out for?

Ronald Allen Barney · Answer

Tax lien purchases and tax sale auctions are a skill set all their own, and can be very high risk for anyone who goes into that market half-prepared.  The best advantage in that space starts with the fact that it's not a saturated market for that exact reason of how risky and complex it is.  You'll be up against dozens instead of hundreds of other investors chasing after the same deals.

Biggest thing to look out for is dirty title.  The more successful tax auction investors hire top flight title search professionals to scour fully into title history to make sure liens aren't lurking that will jump right out the minute they've got keys in hand.  Often anyone who fails to pay their taxes has also failed to pay other people in a way that results in property liens.

Physical security can be a concern as losing a house is often an emotional affair, and some auction investors have had to face assault by the previous owner during attempts at due diligence at the property site.

One notorious investor I'm aware of quotes Sun Tzu with "Victorious warriors win first, and then go to war, while defeated warriors go to war first and then seek to win."  That's a reference to all the research they do up front on the property to ensure they even want it to begin with, and then laying out their bidding strategy while at the auction itself.

Arnie Abramson · Answer

Every state is different.  I think it would be wise for you to let us know what state you are interested in and then the responses will be more beneficial.  My experience (since 1992) has been in Texas and is different that the previous one about Texas.  The risks are certainly manageable and the title issues are not as bad as indicated if you know where to go and, by the way , the redemption period is not the road block for title insurance.

Arnie Abramson · Answer

What county or region are you in that is giving you that much trouble?  If those companies are claiming the redemption period as the reason, you need to find new companies or talk to their supervisors.

Account Closed · Answer

SInce 2008, I purchased 28 properties at the live auctions by auction.com and never had one problem. Every property was move-in ready with the exception that some needed some minor repairs. I recommend that you stay away from online auctions since after you win the bid online the banks often reject the bid and you sometimes end up with a nightmare that takes several months to a year to resolve while your money is tied up. Read up about the problems with online auctions on the internet.

I see no reason to deal with tax lien, tax deed or whatever you call the tax auctions. I wanted to bid at the tax auctions in California and properties were going for 20% to 30% higher that their After Repair Value. I drove around California for two days looking for properties going on the auction block and where the internet showed beautiful homes there was only a concrete foundation and people still bid on the properties thinking they was a home on the lot.

Dallas Hayden · Answer

Grayson County. That was 2 years ago though and things may have changed in the meantime. I don't blame the title companies I spoke with since I've narrowly avoided several tax deed title landmines myself. Exhaustive record searches are key. Again, I'm sure YMMV depending on the area.

Dallas Hayden · Answer

I bet there are regional differences within the state too. Once I called 6 local title companies and none would offer insurance until the end of the redemption period. My tax assessor will actually void sales weeks or months after auction if certain title or auction defects are discovered. Most tax sales turn out well, don't get me wrong! In my experience though you are much more likely to run into major problems with tax sales vs MLS sales.

Dallas Hayden · Answer

I'm just speaking from my tax deed auction experience in TX (no lien experience). Tax deed auctions are incredibly high risk. Tax foreclosures occasionally don't wipe out all liens. Even if title is clear, a defect in the preceding foreclosure or even tax sale itself can cause problems. You often won't have marketable title during the redemption period. Title companies also usually won't insure until after the redemption period. If something goes wrong, you may be taken to court to defend title.

Perform as much research as possible. Make sure to buy low! If you win the auction, be prepared to pay in cash. Then be prepared to personally defend title to the property during the redemption period. Good luck!

Tax Sale Auctions: Good or Bad?

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