Transcript:
Welcome to the Tax Sale Podcast, where tax sale investing is made easy. My name is Casey Denman, I’m a tax sale veteran, the leading tax sale expert, author of The Tax Sale Playbook, founder of The Tax Sale Academy and I’m your host right here on The Tax Sale Podcast.
Thank you so much for joining me on today’s podcast episode. This is a completely free podcast and is brought to you through and because of The Tax Sale Academy. If you’re looking to learn more about investing in tax defaulted real estate, just head to TaxSaleAcademy.com. Again that’s TaxSaleAcademy.com.
On today’s episode we’ll be discussing standard tax sale auction properties AND over the counter or OTC properties. Many investors tend to compare these two strategies.
Now, before we begin let’s discuss exactly what they are. Every property in the tax foreclosure system will begin it’s journey there the same way – that’s when the owner of that property fails to pay the taxes on time. The county’s and city’s obviously need this tax revenue for a number of things so they’re force to take some type of action. Now, the specific action that they take will depend entirely on the laws in that particular state. I’ve got a link in today’s show notes to a state guide that breaks down each one of the states if you’re interested. One of those process is called the tax lien process, which we will not be discussing today.
Another type of process is called the tax deed process. So once the property is delinquent, the owner of that property will have a window of time to pay the county the back due taxes, plus any fees and interest the county is charging – this is known as redemption. If they pay what’s owed, then they’re good to go. Once it reaches the point where that redemption window has expired, however, the property will go through a tax foreclosure process. The owner will lose their real estate for failure to pay back due taxes. The specific vary, but the property will ultimately end up at a tax foreclosure sale. This is a public auction where the bidding generally starts at what is owed to the county and then goes up from there. That’s the standard tax sale auction process.
In SOME states, IF a property goes to the auction BUT no one bids on the property, then the property is available Over The Counter or OTC for short. Basically you’ll walk into the county, pay them what is owed on the property and walk out as the owner. In most situations, the price of the property will be what was owed in back due taxes, interest and fees – with that said, some states actually do discount the price and it’s possible to buy properties for extremely nominal amounts in certain situations.
So what’s the best route to take? We know you can get great deals at tax sales, but it also sounds pretty appealing to simply walk into the county and buy a property without having to attend an auction or bidding or anything like that. So what’s best? The answer is that it depends.
To take a look into this we must think about it logically.
There are a number of different reasons a property goes through tax foreclosure. Many related to the person and many related to the property. Once a property is lost through tax foreclosure, in most situations, it’s gone forever – the owner has lost the property by failing to pay the tax bill, which amounts to a fraction of the actual value. Because of this, many owners will find a way to borrow money, sell the property or otherwise take the necessary steps to stop the foreclosure. If you have a house worth, say $100,000 and you were going to lose it for a $3,000 delinquent tax bill you’d likely find a way to come up with the $3,000, even if you didn’t have a dime. You’d work more, sell stuff, get a loan, you’d probably figure something out. In short, the more motivation you have, the better your chances of finding a way to stop the problem.
Now, on the contrary, there are plenty of folks that want to stop their property from going through tax foreclosure but can’t – they simply aren’t able to come up with the funds despite how much they want to. So, yes there are plenty of nice properties available at tax sales – I’ve seen million dollar properties sell plenty of times and even strip malls with big box retail tenants, so there are nice properties.
Outside of that, you also have situations where property owners don’t have much motivation to prevent the tax foreclosure in the first place – an example could be, well, the person is dead. Not much motivation there, right? Other examples could include properties related to divorce, inherited properties, owners that moved away and don’t want the property or other personal issues.
Or and listen closely here . . . the property might not be all that motivating in the eyes of an owner. That’s such a big reason that we have so many vacant lots and abandoned homes available at tax sales. If a property doesn’t hold much value to you as an owner, you might just abandon it. Maybe it’s a rundown home or a vacant lot that doesn’t have much value to the owner, but COULD have value to us as tax sale investors. OR . . . maybe it truly doesn’t have any value – that easement, strip of land, the retention pond or otherwise worthless property. In other words, there is a very good property related reason that the property went through tax foreclosure. Some properties are even frequent flyers – in other words they go to a tax sale, someone buys it, realizes it has no value, loses it for taxes, then the process happens over and over again.
