Buying at tax sale?

[CSCU2014]

Does anyone have experience/insight of buying property at tax sale? The minimum seems very low. What to look for when researching a specific property? What are the risks? I am talking of buying for investment purpose. It says at the county website that anyone can object to the sale of the property in a year and no improvement should be made in the first year. What does this mean? Thanks!

[SD Realtor]

I have always been curious about tax sales but never did extensive research on tax sales. Every state has substantial differences and there are (or were) a few states that offered really nice deals for tax sales. Now I do not know California law at all because when I was doing research on this stuff, it was pretty clear that California was not a great state for tax sales compared to the way other states implement them.

Your particular question implies that once you bid at auction, even though your bid may be the winner, the original property owner has a year to object and can thus get the property back through the objection process, (in addition to paying off any penalties and all back taxes).

The one thing about buying any property through auctions that are from tax lien sales or trustee sales is that you need to research any other liens or judgements associated with the property. Because as the winner of the auction you will need to cure those at some time in the future.

As I said earlier some states had some pretty interesting things. For instance if you were the winner of the auction, you would get the property but again, the owner had a period of time to cure the lien even after auction and if they cured the lien you get your money back plus interest, and in some states that rate was pretty darn nice. In others it was lame… The cure time varied as well.

All in all it was really interesting. Research the heck out of it and do alot of legwork.

Of course like trustee sales these are cash deals, no financing.

[CSCU2014]

Thanks for your comment. If I want to research on a specific property, where do I get info about the liens? Is it public record?

[SD Realtor]

Yes if the liens are recorded you can go to the county assessors office on Pac Highway and see any and all liens.

[Hatfield]

The tax sale is held once a year at the convention center. It’s coming up – March 19. I had always been curious about these and I finally went several years ago and here’s what I learned.

* Dan McAllister himself runs/MCs the auction, and he’s a pretty funny guy actually.

* The vast majority of “properties” for sale are timeshares, which I think probably speaks volumes about timeshares.

* Many of the properties magically get redeemed a day or two before the auction, which means the list you see on the website isn’t really very representative of what actually gets sold at auction.

* At the auction they print out a book listing the properties with aerial photos and parcel maps. Costs something like $100 to buy the book and register to bid (which I did not do).

* As noted above, all encumbrances on the property transfer to the new owner. My guess is that if the current owner isn’t current on his property taxes, he probably isn’t current on a lot of other things either, so if you buy a property at auction it seems likely you’re also getting stuck a bunch of liens too. I don’t know whether the assessor would know about private notes or mechanic’s liens, so you’d want to research that as well.

* It seems like there’s a lot of smart money at these things. By smart money, i mean bidders who have run title searches the day before the auction and know the properties pretty thoroughly. The sense that I got is that you’re going up against sharks, and unless you’re a shark too you’re likely to get eaten.

* There’s also some amount of stupid money at these things. Once I realized that I was not the smart money and therefore this was not a game I wanted to play, I watched for awhile and then went back out into the lobby and chatted up some of the tax assessor clerks (who by then didn’t have much to do). They confirmed my suspicions about really, really needing to do your homework before bidding. One clerk chimed in and told me about a property in Julian that pops up every few years. On paper it looks great. The property looks fairly sizable but it turns out that it’s only large enough to put in a well, or a septic system, but not both. So there’s no way to get permits to build on it. She said that every few years somebody buys it thinking that they’re finally going to build their dream cabin up in Julian, only to discover that they can’t get permits for anything. It’s of no value to any of the neighbors because they know that nobody can build on it, so it goes delinquent and shows back up at auction.

* As for properties getting redeemed right before the sale, what’s happening is that some investor will track down the property owner and say “look, you’re about to lose this property and wind up with nothing. Let’s work out a deal so that at least you can walk away from this thing with something in your pocket.” That actually seems like a better strategy than buying the thing at auction, but it takes pretty big balls to approach somebody like that.

If you go, please report your findings! Would love to hear other perspectives on this process.

[SD Realtor]

Really informative post Hatfield.

