Buying real estate at an unpaid property tax auction can be extremely lucrative – if you do it correctly. But many buyers make significant errors that erase any profitability and can even lead to losses. So what are the top four things that any buyer needs to avoid at these auctions?
Getting caught up in the bidding – times in which the “winner” is the “loser”
Auctions can almost be hypnotic. You have a price in mind, but things just keep inching up and you keep saying to yourself “why not go up another $100 – it’s not that much more than my last bid”. Thousands of dollars later the gavel falls and you just bought that house you thought was a great deal at a $5,000 price for $12,000 instead. The best way to avoid this type of result is to set a maximum price you will pay beforethe auction begins and stick to it. Don’t let “auction fever” mess you up.
Not doing due diligence in advance
Buying a property at auction does not mean that you can just blindly hope that what your buying is worth what you’re paying. You also can’t assume that the person will redeem their taxes and the property will never be your responsibility. Instead, you have to do full due diligence in advance of the auction to make sure that the property is in complete accordance with your expectations. If you don’t know anything about a property then you have no business bidding on it.
Thinking that something sounds “cheap” without knowing what it is
Some bidders are tempted to do “crossover” bids on properties that they never thought about bidding on until that very minute. They have done no due diligence, nor do they even know where the property is located at. Here’s the problem: it may not be worth even a fraction of the bid. Don’t be confident that “at that price it has to be a deal” as there are many properties out there that are not worth a fraction of the bids. Always remember that there may be a good reason why someone stopped paying the taxes.
Not having the capital to fix up the property
Many properties that you can buy for unpaid property taxes need substantial repair before they could be sold or rented. It would not be uncommon for a house that can be purchased for $5,000 at tax auction to need $25,000 or renovations just to be able to obtain a permit to rent or sell. Therefore it’s essential that you budget in the amount needed to fix up the property and have that capital available to you. The total cost you are really paying for the property is the sum of your bid plus the cost of all needed repairs – not just the bid alone.
Conclusion
Buying properties at unpaid tax auctions can be a great investment strategy. But there are pitfalls that can negatively impact you. These tips will keep you in the correct zone for profitable investing in this unique sector of real estate.