So if you were to take a sampling of real estate in any one area, you’ll notice that likely 99% of that real estate have value of some sort. When we look at a tax sale list, this number begins to decline sharply. Since it varies so greatly I don’t want to provide an estimates, but the percentage of properties that are worthless is certainly greater than 1%. Now, when we consider the fact that a property went through tax foreclosure, then went to an auction and NOONE in the room placed a bid on it, you have to understand that the properties that hit an OTC list have now likely been passed up by a number of people. So the percentage of worthless properties on an OTC list is even higher than that on a tax sale list, which, as mentioned is much higher than any other sampling of real estate. So it’s imperative you’re extremely cautious here.
Ideally, you’ll invest at both standard tax sales and through OTC sales, but only once you have the necessary experience and knowledge to know what you’re doing.
The standard tax sale will provide you the best selection, through this system, of properties to purchase. You’ll have the first shot at the most properties, at the highest quality.
Sure, you might be in a competitive bid situation and you might not buy the property at the lowest possible amount, but you should still be able to get a great deal, make some money and move on to more properties. There are plenty of ways to limit your competition – two examples would be by going to the mid to smaller sized markets instead of the larger ones and by going to auctions that are inconvenient for other bidders.
As a new tax sale investor, I suggest going to standard tax sales first. You can mitigate your risk by doing the proper research combined with a concrete and conservative maximum bid amount. And because of the volume of properties offered, you’ll likely find success sooner there than through most OTC sales.
So, why do I recommend beginners for to standard tax sales instead of diving into OTC sales?
It goes back to the property quality offered. At an OTC sale, you must be extremely cautious about what you’re buying – these properties have been lost by the owner and then passed up at a tax sale. Sure, the opening bid at the sale might have just been too high, but there could also be plenty of other property related reasons. You must have the required skills to really scrutinize every single little detail prior to walking into the county office or logging online and buying the property at a nominal price. I’ll routinely find hidden traps on OTC lists – properties that look good at first glance, but end up having serious issues.
Just a few days ago I saw the last remaining lot in the fairly new subdivision on an OTC list. I could’ve easily taken it at face value and bought it for nearly nothing, but after some digging it became obvious that despite being the same size as all the other lots, this particular lot wasn’t for building – it was supposed to be the neighborhood park but was never developed. To the naked eye, it looked just like any other lot in the subdivision.
When searhing OTC lists my suggestion is to do it early and often. Find properties the moment they hit the OTC list and then do your research and decide if you want to buy them. The properties that have been on the list for 5 or 10 years . . . ya, hundreds of people have passed those up and they’re likely not worth much.
Now, outside of finding properties the moment they hit the list, you can also develop very specific strategies. I’m actually closing a deal right now where there are 50’ lots in this particular subdivision – the county requires 75’ in order to build. One of these lots is on the OTC list for $500, because it’s basically worthless since it’s not buildable. BUT, it joins another 50’ lot owned by a private individual who is selling me his lot for $1500 – that lot is worthless on its’ own, but I offered to pay $1500 to get the deal done. I’ll buy both lots for $2,000 and join them to have a 100’ buildable lot worth around $12,000 now – I’ll actually be building a spec on it, but that’s one strategy to use. The point is that you either need to find that diamond in the rough the moment it hits the list, which yes, absolutely does happen, or you need to take a look at the properties with a very specific strategy in mind.
Buying through a standard tax sale can be extremely profitable. And so can buying OTC, when done correctly. In the end, my advice is for newer investor to start with standard tax sales and then work into OTC sales once they’re comfortable with their research and developing strategies to utilize. Both can be extremely phenomenal investment avenues.
I truly hope this helps you out! Thanks so much for joining me today. If this episode or any of our episode have helped you out, please take just a second to leave us some positive feedback on whatever platform your listening to us on right now. It truly means a great deal to us when you leave those positive reviews and I’m so very thankful for each person who has done so already.
For more information on tax sale investing, you can always check the links in our show notes. We actually offer an OTC specific investing class at otcclass.com or you can join the academy for all of our trainings including out otc class by visiting taxsaleacademy.com
Thanks again for listening. Take care and make it a successful day. See ya!