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Recently, I was approached by a friend of my wife's, and she said that she and her husband were making a lot of money bidding on properties that went up for sale in our area, at auctions like this one, and then reselling them (without flipping or otherwise improving them).

I believe this is a "Tax Deed Sale" but I don't know much about it.

My wife and I have some money we've earmarked for making investments, but this sounds like a lot of reward, and I don't understand the risks. In my experience, risk and reward are directly related, so if there's a lot of money to be made, there's a lot of inherent risk involved.

I found a couple of books on the subject, but just the titles seem to indicate they're strongly for this type of investment and may not be the unbiased primer I'd want in order to understand them.

What kind of experience/knowledge should I have going into something like this? What are the risks involved in this type of sale, and how can I learn enough to know whether I'd be making a wise investment?

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Good question agent36! –  C. Ross Nov 2 '12 at 17:13

1 Answer 1

up vote 6 down vote accepted

You should read into the local and Federal laws that concern these kinds of sales. Potential pitfalls that I know of (there are probably much more):

  1. In many states, these "auctions" are rather random, and you can't chose the property you buy.
  2. Owners may repay the taxes, in which cases (depending on the local laws) you may have to give up the property back to the owner.
  3. You'll have to foreclose on the property to get full ownership on it.
  4. There may be time limitations as to what and when you can do (for example, I know that in some states you have to wait for a certain period of time before you're allowed to foreclose, several years).

Auctions in general mean:

  1. Many times you cannot inspect the property prior to purchase.
  2. You have to pay very quickly (and to decide very quickly).
  3. You will probably have to invest significantly in rehab and repairs before reselling.
  4. You might not get a title insurance
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What is it that I'm actually purchasing then? If they've got, say, an unpaid mortgage, does that mean the bank also has some rights to the property as well? –  agent86 Oct 3 '12 at 18:07
    
You're purchasing the debt. Yes, if there's a delinquent mortgage, it might be that you'll have to fight the bank's claims. –  littleadv Oct 3 '12 at 18:19
    
@littleadv, why would you bid on anything you cannot inspect prior to purchase? Also, in your point 2 above, doesn't the previous owner only have a certain period of time in which they can purchase back the property and don't they have to pay back the bid price plus a penalty to the new owner? –  Victor Oct 3 '12 at 22:56
    
@Victor - why? Because its cheap. Its a gamble. Yes, the time the previous owner can buy it back is limited, and the owner generally has to reimburse the bid. But there would be no gain, and wasted value of money, so that's a risk. The time can be anywhere between days and years. In the case of the OP, in Texas, its several months. –  littleadv Oct 3 '12 at 22:58
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@Victor - I don't know the details, really, that's what lawyers are for. The OP asked for the risks, and that's what I listed. If it worth the potential chance of getting 25% return? Maybe. Maybe not. Who promises that the delinquent taxpayer will pay the debt? Who promises that the bank won't foreclose first? Who promises that he can sell the foreclosed property for more than he invested in the purchase, legalities and repairs? No-one. But the expenses are pretty steep, and the 25% penalty on the taxpayer paying him off is the best scenario, not the usual. –  littleadv Oct 4 '12 at 0:34

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