Discover what to do (and what NOT to do) when buying real estate at Foreclosure Auctions and Tax Deed Sales (also known as Tax Foreclosures). I am going to pull back the curtain and give you an inside look at how the pros do it. Although there are many pitfalls, this video shows you how to steer clear of them as well as make wise decisions when bidding. This is a must watch for anyone considering bidding on a property at a foreclosure auction or tax deed sale (tax foreclosure).
Secrets to Foreclosure Auctions and Tax Deed Sales
Foreclosure Auction: Mortgage foreclosure; the borrower doesn't pay their mortgage so they go through the entire legal process of a foreclosure and then the house goes to an actual county auction or parish.
Tax Deed Sale: Tax foreclosure; the property owner doesn't pay their property taxes, so a house is usually sold as a tax lien first, and then if the tax lien is not paid within a certain period of time it then goes to an actual foreclosure.
If you have read my other blogs or seen my videos, then you know that I'm a creative real estate investor and that means that I am working directly with the seller not sourcing my deals from an agent, the MLS, or foreclosure auctions. But the truth is that there are certain circumstances where it actually makes sense to let a house go to auction.
- title issues
- Extra Liens on the title
- A death which left multiple heirs
- The heirs didn't have the money to pay for probate and they just let it go to auction.
- A messy title where it's better to let it go to auction, clear the whole thing out so someone can buy it there.
In this business there are procrastinators that will literally call you the day before the auction, which doesn't even give you enough time to call the lender, get an updated reinstatement, or updated payoff. .Even if the deal is a home run there's simply not enough time to get the information from the lender to actually purchase the property, even if you have the cash in your bank account.
Sometimes it makes sense to do deals that go to tax or mortgage auction. These types of auctions are better then the ones you will see on Auction.com or Hub Zoo because these are what they call cash on the barrel head. You have to pay the money at the time of the auction. This kicks out a lot of potential competitors, which creates a nice little barrier to entry. If you don't have the cash you can't play in the sandbox.
Abraham Lincoln once said that, "If I have eight hours to cut down a tree, I would spend the first seven hours sharpening the ax."
The first seven hours is going to be you preparing for the auction. You have to have your act together and you have to know your stuff because the auction itself is not where you're going to play all your games. The biggest game playing moments are when you are getting all of the information and doing your due diligence.
The first thing you need to do in your hypothetical "first seven hours" is do your property homework.
- Evaluate The Value
The first step in property homework is to evaluate the value. You might not be able to ascertain the complete total value because you may not be able to get inside but when it comes to condition you'd be surprised how often there is a back door or window that might be open. Now, I'm not suggesting you do that but I know people that tend to find a way to get inside the property if it's vacant prior to the actual auction occurring.
- Assess the Condition
You can assess condition on the exterior easily but the interior might be more difficult. The utilities won't be on so you won't know the condition of the plumbing, electrical or HVAC, but you can get some level of understanding by taking a look and looking at the age of the property.
These two come together though because in order to really understand value you have to understand condition. You want to really start at the comparable sales to understand what the property can sell for all fixed up as well as what it is worth as is. These two pieces of information will help you better understand whether or not you should even waste your time going any further down the road of these seven hours of sharpening your ax. You can compare the property worth and potential worth with the opening auction bid.
Two Types of Foreclosures in the United States
- Non-Judicial: it's usually going to show you the opening bid amount.
- Judicial: they're going to show you the judgment amount.
Judgment is how much the foreclosing mortgage company is owed including all of their back payments and any interest or attorney's fees. The judgment amount is typically what the opening auction bid will end up being for the lender because is most cases the opening bid in judicial foreclosures is $100, but it's not really $100, because a representative from the bank will be present bidding the auction up until at least the judgment amount.
Opening Bid Amount
If the opening bid amount is really close to the property's value it's probably not going to be worth your time.
