Seeking Guidance on Calculating Maximum Bids for Tax Deed Investing

[Kami Kami]

I’m new to tax deed investing and I live in Texas. I’m aware that it might be challenging to have a standardized formula for this…but how will you go about calculating the maximum bid on a house that you intend to use for rental? How will the formula be different if you plan to rehab and sell?

Any guidance or advice you can offer on these calculations would be immensely helpful.

[John Underwood]

It depends on so many variables such as FMV, condition of property, area, occupied vs vacant, size of property, info on previous owners etc.

[Henry Clark]

Recommend you don’t start with this question.  Back up.  Print the rules out for Texas specific tax deed sales. 

Show them in here and we can help you dissect them.  Develop a buy list and logic.

What year does the tax sale go through?  2021?  You still owe forward.    
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Does this cover other tax liens?  Drainage districts, school districts, county, city etc?  

Houses year one 25%, year two 50%.   Forget what you will bid, how much will you invest and not cry when I come back and pay the taxes and the 25%?

Don’t go to the auctions.  Buy your property off auction.   Read the rules.  Pay below tax balance.  

What else?  Tear the rules apart and learn the game.  

[Bruce Lynn]

@Kami Kami You have to decide what it is worth to you? That's how you do you max bid. it is different than bidding on a house you get to look at, see, feel, inspect...because with tax sale properties, chances are you won't get to do much of that. I would also say you need to plan for repairs more extensive than a normal rehab. Most have been vacant for a long time and vacancy often creates more expenses. I guess the forumla would be ARV-holding costs-rehab costs-minium profit target-selling costs=max bid.

Remember you will likely need to hold for two years before you rehab, and during that hold period you have expenses...taxes, insurance on a vacant home, yard care, cost of funds, cleanup, maintenance and probably more.   You can make basic safety, health, protection of the asset repairs, but those may not be good enough to rent the property.  Also if you do a rental it needs to be month to month probably in case the previous owner decides to redeem.  So that may mean you need to discount significantly to take in a tenant who you may need to vacate a month later.  Not everyone wants to do that.   I would guess most investors will pay more for a long term buy and hold vs flip as you can spread out the profit over a few years on a rental vs for a flip you will need that profit (appreciation or value add) almost immediately.   Just to give you an idea to flip you might need to replace roof today.  However on a rental you may be able to nurse an old roof along for the next five years before replacing.  Same with many other featues.  Bathrooms may just need to be cleaned to make it a rental, they may need to be updated to get a sale.

I don't know if I've ever seen a standard formula like some other types of investing have.  Not even sure one forumal fits all.   The difference between a rental and a flip though could have considerations. Some people rehab better for flip than rental. Might be two totally different markets.  You probably need to know the difference in your market.   Also with a rental you may be able to rent day 1 or if it is occupied start collecting rent from the current tenant day 1 or day 31, while to flip you likely will need to hold for 2 years, plus your rehab time 2-3-6months.

As @Henry Clark mentioned about redemption penalities, I will say almost no one redeems in Texas so your chances of getting this interest is super low.  That is unless you decide to do full and extensive rehab during the redemption period.  Then like clockwork, the day you are putting the final finishes on the granite countertops and hanging blinds, they will show up and want to redeem and you likely won't get back any of your rehab costs.

Remember this is all cash business.  No one will likely lend you purchase price or rehab money for these projects before 2 years.  While occasionally there are hidden gems, the nicer properties regularly sell for 100-200-300K cash money that day.   Some places you have to pay that within a couple of minutes and I think every one I've ever been to, pay that day.   If it is online auction typically you have to deposit your max bid up front about a week before the auction.

[Henry Clark]

Learn the rules.  Recommend you go after Off List land only properties.   Texas land you take ownership in I believe 6 months.  My brother does this so not my area.

Example.  This doesn’t happen every day.

$25,000 in past taxes

6 acres in town along highway, town of 30,000 south of San Antonio.

Off list.  Not on auction.

Made offer of $8,000.  Accepted.

Held for 6 months took ownership.  Held another year sold for $210,000.  

Subdivision lot.  $5,000 taxes at auction.  Sold for $50,000 later.  Was in his subdivision.  

Two properties we looked at with nieces.  Same road mile apart.. 20 minutes east of Dallas
 
1.  2 acres.  Rock drive.  1 Mile off highway.  Power lines running over. So you can’t build underneath. Very little property to build on.  Could do boat and rv storage. $20,000 in taxes.  Don’t know how it got so high.  Different taxing authorities literally hold on to properties and don’t put properties up for sale for a while.  This was a bid property, they did not go to auction and bid.

      2.  4 acres. 1 mile off highway.  Last 200 yards dirt or mud road needs rock.  Dry drainage flows through middle of property during weather.  Split in two and sale as house lots.  $7,000 taxes.  They did not go to auction.  
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Don’t know that I would use this as my core business.  Plus you need to do something with the property or you get holding future taxes.  Texas is big though. So lots of properties to check on.