Buying My First Tax Deed

[Mike Rethis]

Hello everyone,

My name is Mike Rethis, and I'm brand new to the Real Estate world. If you read my bio, you will learn quickly where I am at in my journey to the unforeseen future. After just getting my agents license about a month ago, I will be signing with a broker in the next few weeks. During my days working as a contractor, I am ambitiously learning every inch of real estate building for an extensive range of investment possibilities; while networking and learning from other trades. I'm 22 years old, thirsty for knowledge, and eager to attack and conquer the RE world! 

I'm sure many of you started out like me! I have a lot of money for my age, but I am nowhere ready to buy a house cash or even put 20% on a multi family house, pay the closing costs, and then pay more money for renovation. Even just 20% down on something ~$300k would be a stretch. 

I live in CT, a Tax deed states. I am looking to go to the next auction, get the lay of the land, and see what happens at these auctions. My thoughts are that if I can find a good enough deal but don't have enough liquidation, I can pool money with other people I know to make the auction happen. Worst comes to worst the owner pays the money back and we all get our money back plus interest. Best case scenario (for me of course) is that I get the deed for a greatly reduced price after 6 months. Most times I wont end up getting the property but at least I'm not losing something. I would like to buy 3 families, and take advantage of the BRRR method, but I feel the economy is not in a good position for me to be getting one at this point and time. This may be the best bet for me getting a property for under market value. I also think getting out there as an agent and doing a couple listings/buys will help me come into the BRRR method more confidently, effectively, and accurately.

Many people that have done more deals than me (>1), I value any opinion you can give to me on this thought process good or bad. Is my thought process on a good track here? What should I look out for here, and am I missing anything? 

There's 1 more thing I am hoping to clear up. Lets say for example the taxes owed on the property are only $20k but I bid to $50k, win the auction, and the seller pays me back 3 months down the road. Am I making interest on the $50k, or just the $20k owed in taxes and getting my $30k back with no interest?

[Bruce Lynn]

Not trying to kill your dream, there definately can be opportunities, but it's probably a little more or a lot more complicated than meets the eye.

#1 Don't partner with anyone, this just complicates an already complicated process.  Until you are an expert and can explain the risks and rewards.  If you are going to raise money to purchase tax deeds you will also want to learn the securities laws of your state.  Probably not worth going through the legal steps and expense to raise money for single family properties.   Also this is a cash game typically, so you have to have the cash up front day of the sale to bid and buy.  So if you raise money, your friends and family have to front you the cash in most cases.  Are they willing to do that?  Ask them today to see if that is even an option.   Think of what that conversation looks like....hey can I borrow $5000-$10000-$25,000 to invest in tax sales.  I've never done it before, but I think I can get you 1.5% a month.  Not sure when I will give you the money back.  Maybe next month, maybe next year.  By the way you might loose everything because this is risky.....and their response is...if I give you $5000 in case, I might make $75 and you'll give me that back plus the $5000 next month, but I could loose it all?   Then again that's if you make no profit, so are you only going to give them back $50 or $60, so you make $15 and they make $60?   You said you have a lot of cash saved up, so if one of your buddies came to you with that proposition would you be interested?   Also remember if you've done a fund raise, you'll probably want a CPA to do your accounting, so you're giving some kind of documentation (maybe K1, maybe 1099) about earings to your investors....so out of that $15 you made, you have to pay the CPA.

#2.  Before you get too excited go to an auction in your area with your list.  See what people bid and compare to what you would have bid.  Not sure about CT, but in my area people often pay amazing prices for tax sale properties.  Retail or better in many cases.  Often they have different motivations than you.  You have to bid an amount that makes sense to hold for six months or maybe longer if it is occupied, maybe you'll have to hold for a year before you start rehab, by the time you file and get eviction, start rehab, etc.   If the next door neighbor is bidding because they want their mom to live next door, they'll probably pay more than you and have more info than you.

#3 Tax sale properties often need more rehab budget than other homes and remember you can't see inside normally before you bid.  So take that into account.  Very often lots of surprises and normally in worse shape than you think...and that costs money.

#4 Are you familiar with eviction process and how long that takes and what it costs?  If you have to go that route?

#5 I would expect most of the time it is not as simple as just picking 2-3-4 houses, you show up and win and get the house six months later.  Maybe, but normally there is plenty of competition.

Here is some info about CT that I found:

https://www.somersct.gov/downl...

You might want to check to see if NTLA.org has a white paper for you to review.

Also check this website... http://cttaxsales.com/

One great thing there that not all other states have is a list of the results... 1st one I clicked on the handful of properties look like they sold for $100,000 or more, some nearly $200,000.

I see one property, looks like condo that sold for $145,000, but probably previous owner sold a month later for $161,000.  So maybe the tax deed investor made about $2000 in one month on $145,000 investment.  Not bad, but fair amount of risk for 18% and if not paid off, if they would have actually received the property, they might have lost money.

Maybe you can pull 10 of those sheets of sold prices, go back and research the properties, find the values, estimate your rehab budgets, holding costs, resale costs, cost of money, etc and then determine if the ROI is interesting to you. Then decide if you want to play in this space.

Let us know what you find.  And if I am totally wrong and offbase and you crush it over the next year buying homes for pennies on the dollar, call me out.  No better satisfaction than doing what others say can't be done.