Last month I had a guest post on the 1500 days blog in which I discussed two major events in my life that gave me a leg up on financial independence before I even knew such a thing existed. One of those events was the purchase of undeveloped land through a tax foreclosure auction.
In 2000 my wife and I bought 3 acres of land about 3 miles south of downtown Raleigh. At the time the assessed value of the land was $104,000. We bought it through auction for $30,000. Three years after the purchase we completed construction on a new house and have lived there ever since.
I don’t claim to be an expert in tax foreclosure auctions, but having done it once gives me a lot more experience than most. In fact, I’ve read a lot of personal finance blogs but this is a topic I’ve never seen discussed, so I thought you might be interested in learning more about this process.
Tax foreclosure auctions can be an excellent way to purchase property at drastically lower cost than what you would pay on the open market. It does require legwork, patience, and flexibility, but there are incredible deals to be had.
Below are 11 key lessons from our experience.
1. Get to Know Your Local Resources
How do you even find properties that are to be sold at a tax foreclosure auction? We relied on dumb luck – I don’t recommend that route. We literally lived next door to the property we eventually bought. We only learned that the land was to be sold at auction because of the sign pictured above, which was nailed to a tree in front of the property.
Local Revenue Department. A better way to learn about properties to be sold at auction is to check out your local revenue department’s website. We live in Wake County and as you’ll see on the Revenue Department’s site, information on foreclosures is one of the first links listed.
The foreclosures page provides information on the auction process and also lists properties going through the foreclosure process, including the amount of taxes due and the date of sale.
County Real Estate Data Site. A second resource to become familiar with is your county or municipality’s real estate data website. These sites allow you to look up real estate records on all properties in the county. The Wake County Real Estate Data site provides the assessed value for each property in the county and also provides a list of recent sales in the immediate area of the subject property.
The assessed value is how the county values the property to determine property taxes. Assessed value and recent sales give you some idea of the property’s actual market value.
2. Go to a Tax Foreclosure Auction Before You’re Ready to Bid
Going to an auction before you’re ready to bid helps you become familiar with the process and gives you an idea of what to expect. Once you’re ready to start biding on properties it’s helpful to know the lay of the land.
I found the scene on the day of our auction to be not at all what I expected, which rattled me a bit and put a slight dent in my confidence. I was expecting a scene like the auctions I’d seen on TV. A big room, lots of people with numbered bid paddles, and an auctioneer running the show and driving the bidding.
Nope, none of that. The auction was in one small corner of the lobby of the courthouse. There were maybe 6 to 8 people there to bid. The person running the auction was not an auctioneer and did nothing to drive the bidding. She simply told us where the bidding would open and from there left it to us to call out our bids.
We were all standing in a fairly small circle so it had the feel of a high stakes poker game. We were literally staring our competition in the face and trying to win the game but not show our hand.
Going to an auction you don’t plan to bid at also helps you figure out some basics like how to get where you’re going, where to park, and how to find the auction room. Auctions can be nerve wracking. You don’t need the added stress of trying to figure out parking before you start bidding.
3. Have an Idea of Where the Bidding Will Begin
A key difference between a tax foreclosure auction and a standard foreclosure is that the revenue department is only trying to collect on back taxes owed, interest and any costs they have incurred in bringing the property to auction.
They aren’t trying to get top dollar or cover remaining amounts owed on a mortgage. Because of this the bidding is likely to open at a far lower amount than you might expect.
The bidding on our 3-acre property valued at $104,000 opened at $12,000. When I heard this number called out I was stunned. We should’ve done our homework and known this ahead of time. It would’ve been easy enough to find this out by placing a call to the revenue department before the auction and simply asking where the bidding was likely to open.
4. Set Your Own Bid Limit and Stick To It
This was the one smart thing we did in preparation for the auction. We set our upper bid limit at $50,000. We simply were not going to go over that amount. If the bidding went higher than that I was mentally prepared to walk away and let someone else win.
It’s not that the property wasn’t worth over $50,000, it’s just that we were inexperienced and very nervous about taking on an uncertain amount of debt. Setting our own limit and being ready to stick to it gave us a hedge against taking on more debt than we were comfortable with.
5. Be Ready To Make a Deposit
This seems obvious, but it’s worth pointing out: be prepared to put down any required deposit the day of the auction should you be the winning bidder on a property.
In our county winning bidders are required to make a 10% deposit payment at the conclusion of the auction. Our winning bid was $30,000 so we had write a check to the county for $3,000.
It wouldn’t surprise me if most municipalities still require a deposit payment to be made by check. So don’t forget to dig out your checkbook and bring it with you.
6. Understand the Auction Process from Start to Finish
This is absolutely critical. We almost lost the property we’d won at auction because we didn’t fully understand the process.
Our county has what’s known as an “upset bid process” which is a 10-day period after the actual auction when anyone can submit an upset bid as long as it is higher than 5% of the winning bid, or $750, whichever is greater.
The trick with upset bids is that you have to go to a different office to make them. Instead of going to the Revenue Department to submit your upset bid you must go to the Clerk of Superior Court. And the Clerk of Superior Court will not give out bid information over the phone. If you want to submit an upset bid or find out if anyone has placed one you must go to the Clerk of Superior Court in person.
