The True Value of Tax Auctions

With the large volume of misinformation, and even larger volumes of discrepancies about tax sales, there is a loss of perceived value associated with property tax sales. How about simpler terms. There is a lot of information thrown at you, a lot of wrong information, and a lot of right information. Since there is so much, it is hard to decipher fact from fiction. As you learn, you find that some facts are based in fiction, and some fiction is based in facts. Which leads you to believe that the value of the investment just isn't there!

Truth is, Real Estate Property Tax Sales, Tax Liens, Tax Lien Certificates, Tax Deeds; they all serve the same purpose, to get taxing authorities lost revenue. They are not intended to make anyone rich or "steal" someone's home. They are just a tool used to recover lost revenue. 

There is a lot of perceived misconceptions about this niche in Real Estate Investing. My favorite and probably the biggest lie by the infomercial crowd; "Little to No Risk." I call a big BS to this statement! As with any investment there is always some risks. If you don't take anything else away from this post, please understand that last statement. I'll repeat it.

With any investment there is always some risks!

The second perceived misconception is, pay someone's taxes and wait for them to pay you back with interest. No work involved! I declaring another BS lie. If you believe for a moment that there isn't work involved, your wrong. Title company's make millions of dollars proving that this is nothing more than a myth. They get paid to do the work (research).  As for someone just paying you back, it may or may not occur. There are no guarantees. There are people who have never paid a bill a day in their lives. Car salesmen call them bogies, or bogus liars. 

The third misconception is that the properties are all worth hundreds of thousands of dollars. While this may be true in a small percentage of tax foreclosed homes, you cannot expect this to be true even a quarter of the time. We wouldn't have ghettos if every property was 250k. We also wouldn't have mansions and golf courses either.

What has happened more times than I care to ever se people go through, they receive the wrong information for their location. I will say that my department handles 10-15 people a day who spent money on an infomercial course on how to get rich quick through tax liens. It is really sad. These people all follow the same script, say the exact same things. When they get off the phone, or leave the office, they go I've been duped. 

Here is the ironic thing, I think the author truly believe the lies they sell. Why? Simple, it makes them money, and the techniques may work in a few areas. Just not all of them. Shoot, I could probably put one together and sell it for $399.95 and make millions. But why would I do that, it's unethical. And in Real Estate, ethics is a notch on your key to success. 

So what is the "true" value in tax auctions (or liens, deeds, and OTC sales)?

There is actually a lot of value for everyone involved an investor, property owner, and taxing authority.  Each gain a value from tax sales in different ways. I'll explain.

Let's start with the most direct and simplest true value. It puts the property back on the Tax Role. Taxing authorities need all the revenue they can get.just look at Detroit, and Orange County, CA. In its simplest form, it allows the authorities to gain these revenues that they otherwise would have lost due to taxing authority exemptions. 

The property owner gets help paying their taxes, sometimes this really doesn't add value for them. But hey, you never know if the owner has been out of work, died, or has been hospitalized for long periods of time. They may just need some extra time to get "caught up." There are times when a property owner just wants to walk away from a property, and this gives them an opportunity to do so.

Here is the really important part. The value for investors. I like this part, because it directly affects me and how I make my decisions on my investments. There are several areas where an investor can gain value from tax auctions.

First, and foremost. You are adding value to your portfolio and making money. This holds true if and only if you do your homework. You will make money from tax sales a couple of ways. 

First is through redemption. You get paid interest on your investment through redemption. Depending on where you invest, it could be anywhere from 10% to 50% or higher. That's better than any bank rates at the time of this post.

Secondly, if the owner doesn't redeem the property, you then gain the value of ownership and the increase in equitable value in your portfolio. See that $10,000 you spent expecting to get $11,000 in six months just got you $50,000 in an equitable position (yes there is work to get to this point). Or the property you bought for $75k just sold for $100k and you made $25k or 33% on your money.

Thirdly you get satisfaction of helping out. This is a underlying satisfaction that most people don't understand and really don't think they feel. Investors think in dollars and cents not in emotions. This is good, but emotions do tend to follow investors like a bad habit. It's just like when you get upset about losing a home due to someone outbidding you.

And my final thought on how tax sales hold a true value. They allow you as an investor a new way to think outside the box far easier than other transactions. I say this because you don't have to limit yourself in knowing a specific exit strategy from a property. It holds an intrinsic educational value, you learn that you can think you bought a dump and it really be a treasure. 

I'll give you a quick example:

I bought a piece of raw land at a tax sale. Bad neighborhood, huge problems with illegal dumping. I'm talking tires, trash, building materials, even a junked car. I was thinking it was going to cost me a couple of thousand dollars to clean the lot up.  I was in the process of cleaning the lot and my wife found 3 piles of garden decor sandstone bricks. Easily $300 at Home Depot.

So as we are loading the truck with these bricks, a guy drives up. Wants to buy the junked car. I told him I need to see if I could get a title, this took about two weeks, and I called the guy. He said if I could deliver he would double his offer. $500 later I unloaded my trailer and drove off. Wait it gets better, I got $7 a tire, and $12 for each unbroken pallet. Then took all the junked metals to the scrap yard and pocket another $200.

All in all, not only did I pay for the lot, but got paid in cleaning it up to the tune of $460.00. The best part was the neighbors bringing over a glass of tea, and helping out, because they saw that someone did care what their neighborhood looked like.