Here's the example. If the opening bid is going to be $100,000 and the value is $200,000, then this is an exciting potential auction because there's a lot of room in the deal. So the bank will tap out at the judgment amount and then the only competition you are left with is other investors.
If the value is $110,000 and the opening bid is again $100,000, the problem is that the lender might go all the way up to their $100,000 judgment and then there's no real room for profit.
You might be saying, "Phil, what happens if the value is $80,000? Is the lender going to come up to their $100,000 opening bid?" Maybe not. They might max out at 70. They typically do a drive by VPO or a drive by appraisal right before the auction if they're in a situation like this to ensure that they at least bid an amount that's reasonable. The property could go for less than opening bid amount, it sometimes depends.
Now, I'm not talking about tax appraisal value, I'm talking about the actual comparable sales on the MLS closed comps value. I've got a great video on that, Determining Property the Right Way, that'll help you better understand what I mean. If you understand that the opening bid amount is going to be well below what the value is you might have a promising deal.
Do a Title Search
You need to know what's on the title because some liens will sometimes survive the auction, such as tax, property taxes, and even IRS tax liens. It's not just about liens either, you need to know about any remodels or builds on the property that never closed off on the building permits. That could be a real problem, that could extend past the closing. All kinds of issues could occur.
I actually pay for a professional title search. I can do title searches through the counties that I invest in online, but I go to the next level because I want to make sure there's no mistakes. When you do make a mistake on this it can be very troubling. You buy a property with what's called a "dirty title" which is awful, especially with tax deed sales where in many cases with a tax foreclosure you have to file what's called quiet title. You have to file it after the closing to have the ability to resell the property and give the new buyer title insurance because when you buy at an auction you're not getting title insurance.
When you resell after you've bought at auction you don't always have the ability to give the new buyer title insurance, especially tax deed sales, and so sometimes you have file quiet title. It is extremely important that you understand this, which is why I get professionals involved. Even if you spend the money on the title search and the deal never comes together, it is still better safe than sorry.
Figuring Out Your Max Bid
After you have done all of the initial analysis of the property, you are now in the position to potentially consider putting together your max bid amount which is also incredibly important. You want to go into the auction with a plan on what your max bid's going to be. Before you do that we have one more piece of this seven hours, and I'm going to call it this...
Rules of the Game
In my beginning investor years, I decided to bid on a property at an auction. The property was in foreclosure for years and the borrower had continued to file frivolous law suits and throwing out all kinds of cockamamie schemes to keep the house from going to foreclosure. On the day of the foreclosure I won the option at $385,000, so I wired in $385,000 cash to the county. Well, in this particular situation there was a seven day period where that borrower could dispute the foreclosure sale, and he did. When he disputed, it put the property into this limbo stage where I didn't own it so I couldn't even put insurance on the property. If it burned down my $385,000 was at risk.
There were two judges in the county that were handling these disputes. One of them was on vacation for three months and the other one was way backed up with work. It took seven months to finalize the auction deal. He actually ended up winning the dispute so he got to keep the property, believe it or not, it was ridiculous. I received my money back eight months later and I didn't get any interest on it. Thank goodness I got the money back it tied up $385,000 of my cash. What the lesson there was this. Had I been smarter I would have looked up the foreclosure case records and I would have seen that this guy had filed all these frivolous lawsuits for years and years and years. That would have told me that this was a risky one to bid on because somebody could have pulled this stunt.
You're going to need good legal help, either a foreclosure attorney or a real estate attorney that understands auctions and works with clients that actually buy these properties at auctions because you could make a big mistake and it could be very expensive. Now, this one ended up just costing me the fact that my money was tied up, for eight months, so it was more like an opportunity cost.
Right of Redemption
A right of redemption means that the person who was foreclosed upon has the right to redeem or buy the property back for the amount it went to auction for. An example would be New Mexico. When the property goes to foreclosure, let's say it went to foreclosure for $100,000 and you won the bid, what if you started renovating the property, started fixing it up, and then all of a sudden 30 days into it you get a knock on the door and they say, "Yeah, I still own this property, I went and redeemed it. Thanks for fixing up my property for free." It's happened, so you need to understand the right of redemption.
