I just returned from teaching another successful course on tax deed investing in Houston, TX. It’s always amazing to me to see how many people show up to the tax deed auction, not having done their homework but still expecting to get the great deals that auctions can provide. Though the process can be lucrative, it can also be be risky if investors don’t research first and learn what the many pitfalls are with lien and deed investing. You can invest in tax liens and deeds to realize significant returns, but you need to know exactly what you are getting yourself into. Here are some tips to help you reduce the risks of investing at tax deed auctions.  

Perform the Due Diligence

You must do your homework before bidding at a tax deed auction to avoid potentially costly issues. Due diligence includes inspecting the neighborhood and property to determine the home’s actual value. In most cases, you will not be able to view the interior of the home. Go to the county assessor’s office to obtain information on the number of bedrooms, bathrooms and total square footage of the home. I have seen several homes advertised in the county’s register that looked great, but when I drove to the property, the home was simply missing. Last year that happened at least 3 times. Sometimes if the house is unoccupied, it gets vandalized and the county needs to demolish it for safety reasons. Often, property owners who fall behind on their taxes do not have the resources to properly care for the home. You could end up with a property that requires extensive repairs or upgrades to the structure and upgrades before it can be rented or sold. Also, hire a local title company or real estate lawyer to conduct a title search. The title report reveals if the home has other outstanding liens that will need to be satisfied in order for you to obtain a “free and clear” title to the home.  

Residential Properties Carry Less Risk

You can invest in tax deeds for residential or commercial property. For beginning tax deed investors, improved or unimproved residential properties—land improved with a structure or land only—makes the best choice. Improved properties mitigate your risk even further because you may find it difficult to sell vacant land. There are always exceptions to this. This month for example, I saw an ad for a 24-unit apartment building with the opening bid starting at $3500. Sounds great, doesn’t it? But upon doing our due diligence, the students and I quickly discovered that this was not a good deal. You can expect more competition for improved residential properties, but if you are looking for income, it represents your best option.  

Understand the Bidding Process

Make sure that you possess a clear grasp of the bidding process in the county where the property is located. Some states start with a minimum bid amount, and investors bid the price up.–the bidder willing to pay the most wins. In other states, you must bid the interest rate down and the lowest interest rate wins the auction. In Texas at the auction that I take my students to, there are actually 8 auctions going on simultaneously. This can be very confusing if you lack the training for this type of auction bidding. I have put together some free videos to better explain some of the details of how tax liens and deeds work. To find out more, Click Here.

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