Preparing for Tax Auctions in Texas

The work that you perform before you do your due diligence can be just as important as your due diligence itself. Lately I've been reading a lot of forum post about due diligence and the use of title companies and the cost correlation between the two. I've noticed that there are quite a few investors, both novice and seasoned, who throw money away trying to complete their due diligence and title work. Why does this happen?

I think first I should give how I define due diligence. Due diligence is the act of ensuring all available information on an investment is accurate and true. It is the action in which you as an investor should base your decision on whether or not you have a great investment.

Most (I won't say all) novice investors think hiring a title company is the end all be all of due diligence, to ensure that the title of the property is perfected. I only see this as one step in the entire process of due diligence, and shouldn't be relied upon as a sole source of information. I say this because as I was reading a forum thread, a comment was made about how does one find a good property at a tax auction without spending $30,000 in title company fees, if there is 100 plus properties up for auction.

The answer would be and should be due diligence. However, I think what you do prior to determining your plan of action (path of execution in due diligence), can be just as vital as the execution of your plan. I will give an example of what I am trying to convey as prior to determining the plan of action. A prequel if you wish to call it.

When I receive a tax auction list, I look for several things immediately, to begin the narrowing of my targeted desired properties. I do this to every list, every time.

1) First and most important: LOCATION! While I don't believe in bad neighborhoods, I do believe in overpricing of homes is a valid concern everywhere. Why spend time on a home listed for $125,000 in a neighborhood with a median home price of $50-$60k.

2) Preliminary Cost of Rehab: Newer doesn't necessarily mean it's better. While the most costly rehabs generally are done on older homes. I remind myself of the blog, I read where an investor paid $185,000 for the rehab on a house that was only 30 years old. Then I look at a home I passed on that was in bad shape, and had probably just as much cost for rehab, as the one in the post (Never buy from a hoarder).

3) Minimum Cost of Acquisition: My niche is in tax auctions, it live by them and boast about all the steals I or others I personally work with have made. I also make fun of those who don't follow rule número one, do your due diligence; that participate in the sales. They always bid more than they should and run up the prices on bad investments. The fools forget that they only need to win the auction by $1.00. So minimum cost is only $1.00 more than the next highest bid, and that needs to be determined.

4) Eliminate Losers: I won't look at a property that starts at the assessment, unless it is undervalued and is raw land. Average Mr. Wholesaler already wants to pay less than I did on the property, why give him ammo for his offer. So, if the minimum bid is greater than the assessed value, I generally pass on that property (there are exceptions to every rule).

5) Redemption Tolerance: I do not go to a tax sale looking for properties to be redeemed. I go looking for investments that will make me the most money. Almost 90% it is not a redeemed property that makes the most money. Texas has a pretty generous rate on the redemption of the property, 25% or 50%. I'm sorry, but 50% isn't worth two years of my time, unless I am earning cash flow at a minimal rate (<$100 mon). To me, redemption equals an investment failure.

6) Liens: I try and research liens to the best of my ability. Why? I hate filing title insurance claims, they are a massive headache and take forever. Title companies do and will miss something somewhere if given enough opportunities. I learned from a really expensive title company mistake involving Agriculture Rollback Taxes. Several title companies missed 15 tax accounts for one rollback, that eventually cost them $121,000 in claims. Get the title company to verify what you found, without telling them you already did a preliminary search.

7) Additional Taxes: I keep a threshold on how much additional taxes I am willing to pay outside of the actual tax judgement. In Texas, just because a judgment is rendered, a taxing unit may take several years to obtain a writ of execution to sell the property. This causes additional taxes to be due upon the purchase of the property.

8) Withdrawn Properties: Self explanatory, just remove from list.

By the time I have completed these 8 items, I have usually narrowed the sale list from about 100 properties to about 8-10 if I'm lucky. This is when my due diligence kicks in, and I begin to work on identifying the best of the remaining properties to try and purchase.

This brings me to my observation. I have done all this without employing a single title company.

Here is a case study to illustrate my methods. Actual home pictured above.

The October 7th, 2014 Tarrant County, Texas tax auction list contains a potential property that is steal. So following the eight steps above, I should be able to determine if the property is a viable option for investment purposes.

1) Location: Quiet established neighborhood, yes! Schools, some of the better schools in an otherwise, average mid size city school district. Access, to desired amenities, minutes from shopping, and entertainment, most definitely a plus.

2) This is hard to judge, the home upon inspection is occupied, and under the laws, I cannot disturb or trespass. Since there was no answer at the door, I cannot legitimately access this criteria. (Deal breaker).

3) Minimum bid is right at $24,000 and the assessed value of the property is $105,000. If the home sells for minimum bid or close to it, I can possibly withstand not estimating repair costs.

4) At $24,000 on a 3-2 in a decent neighborhood, this would be a great opportunity to wholesale. And since the property is only one fourth of the assessed value, it could actually be worth the risks. Even if there is $50,000 in rehab costs.

5) The property is in an estate, the likelihood of the property being redeemed within six months is slim. The heirs have not paid taxes in five years. But if some fluke were to occur, 25% in six months on $24,000 is an acceptable rate of ROI.

6) Liens, the meat of title company work, I found two, one mechanics lien and one mortgage, the mortgage had been released, and the other was from 1987. The mechanics lien will get released with the sale, and since the mortgage is paid, I see these being non-issues.

7) Additional Taxes, since the judgement occurred in early 2014, and Texas collects taxes in arrears, I would expect on 2014 taxes to be due. Estimated taxes is $2900.00 and within acceptable tolerance for the price.

8) this must be checked at reasonable intervals up until the sale date, every Friday until the week before the sale, then daily.

Overall rating on the property is a C-. I would rate this as a watch, but most likely won't bid unless I can get some more information from the residents. Are they the listed owners or renters? If they are the owners, will they be willing to sell the home for the back taxes plus $5000? Finally, can I get inside to see the condition of the home?

What did this cost me in terms of money, one hour of time and $3.00 for the gas to drive to the property and take pictures.