No Right of Redemption
Now, certain states don't have right of redemptions on mortgages because of the deed of trust or the mortgage will actually nullify that. HOA, Home Owners Association, foreclosures sometimes still have these right of redemptions as well as tax sales. You also have to understand the property's boundaries, what's going on with the property itself in regards to laws.
A person was bidding on a tax deed sale on a vacant lot. A lot of times these tax deed sales are vacant land, not houses. The numbers seemed amazing so he won the auction and then he later learned that that particular lot had a historical overlay and it could not be built upon so the land was basically useless. It was in a residential community and he thought he could sell the lot for $100,000. He paid 10 grand for it and it turns out he couldn't build so he sat on it and he now pays the taxes on it each year.
You need to understand the rules of the game. I think an attorney could really help you go through all the things that could go wrong, what you need to be aware of. Sometimes its situation will depend on whether it's a mortgage tax or an HOA foreclosure or what is involved in the actual auction itself.
Now that you've done your first seven hours sharpening your ax, we can discuss the auction. The actual auction can be either in person online. When you're dealing with an auction there are a couple of rules I need you to keep in mind.
1. Max bid already determined.
There's this one particular auction where every single time that it was in session the same old Big Roy came in the room. He had his chest out and anybody who saw Big Roy, knew if he was bidding he was going to put up a fight. They thought Big Roy was making a killing around town with all the deals he was doing. Oftentimes, if he started bidding with you, you would always bid up a little more, because if Big Roy was bidding on the deal it must be good.
Well, here's what the real story turned out to be. Old Big Roy, worked for a bunch of attorneys and doctors in town that weren't very smart. He raised a bunch of money and basically had a mini "Bernie Madoff Ponzi" scheme going where he would get the money from them, buy these properties, he'd fix them up a little bit, and he often lost money on them. New money had to keep coming in to pay off the old money and he eventually got in big trouble. All these people were thinking that Big Roy had his act together and it turned out that wasn't the game he was playing at all, he had a Ponzi scheme going.
Foreclosure Auction Tips
- You do not want to go into the auction and on the fly change your bid
- You want to be focused, you must have your max bid already determined, and don't change it.
- What's going to happen is when you're there, especially in person, if you see some other people bidding you might think, "Maybe they know something about the value that I missed. Maybe this thing's more valuable than I thought it was."
- Don't think that way, you have no idea what they're up to.
- Don't follow anybody else in the room. You have your max bid and you stick to it.
2. For When You Lose
It's okay. I understand, here in America we're very competitive. We love sports and we always want to win, win, win. You need to be okay with losing. I lose a whole lot when it comes to these auctions because I don't like paying very much. There's always some sucker out there willing to pay way too much for some of these properties. Be okay with losing, it is not a big deal. Be okay if it doesn't go to sale, you'd be surprised, how often these properties never actually go to auction.
Tax deed sales are pretty much 100%, they always go to auction. Sometimes, they'll pay it up the day before or maybe the lender will postpone the sale because of some frivolous foreclosure defense attorney's letter, all kinds of reasons to push off the sale. You may do all your work and it may not go to sale but that doesn't mean it's going to always stay in limbo. Keep an eye on those, they may come back around.
3. For When You Win
If you actually win, congratulations, make sure you get insurance bound on that property. It's easy to forget that detail but you're the owner now. If you're the owner you'd better put some insurance on there, because it's probably a vacant property at that point. Maybe there might even be some squatters in there.
If it is a tax deed sale and you have to do quiet title make sure you file for that. In a lot of cases, I know in Florida quiet title can cost $2,000 so you have to factor that into your bidding. You'll have an extra $2,000 expense when you win a tax deed sale.