Tax Deed Auction, am I missing something?

Question

Hey BP I am an investor in Northern New Mexico and have a tax deed auction question. In my county they post the list of properties that will be up for auction at the tax deed auction ahead of time. I have been using deal machine to look up the properties on the list to find information about the properties, owners etc. I am finding properties that are not in that much tax debt that are completely paid off (this matters in NM because other liens like a mortgage are not erased with a tax deed auction like many other states). Basically, is it possible that all these paid off properties with not a ton of tax debt are going to be sold at these auctions? It seems insane to me that someone owning a 500k+ property that is in less than 10k of tax debt would let that happen... Am I missing something or are these properties really being sold at tax deed auctions and the owners with hundreds of thousands of equity have no recourse?

Pete Harper · Answer

I've attended several tax sales in Texas.  Here is what I've found.

1) All the "good" properties get taken off the tax sale at the 11th hour.  The owners scrape together enough cash to make a payment.  Frequently this same property will show up on the next sale a couple months later only to be taken off again.  I've watched the same property go to auction 3-4 times this way.

2) In Texas there is a redemption period that is different for Homestead vs non-Homestead property.  Homestead properties can be redeemed by owner for a period up to two years.  Non-Homestead is 6 months.  Meanwhile you can't make significant renovations to or resale.  Be prepared to have your money tied up a long time.

3) The majority of properties that do make it to auction have been abandoned for years.  Typical scenario is the owner has passed away with no heirs.  The property sits abandoned for 3-5 years before the property lands at auction.  Do you due diligence.  I've found homes "missing" as the city bulldozed them down because of fire hazard.  Not uncommon to see roofs fallen in or other major differed maintenance.

4) When a "diamond" does make it to auction.  Be prepared to bid against the Pros. These guys are brutal and are willing to pay top dollar.

5) One strategy I did try was to contact homeowners pre-auction.  Offer to buy the house pre-auction for a little more than taxes.  This is potentially a win-win the seller gets a little cash and you get a property with clean title at a reduced cost.  I've had one deal like this but backed out after I found the kitchen roof had caved in.

Tax auctions sound great on paper but you really need to know what you are doing.

Wayne Brooks · Answer

@Emilie Adamovic

1) the vast majority of these get caught up/paid off just before the auction

2) here, tax auctions are very competitive and sell for near market value, so the owner gets the excess proceeds.

Bruce Lynn · Answer

@Emilie Adamovic   I work in Texas so know nothing about NM tax sales #1.  However I would say this tax payment deadline is the prompt to pay.  I will say in Texas probably 90% or more of the properties you describe will not actually go to the sale.  Here nearly every auction is on a Tuesday, 1st Tuesday of the month, so they will get paid on Friday/Monday...and occasionally 5 mins before the sale.

You are correct $500,000 properties rarely get sold for $10,000.   Now with that being said, occasionally one slips thru the cracks.  You show up often enough, maybe every sale, every month for 3-4-5 years, you can grab one.  Most people just don't have that patience.  They give up after 1-2-3 sales.  Also typically you are not the only one with eyes on this property.  10 other investors will too, so probably will not go for the minimum bid, but something much higher.

What is the recourse in NM?  Here in Texas the previous owner has 6months to 2 years to redeem with a penalty to reclaim the property.  Few do, but it can happen, especially in cases like this.  They may also challenge the sale (maybe they weren't properly notified.)

I suggest you read the tax sale laws in your state.  If there is training by the sales authority: sheriff, tax assessor, attorney, or tax appraisal district attend that to get better insight.  See if any of your local REIAs have training.  See if there is a white paper on NM tax sales on Tax Lien Investor Association website.  Read the 16% solution book and see if there is a chapter about NM.  After you do all that, take your list and go to 1-2-3 auctions, see what happens.

You also have to think about ...could you really go to the next auction with $100K in cash and pick up $5,000,000 worth of property.   Maybe, but I would think that is a rare day.  I've gone to auction every 1st Tuesday for probably 10 years somewhere and never seen that.  Probably not even over all the auctions.  Can you pick up a good deal here or there.  Yes.  Can you do it at every sale?  No.  It has been a nice hobby, but I could not make a living doing it here in Texas.

Bruce Lynn · Answer

@Emilie Adamovic   I would ask your sale authority what is done with overages.  Every taxing entity seems to be different.  Even if the state law says one thing, often the local officials implement their own rules it seems.

Generally in Texas the previous owner needs to request the overage within 30 days. I think in most cases they don't get notified of the overage or how to claim it.   Probably has been the same in many other locations as well.  There used to be people who work the "overages", basically contacting people and setting up a way to claim the overage for a % of what's due.  When this gets unfair, then the states or locations implement new rules.   Also we're starting to see more court challenges and laws change in many states about the overages.  Mainly it seems in NE of US, or more northern states, but I also think MS is another.  When you see these crazy amounts for the overage and basically it goes tot the taxing authority when unclaimed, it might seem or be seen as unfair to the owner who would have been entitled to it if they had known about it or be aware of how to claim.One famous recent case is Tyler v. Hennepin County.  The U.S. Supreme Court unanimously held that a county's retention of the excess value of a home in a tax sale violated the Takings Clause of the Fifth Amendment.

Emilie Adamovic · Answer

Thank you so much for all this information and it makes a lot of sense. I know for a fact in NM there is no right of redemption period after tax sales BUT there is the 2 year period that they can reclaim if they can prove they were not properly notified. I am definitely going to go to the tax sale and see how it goes and at the very least I can talk to other people locally who go to them and pick their brains a bit.

Tax Deed Auction, am I missing something?

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