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Tax Lien & Tax Deed (2) – The First Auction
Continuing from the previous post, my focus is on real estate debt auctions and real estate property auctions. For those unfamiliar with this field, in brief, debt auctions involve purchasing the debt of a property owner who owes taxes. I can attend the auction to buy this debt and earn interest. Depending on what transpires next, the property owner may redeem the debt within a specified period by repaying the principal plus interest, closing out the transaction. Alternatively, if the property owner doesn’t redeem the debt, I have the right to acquire the property at an extremely low price (this is an extremely simplified version of what really happens but you get the idea). Property auctions, on the other hand, involve bidding against others to potentially acquire property rights at a (supposedly) low price when the owner is in tax arrears.
So, my first step is to understand the rules in each state. I filter out states where the returns on debt are lower than what I could achieve with my current strategy (as per the third principle outlined in the previous section, namely legal lending lol), which eliminates about 90% of the workload 😂. Then, I look at the redemption periods for the remaining counties and eliminate those with excessively long periods, leaving only a few scattered locations – fewer places but likely with more competitive bidding. Next, I further filter these based on factors such as population, economy, trends, etc. Finally, I contact each county one by one via phone, also filtering based on convenience.
Next, I gather the auction records of potentially high-yield counties from the past few years, filtering out assets I’m not interested in (such as agricultural land, wetlands, etc.). After researching each remaining asset, I find that bidding has squeezed out most potential returns. In other words, while theoretically you could achieve a 20% return, in reality, winning bids only yield 3-5%, sometimes even 0%. Only a very few counties still have a high probability of achieving over 10% returns. (I’ve created a list for myself; this list can help you achieve over 10% annual returns. If you are interested to get the list, feel free to reach out)
Applying the same method to property auctions, I narrow down to a few counties where it’s still theoretically worth attending. Then, based on the auction dates in these counties, I schedule all the auctions for the year and attend accordingly, sharing the auction experiences and results with everyone.
Having outlined the general approach, let’s move on to my first auction.
For the first auction, I chose Buffalo, where I can make a round trip on the same day and be back home to say good night to my baby!
You see, often after thorough research, the decision comes down to practical considerations such as putting my kid to sleep, haha.
I set off at 6 a.m. – never in my life had I have to get up sooo early! It’s the first time I’ve seen the highway ramp near my home completely empty – sometimes it takes me 45 minutes just to get from my garage to the front door because of the traffic 😂.
I also enjoyed the sunrise on the way, arriving at the Buffalo City auction center at 8:55, just 5 minutes before it started. Then I realized, there were two mounted police officers at the entrance 😂, and surprisingly, there was no parking lot at the convention center; I had to park in the nearby open-air parking lot. This lack of infrastructure made me think there might not be that many opportunities here.
While getting my ticket for parking, I noticed that everyone in line was eager to enter, mostly South Asian, Middle Eastern, and Mexican people. My gut feeling grew stronger – maybe I shouldn’t have high expectations of the opportunities here today
Stepping into the venue, oh boy, they said there’d be little competition at the auction, but it looked like there were at least a thousand people! There weren’t even enough seats; some people were standing in the corridors and at the back. I observed that roughly one-third were white or black, one-third were Hispanic, and one-third were from the Indian subcontinent and the Middle East. With this ratio, I guess there’s little chance of making money.
Fortunately, I was alone, so finding a seat was relatively easy. I chose the first empty seat I saw, quite close to the front and near the aisle. The people around me seemed local, which was good for gathering information, so I sat down.
The auction was quite casual; county government officials explained the rules on stage and then called out bids for each asset, all of which participants must understand beforehand. So, if you’re just here to listen to the rules now, you’re screwed. Also, you must have already identified the assets you’re interested in and done due diligence before the auction (I’ll share detailed due diligence after the auction). Majority of people already knew what lots they would bid on and for how much, along with a check.
The auction began; there were over a thousand assets of various types – vacant land, residential properties, agricultural land, hotels, etc. As long as the property owner in the county has not paid taxes for a certain period, their property is listed for auction, with different years listed. For newcomers, the most efficient and straightforward method is to only look at the latest “fresh” listings while filtering out all non-standard assets. What’s left are the straightforward residential properties in good areas, which can filter the assets to a few hundred or even dozens. This makes it very clear whether there’s room for profit or not.
The show began. In less than 20 minutes, my pessimistic forecast came true. I’ll share the real experience and real data next time, stay tuned!