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Tax title sales


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Does anyone here have any experience in bidding on tax title sales. I am in a "bid-down" state. I've spoken with a few different lawyers and I'm pretty sure I've got a sufficient grasp on thet mechanics of it.


I've isolated the variables on which to base my analysis for making bid decisions. I wanted to bounce my logic off the board if any one was interested in hearing further about it or had anything/experiences they'd care to share.



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Are you talking about tax lien sales, or tax deed sales?  I have been to a few tax lien sales.  I think you can make good returns on these, but there is a hassle in going to the sales, filing paperwork with the court, and keeping records.

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I talked to someone recently who has done this in a BIG way.  He said you need to learn the mechanics for each state, but once you get it down it's just a matter of going to the sales.


The one takeaway I had from the conversation with him was that you're better buying bigger liens verses small ones.  Buy liens on hotels and restaurants instead of small single family houses.  There is less competition and it's easier to get paid on the bigger ones.  If you don't then you own a very valuable commercial property for almost nothing.

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I think you would have to do it in a big way.  Small dollar amounts don't work in my experience because the liens are redeemed too fast.  For example, in Louisiana they paid 12% per year, but they were all redeemed pretty quickly so I only made 3% or so.  Another time I went to a sale in Illinois and all of the lower risk ones went for 1%, so I wasn't able to find anything worthwhile.  I was looking for the ones with homeowner exemptions.  Perhaps I was using the wrong strategy, but that was the only shortcut I could see to ensuring that you were getting something worthwhile.


I think the way to do it would be to have a schedule and attend all the sales you could, and do it in a tax advantaged account.  I would like to hear more about how your friend is operating, Nate.  Also would like to hear more details from Evolveus or anyone else who'd like to chime in.


BTW, there was  book written about this called "the 16% solution" which lays out a system for this strategy.

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I am referring to tax DEED sales, and yes Oddball is correct that each state has its own mechanics, so some of what I will put here may or may not be relevant to other states.  I'm in Louisiana, and I have spoken to a couple of lawyers about the process and how it works here in Louisiana.  Here is my understanding of it:


The property taxes have not been paid, and the owner has been notified numerous times by the municipal official.  Not sure of the specifics around that, but anyways, the properties are now up for auction because of the delinquent property tax. 


In a bid-down state, there are a couple moving pieces in the auction.  One is the tax due + penalties, fees, interest, etc.  In the auction, that number is static - it will not change and it has to be paid in full.  The second variable is the Ownership Interest in the property.  It starts at 100% and then bidders bid down with the lowest ownership interest bid winning.  So the lowest bid wins?  That didn't really make sense to me at first, so I kept digging. 


Here is an example:  A property is up for bid, $20k due for taxes and I bid 100%.  Then Sardar Biglari comes along and bids 85%.  At that point, he would be the winner due to his lower ownership interest.  So the lowest ownership bid wins.  Ok, got that.


What did I just Win and Why would I even Want to Win a Tax Deed?


In my state, if you are the winner at the tax deed auction, you can hold the property for 3 years and if the owner does not redeem it during those 3 years, then you can file a suit to "quiet title".  If the owner does not come forth within 6 months of the quiet title suit, the property then transfers to you 100% REGARDLESS of your ownership interest bid at time of the auction.  And all you had to pay was the property tax for 4 years (the auction payment plus 3 successive years) and lawyers fees.  If you've selected a marquee property (and you should), then that is probably as good as it gets. 


That is the best case scenario, so let me present a couple other hypotheticals to show other potential outcomes, both good and bad. I'll use extreme ownership interests for illustrative purposes.


1. Say you win the auction with a 100% ownership interest and at the end of year 1, the owner decides to redeem the property.  In the event of that, the law states that they must pay you all taxes, fees, and penalties you had paid thus far, as well as a 5% penalty (based on tax liability) and 1% simple interest per month after you take over the deed.  So at a minimum, you should make the 5% penalty then start tacking on simple interest every month thereafter.  Also, the redeeming owner handles this transaction thru the municipality, so there shouldn't be angry mobs forming outside you bedroom window. 


2.  That same scenario applies if you win with a 1% interest in the property.  You pay the full tax liability at the close of the auction and continue paying the full tax liability as the months go by.  Upon redemption by the owner, you would be paid 5% penalty + 1% simple interest on the tax liability per month.  So in the case of a redemption - it doesn't really matter what percentage you own, you still get paid the same amount.  Again, those numbers are specific to my state, and I'm almost certain they will be different in other states, but I'd guess the general mechanism is somewhat similar.


Where Ownership Interest Comes Into Play


In speaking with lawyers who have fought on both sides of these cases many times, I was told that most frequently if it gets all the way to the "quiet title" suit, more times than not, the owner shows up and forces a sale of the property.  The owner is obviously not going to pay the taxes, so might as well sell.  This is where you r ownership interest is crucial.  In the event of a sale, you would receive proceeds from said sale in the amount proportionate to your ownership interest. 


Say you have a property that has an annual tax liability of $20k and suppose you make it to quiet title and a sale is forced.  If you've made it to quiet title, then that means you've paid 4 years worth of property tax, $80k, you've hired a lawyer to file suit, $3k, and you've probably had to do some sort of minimal upkeep on the property the last 3.5 years, $2k.  So you're in for $85,000.


Let's say the property will fetch $500,000 at sale.  Remember, at a sale, you get your ownership portion of the proceeds - not the taxes, interest, and penalties you'd get in a redemption.  Let's say you have an ownership interest of 40%. So how does that look?


