Delinquent tax auction - what am I missing?

Question

Yesterday, I went to my first delinquent tax auction—Berkeley County, SC—just to see how it works.

I guess most of them a pretty much the same. Once a property is auctioned, the current owner has up to a year to pay off the delinquent tax and retain ownership. If the tax is paid within the year, the successful bidder gets their money back plus an attractive interest rate on the delinquent amount (12% in Berkeley Co.). If the delinquent tax is not paid, the successful bidder gets the property.

Here’s what I couldn’t figure out:

There were properties that appeared to be comparable on paper…i.e. SFRs owned by individuals in established neighborhoods probably worth upwards of 100K and owing $500-$1500 in taxes. Some would get bid up to 2K-5K; others were bid up to 50K!

I can understand the 2K-5K, but in order to bid a property up to 50K, you have to have a pretty good idea that the current owner is not going to pay off the delinquent tax. It doesn’t make sense to tie up 50K in order to earn 12% interest on 1K.

• Are these bidders who have researched the property—perhaps even contacted the owner—such that they know the tax will not get paid?
• Are they lenders trying to minimize losses by bidding on properties for which they still hold a note?
• Or are these corporate investors who bid up a large number of properties knowing that a certain percentage will not get paid off? For example, if you successfully bid 50K on 20 different properties that average over 100K in value, you could get a decent overall return if only 2-3 of them actually convey.
• All of the above?

Just trying to understand why some get bid up so high and others don't.

Jay Hinrichs · Answer

not an expert in SC ... although I have a lot in Charleston that we are trying to get title insurance on.. and its quite an ordeal for the seller... as all the heirs have to be notified etc. IE you have to do a quiet title action... and in Charleston ( the area of the city we are buying in that was predominatly minority) the heirs are tough to find.. IE folks married and never properly divorced or estates not probated etc etc.. at the end of the day the seller is simply waiting out the 10 year rule.. after 10 years there is no redemption for any reason. and we should be closing in Feb...

but the seller ( out of state) has held this property that long... not sure what she paid for it.

but we tied it up 2 years ago and have spent the 5k so far.. to try to get title insurance so we can get a construction loan.. the only good thing is in those 2 years the lot has doubled in value... LOL.. so it can be luck of the draw sometimes... once we get this going it will be super profitable.. and I suppose the seller made a profit even after 10 years.. they may have paid next to nothing for the tax's on a bare lot in what was the HOOD 10 years ago.. and what is now some of the hottest real estate in the country.

Dennis Weber · Answer

@john underwood will know. Does SC have an interest rate for the overbid?

Josh Carr · Answer

@Pearce G. The opening bid price will be a total of all of the back taxes in SC. It depends on whether or not there were no bidders previously and so you may be looking at a listing that was considered forfeited lands and those are the years originally on the auction listing. Other than that you should be looking at all of the years delinquency together as your opening bid. Some people will bid up to 50K because they know that if they bid high enough and the property owner can't pay them back then they will have the property for their 50K. Would the property be worth bidding it up to 50K if it was acquired? That would be the goal behind a bid that high. Knowing things about people in the area can make a difference. Maybe the property owner was going to prison or had passed away and the bidder knew this. These are things that would make sense to bid something up to that much. In New Jersey they do it that way often and then the township will hold the excess proceeds in a trust for the bidder. After the two years of redemption has passed it is possible that the bidder would take the property for the amount they bid it up to knowing that the owner didn't redeem. It's a good strategy to secure the property.

Jean Norton · Answer

Each state has their own laws. There are some little known (by us small time investors) laws that allow the hedge funds to bid based on statistics, whether they make sense or not, as statistically they will end up profitable overall.

For example, in Florida, they will bid in ways that make absolutely no sense. The loophole is that most taxpayers redeem within the first few months, with a return of 5%. That's not a bad return for 2 months of investments.

Regarding the $50k bid on a low tax amount, it is possible that investor has some personal knowledge of the issue - such as maybe the person died? If the property itself is worth $100k, then they got a good deal if that tax is never redeemed. That's all I can think of.

Delinquent tax auction - what am I missing?

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