Tax Sale Investing: Pros and Cons

Have you heard about tax sales?  I was interested in them and the opportunity to get properties for pennies on the dollar.  I decided to attend several sales a few years back.  I even bought a house that went through this process.  No better way to learn than to participate!  I had preconceived notions and learned a lot in the process.  This is a quick write-up on what I learned to give you a perspective of the sale and process here in South Carolina.

The set-up:  The sales are normally run by an auction company or at least in an auction style format.  You will want to get to the sale early to register, if you haven’t done so in advance.  You will also want to get a good seat in the sale area where you can be sure you will be seen if you bid.  Go to the county webpage so you know the rules and process before attending.

Typical competitors:  There will be all types of people at the tax sale.  There will be institutional investors who might have several hundred thousand and more to place, neighbors interested in a piece of land, people just observing the process, family members who may make a quick speech asking for a given property not to be bid on in order to keep it in the family, and people who are interested in a good deal on a property and have done research.

Let’s talk about the Pros and Cons of Tax Sale Investing

Pros:

  • Potential to get a piece of land for a significant discount (back taxes owed + additional bid up).  There is a chance!
  • Potential to get 12% interest on a successful bid (max interest can not exceed opening bid)

Cons:

  • Institutional investors attend, going after yields and wanting to place a lot of money.  I have seen cases where properties were bid up to 80% of appraised value.  A safe 4-5% yield can be achieved in this manner.  When I first attended, I was disappointed, as I didn’t know to expect this.  If there is a nice house available in the sale, do not expect it to go for a low bid!
  • A lot of research is required.  Google Maps and County databases contain good information.  As with any purchase, be sure to check out the property in person before buying.  Perhaps the house seen on GoogleMaps was flooded and no longer exists.
  • Auctions can cause you to make emotional decisions.  You want to “win”, so be careful to bid up only to what you are comfortable placing.  It doesn’t make sense to win a bad deal!
  • Understand what you are buying.  Sometimes neighborhoods forget to pay taxes on common areas.  Sometimes you can find roads.  What would you do with a road or a landlocked neighborhood common area?
  • If you are a winning bidder, there is a 1 year redemption period.  If you buy a house, you can not go on that property.  During the 1 year period, the house could deteriorate or be vandalized.

For fun, let’s look at a few examples from a recent sale:

Example of a common area in a neighborhood.  A swimming pool is included!  Notice the properties are landlocked and appear not to have an access point to them, which is a definite sign to stay away!

You never know what you will find.  If you are a football fan here in South Carolina, there are parking spots in a USC Caboose tailgating area.  Be sure to do your due diligence to know exactly what it is you are purchasing.  Do you have access to party in the caboose on gameday?  That would be good to know in advance of placing a bid.

Here is a case of an entire street available.  If you win this bid, what would you do with it?  The possibilities are endless and fun to think about (put up a toll booth to earn extra cash?), but do you really want to deal with owning this piece of land?

If you have done your research, you will notice that there are people who are hyped up to participate in the auction and are bidding on properties sight (and site) unseen.  There will be people who buy a sliver of land in a floodplain, a drainage ditch, and tiny landlocked lots with no access.  Don’t be that person!

 

In Conclusion: 

Going to a tax sale can be interesting and fun.  Be sure to know the rules and realize there are other people working to get good deals.  If there is a nice house, you are not likely to get it as it will get a lot of interest.  Do your due diligence before bidding, including going to view the parcel in person.  In SC there is a 1 year redemption period, so be cognizant that a vacant home could deteriorate in that time.  There are niche areas where there are less competition you might want to consider (ex: empty lots).

Last but not least, buyer beware!  There is likely a reason the property did not have the taxes paid on it!

Have you been to a tax sale?

Leave a Reply

Your email address will not be published. Required fields are marked *