$500,000 * .4 = $200,000

$200,000 - $85,000 = $115,000


Not a bad haul.  But is it worth your time? 


To me it seems that the key variables to know are:


  • Value of target property
    Annual Tax Cost and any potential upkeep / maintenance
    At what point does ownership interest in a sale eclipse the amount of cash outlay to service the taxes. 


The Bad and The Ugly


Let's say that same $500k property you have a 1% ownership interest goes to sale.  You get proceeds proportional to your ownership interest of 1% in this scenario.


$500000 * .01 = $5000

$5000 - $85000 (tax, upkeep, lawyer) = -$80000


That's obviously an extreme example and a terrible outcome, but I just want to illustrate how this can go wrong if your ownership interest in a sale will not be worth more than the tax servicing.  In light of that it appears to me that you must truly know the property's value, know the annual taxes and upkeep, and then keep an ownership interest that would in a sale yield above and beyond what you shelled out in taxes.  If you get enough equity in a forced sale, then eventhough money is tied up for 3 years paying taxes on a property you can't use, the IRR's can still be attractive. 


I have not done this before, but a friend told me about it and my interest got piqued so I started asking questions.  I thought the board might be a good place to get some feedback insights, etc. 

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I'm going to auctions in two different parishes that I know really well down here.  I have realtor connections that I can bounce valuations off of based on previous sales, and I can see that tax amount at the tax assessors office.  I'm going to calculate at which is the lowest ownership interest point that I could double my money at, and if the property goes below that threshold, then I just won't bid.  Not sure if I expect to bid on anything unless its a no brainer - but I want to be prepared.   

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Thanks for that info, Evolveus.  That is an interesting process they've come up with.  Louisiana always does things a bit differently.  Like I said I went to a tax sale in LA (baton rouge) and it was a tax lien sale.  Does this mean that the properties you are bidding on were the ones that wouldn't sell in the tax lien sale?  Or do they just not have the lien sales in these areas you are working in?


Have you talked to some people who have done this?  I'd like to hear how it has turned out for them.  I am assuming that most of the time the owner redeems fairly quickly and you get your 5% plus a couple months interest.  That was my experience with the tax lien sale.  That would actually be a great outcome if you could keep churning these, since your annualized rate would be higher the sooner they redeem because of the 5% penalty, and you'd probably have fewer expenses and headaches.


I would definitely be interested in hearing how this turns out for you.

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After reading this thread last night I ended up staying up way too late reading about tax sales in Pennsylvania.  Here are some details for anyone interested.


In PA there are two types of sales, Upset sales, and Judicial sales.


An upset sale is one where the property is sold for the tax amount due, but liens remain outstanding.  A buyer who purchases at an upset sale pays off the outstanding taxes and fees and receives the deed to the property, but all liens (including mortgages) remain.  This is the type of sale that someone losing their house would want to be purchasing at.  My impression is that banks are often the bidders here.


If a property doesn't sell in the Upset sale it's moved to a Judicial sale.  A judicial sale removes all liens from the property.  Purchases made at a judicial sale are free and clear with a few exceptions.  If someone enters into a mortgage between the announcement of the sale and the sale date that's not eliminated.  Neither are mortgages on mobile homes.


Lastly there are repository sales.  These are places that didn't sell at the Judicial sale.  They are held on a repository list and buyers can bid on them at any time.


I've been browsing some lists of properties, there are some interesting properties out there.


Some PA counties post lists of properties online.  Others will mail them to you if you pay a $5 fee.  Some others require a small fee in person, something like $8.  The rules are all over the place and vary from county to county.  From a few hours of surfing the best properties seem to be the ones that are rural.  There isn't the money or interest to purchase some of this stuff.  A lot isn't worth purchasing either, lots of small lots, side yards etc.

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One risk to consider is your ability to obtain title insurance on the property if you become the owner (or a buyer's ability to get title insurance when you try to sell).  Some of my friends have experienced huge issues obtaining clear title and title insurance when a previous owner accuses the municipality of doing something wrong in their process, which can keep you from selling a property you acquired this way (even after you have borrowed money to completely renovate the property).  A friend of mine was stuck with a New Orleans property for over a year longer than he expected while a previous owner fought and sued him.  The city was the one that allegedly messed up - but you basically can't sue the City of New Orleans in this situation according to virtually every lawyer in town.  Nobody will even try.  Add in potential lapses in mail service / required notifications due to Hurricanes and lost or damaged records and you've got a potential mess.  I've heard Louisiana is one of the least attractive states to do these types of deals, but it could still be worthwhile.  I've heard that Florida is more investor friendly.


edit:  One strategy that my wife has used several times successfully is to purchase blighted property from an individual or family that is about to lose their property to the 3 yr tax sale process.  Faced with a choice of losing the property for no net proceeds or selling to my wife for some amount more than the back taxes plus all interest and fees - many prefer to redeem their property and sell it just before the tax sale guy would take over ownership.

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I would be hesitant to get involved in anything like this in New Orleans.  I have a feeling that if you happen to be foreclosing on someone with connections down there you are going to have some headaches.  That is true anywhere but I think New Orleans is a place where you may run into more issues.  Especially if you are a !@#$ yankee like me.


I got a feeling attending some of these auctions that some of the bidders were a little too cozy with the county employees.  I think the new treasurer in the IL county where I attended is a good guy with integrity and he saw this and  implemented an electronic bidding system to make it fair.  That is nice, but unfortunately the properties I was interested in were all going for 1% so I lost interest.  I am wondering if money will flow out of these types of things and back into stocks now that animal spirits are starting to stir up.  We'll see.

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