[joeypants05]

So I’d like to take a swing at helping answer your question as I’ve been doing quite a bit of research on this since I’m looking at moving to southern California and there is very little information to be found on the subject. Skip to the end if you want to see the conclusions I’ve drawn for myself. Below is what I’ve found with references wherever possible.

1. Most properties initially listed are redeemed before the sale. See (http://www.sdtreastax.com/prior-year-sale-results.html) for actual sales numbers but in the last few years about 1/3 of all properties initially approved actually went to auction and fewer yet sold. In my simple logic I assume most homes are redeemed if the person is actually still residing there because scraping together 3-5 years of taxes and penalties is much more palatable then losing all of your equity in the home. Owners also have the option of declaring bankruptcy to delay or stop the tax sale.

2. Most properties that you actually want will not go for the minimum bid (unless you want some land in the middle of nowhere or something else out of the ordinary). I ran down a few of the prior year sales list (refer to the link in 1 for the prior year sales lists) and found that properties that seemed to have a house in an alright area went for well above the minimum bid. To give a few empirical points of reference a house in Carlsbad went for about 360,000 whereas the opening bid was 200,000, another property sold for 315,000 with an opening bid of 181,400 and another sold for 222,000 with an opening of 50,000. You have to assume there are investors there that will drive the prices up, by all likelihood it will still be below perceived market value but there is a level of risk involved and the sales are cash which keeps many out of the process as a whole. I’d speculate and say most banks won’t give you a loan for these properties and if you win a bid and fail to pay you forfeit the deposit. See (http://www.sdtreastax.com/deferred-payment-agreement.html) for deposit and when full payment would be due (it seems either immediately or within 30 days). To correlate properties to actual addresses easily I found that you can take the Assessor’s Parcel Number, go to (sdgis.sandag.org) put the number in and see where it is on a map along with other information.

3. From everything I’ve read the property sold at these auctions are free of most liens that you’d usually think would convey. There are some exceptions here including IRS liens (and/or I assume any lien that could be considered superior then the state tax), liens from local governments, mello-roos, lis pendens and others. See (http://www.sdtreastax.com/docs/important-information-for-bidders.pdf) and (http://www.sdtreastax.com/terms-and-conditions.html) for what can convey with the sale.

4. There is no redemption period as you might traditionally think about it. Technically redemption for the owner of the property ends at 5:00pm the day before the auction. The only other reference I found to redemption was if there is an IRS lien against the property the U.S. government can redeem it but they will pay you the full purchase price. See (http://www.sdtreastax.com/right-of-redemption.html).

5. All properties are sold as is and there seems to be absolutely no guarantees. It seems they will sell you anything at these sales and it is your responsibility to do the research. If the property is not up to code, has a bad foundation, is not developable etc it is on you to know that before buying it. See (http://www.sdtreastax.com/docs/important-information-for-bidders.pdf) especially the “CONTAMINATED PARCELS” section as a reference to what they mean by as is. In short if you buy the property with toxic waste on it then it becomes your toxic waste to clean up.

6. If I were going to buy a house at a tax auction I’d treat it like a foreclosure auction and do as much due diligence as possible. I would pick properties in an area I want and keep an eye on them until the auction approached. I’d gather as much information as I could about them (anything in city/county records) and I would try to get title insurance to ensure there are no IRS/other liens pending. If possible I’d try and find someone who has done this before and probe them for as much information as possible (buyers are listed on previous year sales so that would be a good place to start to track one down). I’d then set a price I’m willing to pay for the property with the appropriate amount of risk factored in. Then show up to the auction, see if any of the properties you want are actually there and if they are then sign up to bid. If the property goes over what you want to pay wait for the next one and if all of them do wait until the next one.

In conclusion I’ve decided this isn’t the best course of action for me as there is a very high level of risk involved, I’m unlikely to find a property in the area I want and while you can get a deal it won’t be that spectacular after you spend money researching the property and fixing it. If you are not looking for a specific area, have the money on hand, know a lot about real-estate, can do some of the handy work yourself and are willing to take a very high risk then it might be worth pursuing.

[CA renter]

Thanks to Hatfield and Joeypants for your informative posts. Great info!

[Author]

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