We knew about the 10-day upset bid period, but we didn’t know that we could’ve been checking throughout that period to see if any upset bids were made and placing our own counter bids (upset upset bids?).
Instead we left things to chance and were both nervous wrecks for the 10 days after the auction just waiting to see if we had truly won. After the 10-day upset period had elapsed we finally got a call from the Revenue Department letting us know that there had been no upset bids and the property was now ours – as soon as we paid for it.
7. Have Any Required Financing Lined Up In Advance
If you’re planning to finance a portion of any property you purchase through auction make sure you have your financing lined up in advance!
This is incredibly important. Our lack of planning in this area almost killed the deal.
We had set our bid limit at $50,000 but we didn’t have $50k sitting in the bank ready to go. If we were fortunate enough to win the auction I naively assumed that we’d just take out a small loan to pay for the property.
Even if we won the auction at our maximum bid we’d only need to borrow $45,000 after putting down a 10% deposit. We both had good credit scores and steady jobs so I thought getting a loan for this amount would be a piece of cake.
Not so fast my friend. We quickly learned that getting a loan for the purchase of undeveloped land is a whole different ball game.
The reason it’s more difficult to finance land is because land purchases are a much greater risk to lenders.
With a financed purchase of a home the borrower has a much greater incentive to avoid foreclosure. Going into foreclosure on your residence means you and your family need to find a new place to live. If you default on a loan for undeveloped land you lose the land but not the roof over your head.
Any loan default is going to ruin your credit rating, but if someone default’s on a land loan it’s not going to result in them being evicted from their home. So it’s a lot easier for a borrower in dire straits to simply walk away from a land loan.
Similarly, it’s a lot easier for a lender to off-load a foreclosed home since there’s a much bigger market for homes than there is for undeveloped land. The lender may have a much more difficult time recovering funds if they need to sell undeveloped land.
In the end, our lender required us to write a letter explaining how we intended to use the land. We both had to sign the letter and, as I recall, we also had to sign a document at the closing agreeing to the condition that the loan was only made for the purchase and use of the land as described in our letter.
Keep in mind that this was all before the financial crisis and the collapse of mortgage-backed securities. Since we’ve been through all that mess I’m sure there are even more hoops to jump through if you want to borrow to buy undeveloped land.
Figure this out in advance! I can’t stress that enough.
8. Make Sure You Can Access Your New Property
If you’re bidding on undeveloped land like we were make sure you can secure access to the land. We were fortunate that our land had frontage on a city maintained road.
You’ll want to check to see if there are any easements on the property you’re bidding on, or if an easement on someone else’s land is required to access the property you’re interested in.
You don’t want to buy property you can’t get to.
9. Have a Plan for Water and Sewer
Again, with undeveloped land, make sure you have a plan for getting water to and away from any future dwelling.
Our property is inside the city limits so we had access to city water and sewer lines. However, I learned that making the connection to city infrastructure and running the pipes on to our property required a specialty contractor to run about 12 feet of new pipes from the road to just over our property line. After his three hours of work I wrote the utility contractor a check for $5,000.
If you do not have access to municipal water and sewer plan to pay much more than $5,000 to have a well dug and a septic system installed.
Check with your county health department to find out how the well/septic permit and inspection process works. Ideally you would know ahead of time whether or not the land you’re interested in has suitable soil for a conventional septic system.
10. Look for Property that Appeals to You, But Has Drawbacks for Others
If there’s a pro tip in this post it’s this: If you can find property that suits your purposes but isn’t ideal for your likely competition then you might be looking at a sweet deal. This was the case for us.
Our property has a small creek running through it and there is also a utility right-of-way that crosses the property on the opposite side of the creek. We love that we have a creek and a small flood plain on our property. It’s a built-in water feature that attracts wildlife. We benefit from the right-of-way as well because it serves as a walking and biking path.
But a developer looking to maximize the profitable use of raw land would find a creek and flood plain less advantageous since they reduce the amount of build-able land on the property. The utility right-of-way has the same effect.
These features gave us a strong advantage in bidding against the developers at the auction. We were all bidding on the same piece of land, but the presence of the creek and the right-of-way made the effective size of the land smaller for the developers.
11. Understand Zoning
Make sure you understand the zoning of any property you’re interested in.
Our property was zoned R-4, which means it could have up to four dwelling units per acre. Again, this made the property less desirable to developers because it only allowed for low-density residential development. If the land had been zoned R-10 or higher (R-10 =10 residential dwelling units per acre), then the economics might have been much more appealing to developers.
It is possible to get a zoning variance that allows you to deviate from existing zoning, but that can be a long process and there’s no guarantee you’ll get it.
So there you have it! Eleven takeaways from the sweetest financial deal we’ve ever made. I’m certain there are still sweet deals to be had through tax foreclosure auctions, but, as I said at the beginning, it’s going to take some legwork, patience and flexibility in order to capitalize on them. Hopefully the lessons learned from our experience will give you a head start.
I would love to know if any readers have ever purchased real estate through an auction and what your experience was like. Thanks for reading and let me know what questions you have in the comments.