Don’t LOSE YOUR SHIRT in an Overbid Tax Lien Auction

Don’t LOSE YOUR SHIRT in an Overbid Tax Lien Auction
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Have you been hesitant to invest in states with an overbid auction?  Has the thought of bidding up to 30%, 40% or even more of the assessed real estate value kept you away from certain state tax lien auctions?  I’ll discuss several tips and strategies that will minimize your risk of loss and maximize gains in these states.

Not familiar with an overbid auction?  In a nutshell, bidders are allowed to bid up the price of the tax lien over and above the initial opening price (usually this opening bid is the amount of delinquent taxes).  This amount over the opening bid is called the overbid and may or may not earn interest depending on the state.

Bidding in overbid states requires much more due diligence than other tax lien auctions.  You must be familiar with the actual market values of the properties you’re bidding on—don’t rely on the assessed values or old comparable sales.  Talk to local real estate agents and get a feel for what you can really get for the property if you are awarded a tax deed.  Almost every property I’ve received deed to in these states has needed serious repairs or upgrades.  Thus, the actual market value of the property may be nowhere near the price of neighboring homes—so, discount your valuations of the properties you’re bidding on more than you think.  In the case of tax sales, overly optimistic assumptions have caused more losses for investors than anything else.

Now that you’ve gone thru your list of properties you’re going to bid on and you discounted their values appropriately, it’s time to figure out how high you’re going to bid.  First, be familiar with the mechanics of the auction. For example, in South Carolina, the interest you earn is capped to the amount of the opening bid (about two times the taxes owed).  If you bid too high, you may only receive a small return on your investment.    Next, get a feel for how competitive the auction is by looking at past auction results and talking to other investors who have experience in these auctions.  In really hot markets, I’ve seen bidding go as high as 75-80% or more of assessed values.  In my opinion, this is a huge risk and may be worth avoiding the auction altogether.  However, most auctions nowadays typically only bid up to half the value of the property or less.

For each property you’re going to bid on, pick a number that you’re comfortable with if the property does not redeem and you receive a tax deed.  Due to the short, one-year redemption period in South Carolina and Indiana, receiving a tax deed happens more than you would think.  Keep in mind that you will be responsible for legal costs to clear title, additional taxes that accrue, municipal fines, and closing costs if you sell the property.  When I determine my max bid amount on each property, I take my conservative market value, then subtract out the potential costs described above, and finally make sure I have some room to make a profit.

Finally, if you have not been to many auctions in the past, my number one tip for you is to not get carried away by other bidders in the auction.  You may see properties you’re interested in go for amounts way above your limits.  Stick to you guns and don’t change your bidding parameters just because someone else is bidding up the prices.  Have patience.  A lot of times, near the end of the auction, these bidders have run out of money and the competition for tax liens subsides.  Sometimes, not bidding on a property is a much better option than paying too much for the lien and losing your shirt on it.

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