Even when insanely busy, I’m pretty much always scheming. The scheming actually is probably directly proportional to general busyness, especially when doing lots of manual labor, as my mind inevitably begins to wander and ponder assorted things.
One area of real estate investment I’ve been looking into the last few months are tax deed sales. It differs from state to state as far as how they’re handled, but in Texas if you don’t pay your property taxes, the county you live in will eventually auction off the deed to your property. The auction is typically held on the first Tuesday of the month on the county courthouse steps, and is usually conducted by the sheriff. The minimum bid for properties that are being auctioned is the total amount of back property tax due, but the final bid of course can be higher if multiple bidders are interested in bidding.
If you’re the winning bidder, you pay up and get the deed to the property. It’s yours. Depending on whether the property had a homestead exemption or not, the previous owner then has a period where they can pay the back taxes plus a 25% penalty fee, if they want to reclaim the property from you and get the deed back. If the property had a homestead or ag exemption (or had one in previous tax years), the previous owner has 2 years to find the cash to get the deed back, with a 25% penalty assessed each year. If the property didn’t have a homestead or ag exemption, the previous owner has six months to pay up and redeem the property.
While many of the properties that go through the tax deed sale process are vacant lots or empty acreage, there are usually quite a few properties with houses on them. Since the minimum bid is for the past taxes due only, there’s the potential for buying properties at a huge discount, literally for pennies on the dollar. In our area I’ve seen somewhat run-down small houses in sketchier parts of town go for as little as $2,000 at auction. If they aren’t redeemed by the owners, after the redemption period expires you own the land and property outright, and can immediately turn around and sell it as-is. Even if you only get $20,000 for the run-down house, well, that ain’t bad.
Remember, too, that if the owner does redeem the property, you make a minimum 25% profit on your investment, due to the penalty fees assessed which you collect. So it’s not the end of the world if the property is redeeemed, as you still make money. In fact, some investors only bid on properties they think will be redeemed, as they’d rather steadily collect 25% returns on their money than deal with any issues of owning the property outright.
One huge thing to note, though, is that the auction does not extinguish all liens on the property. Some liens survive the process, so you have to be pretty careful when bidding on properties, as you could find yourself holding the bag for all sorts of money owed to the IRS, to hospitals, builders, etc. This is the main reason whyinvesting in tax deed sales isn’t a slam dunk, as you have to either learn how to competently do title searches or pay a title company to run searches on all the properties you’re interested in bidding on at the tax deed sale, which can get expensive pretty quickly.
Another major disincentive is that if the house is occupied at the time of the tax deed sale, you’re placed in the unfortunate role of grinch. Once the tax deed sale is complete and you buy the deed, it’s highly recommended that you evict the people living in the home (who are usually the owners). While they can still redeem the property during the redemption period, you control the property once you hold the deed, and little good comes of letting them stay in the home. More often than not, people are pretty pissed at the situation and not inclined to keep the home in good repair, if they don’t plan on redeeming it.
You also can’t immediately start work on the house once you have the deed, due to the redemption period. It’s a bit of a gray area, as you’re reimbursed for certain necessary expenses during the redemption period, such as insurance costs, or for fixing a hole in the roof that would cause major damage to the home if left un-fixed. If you paint the place and put in new carpet, though, and the home owner redeems the property, you’re typically not reimbursed for that, as it’s not a necessary expense. So you basically have to sit on your hands until the redemption period expires, which can take up to two years.
The list for the next sale in May was just posted to our county’s Appraisal District website (some counties have the info online as far as properties coming up for sale, others don’t), and I spent yesterday checking out some of the listings. Most were duds or had 2 year redemption periods, but I did find one that I probably will go ahead and have a title search done for.
It’s on the sketchier side of town and is currently abandoned, with the windows and doors boarded up. It’s an older frame house, built in the 1930′s, and from the property tax records it looks like the owner died and her heirs never paid the taxes after that point. It’s on a double lot, though, nearly .4 acres, and the minimum bid is $2,700. Despite being abandoned, it’s not in terrible shape, and the roof actually looks halfway decent. It’s not slumping or about to keel over, and I managed to climb on some junk and peek in through a kitchen window that wasn’t boarded up. Couldn’t see much inside but the kitchen was crammed waist-high with all sorts of stuff, not junk or trash but stuff like boxes, old-fashioned gas lamps, dishes, etc. There was also an attached shed that was completely falling down, but had lots of scrap steel inside, and there was tons of scrap and stuff in the yard.
The odds of it being redeemed within the 6 month period are pretty slim, so if I was the winning bidder I’d probably end up owning the place. The tricky part is that it’s not like buying a home and inspecting the property, as you’re basically bidding sight unseen (other than poking around, err, trespassing, like I was doing yesterday). So there’s always the chance that I could buy it, discover that there are assorted costly issues that make the house unsalvageable, and be stuck with an abandoned house.
That’s pretty unlikely, though, and for a purchase price of $2,700, even with the worst case scenario I could probably still make a little cash simply from selling the scrap and anything else salvageable, paying someone to level the house, and selling the lot. Plus I have to admit that the treasure hunt aspect of it is kind of intriguing, as far as buying a house with who knows what inside, sight unseen.
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