How to Buy a House For Cheap: How We Bought a House for $10,000
First, I’m going to preface this post by saying this can be completely risky. However, if you know your area well and you know the cost of fixing up a property from the bottom up, this could be very beneficial for you. The method I’m about to describe is probably one of the riskiest ways you can buy real estate. It is definitely not for the faint of heart but, I bring it up because it is a good way to find great deals for cheap.
We recently bought our first flip property at the beginning of January. We actually bought this property at something called a tax foreclosure auction.
In this post, I’m going to go into detail describing:
- What exactly a tax foreclosure is?
- What are the risks involved with buying a house at tax foreclosure?
- What are the benefits of buying a house at tax foreclosure?
- How to minimize your risk with buying a house from a tax foreclosure auction.
- Is it worth it?
A tax foreclosure auction is basically an auction where you can purchase a home for the taxes that are owed on the property. For some reason or another, the current owner became behind on taxes for a period of time and they were unable to pay back taxes. After the homeowner is served several notices and isn’t able to pay, the home goes on tax foreclosure auction.
In our area, this is done at the courthouse and it is held once a month.
We started going to tax foreclosure auctions a couple of years ago. We would look up the homes listed for tax foreclosure, assess where they were located and assess whether or not they would be worth looking at. We use Zillow to determine whether or not a property is worth looking at. I go over our exact process of how we use Zillow in this post.
If we felt the property was worth looking at, we would go and look at the outside of the property prior to going to the auction. We would look at the neighborhood, school system and look at what it would be valued at on Zillow.
Usually, you will be bidding against several other Real Estate Investors so it can be very competitive depending upon the market in your area. Ours has become quite competitive as homes are quite cheap so we know that there will be competition and we come up with our bottom line number prior to going to the auction.
What are the risks of a house at tax foreclosure auction
You can find great deals on home at tax foreclosure auctions however, there are significant risks involved when you buy a house at tax foreclosure. The risks include:
- You are unable to look inside the home prior to purchasing the property.
- You are unable to have an inspection done.
- You don’t know if anyone is currently living there or if the property is livable.
- You may have to go through an eviction process if you want the tenants out if you win the bid. So that would involve paying a lawyer, going through the legal process, etc.
- You have to consider every single bad scenario that you can think of prior to bidding on the property and you have to know what the property is worth. Make sure that it is worth it prior to even bidding on the property.
- You have to have 10% down on the day of auction.
- You will likely not be able to finance or get a loan for the rest of the amount.
- You need to know if you live in a tax deed or tax lien state and know the difference. This article will give you a very good understanding between the 2 and it even gives you the US map and tells you which state does which type of tax foreclosure. We live in a mixed state but we did a title search on the property we just bought to make sure we knew what was going on with it prior to the purchase.
As I mentioned, we have bought two houses at tax foreclosure auction. The first house we bought was in a good area with a decent school system and after we bought the house we ended up going and meeting the tenants. We walked through the home and actually had our contractor walk through it with us within a few days of buying the house at the auction.
We realized that there was more work than we were willing to put into the property and it was not something that we wanted to do. We ended up posting the house on Craigslist and had three or four people interested in the home. In this particular case, we ended of reassigning our bid to another investor and we did not have to pay for the entire property. Essentially, we ended up giving that other investor our bid which worked out great. But it could have been a very bad thing if we hadn’t found someone else who wanted the property.
Our most recent house and the one we just bought for a flip we actually bought at tax foreclosure auction. We are planning on using it as a our first short term flip property.
We have a partner for this particular property so he is splitting all the costs with us.
We ended up looking at the auctions for this day and found this property and found that it was listed for under 10,000. Greg actually went to the auction and had the winning bid of $10,100.
He and our friend Sabre went to the house after auction and found that that it was vacant. We were able to discuss the home with the neighbor and found the no one had been living there for over a year.
Thankfully, this property ended up going much smoother than the first property we bought at tax foreclosure.
Our contractor was able to look at the property very quickly and we found no big issues. Most of the work that needed done was cosmetic.
We estimate the total renovation cost to be around $10,000. We will be all in on this property for around $20,000 and we are listing it for $49,900 and hope to list it at the beginning of March.
What are the benefits of buying a house at a Tax Foreclosure Auction?
There are some really great benefits to buying homes at Tax Foreclosure. The main one is the price of the homes. You will get them significantly cheaper than if you are competing with other investors for properties that are listed on the MLS. However, if your local real estate market is getting saturated, you will notice more and more investors that show up to these tax foreclosure auctions and you will be bidding against them. I just wanted to mention that as an aside.
Here are some other benefits:
- You aren’t paying realtor fees. Honestly, I am not against paying our realtor. She is excellent and she finds us great deals and she is worth paying, but if you are looking to save some money up front, this is a benefit of buying a house at tax foreclosure.
- You get the house for much cheaper. I mentioned this but it is worth mentioning again.
- You have immediate access to the home. You can get in, assess the property, talk to the tenants, figure out what you want to do with the property and just get moving. You don’t have to wait 30 days to close on the property.
- You won’t be financing the property. Well, I should say you won’t be traditionally financing the property. Maybe you have a private investor who you are working with, but again, you will have more immediate access to the property when buying through a tax foreclosure. You won’t need to go through a bank and do a bunch of paperwork.
How to minimize your risk at Tax Foreclosure Auction
So we have already talked about why it is risky to buy a house at Tax Foreclosure Auction. I want to go over some ways you can minimize your risk or at least go over how to analyze whether it would be worth it to invest in a house through the tax foreclosure auction.
Here are some ways to minimize your risk:
- Know what everything will cost. Know how much it will cost in your area for a new hot water tank, air conditioning unit, heating unit, windows, mold mitigation, the cost of a new roof, the cost of a lawyer, etc. The more you know about the costs in your area, the better prepared you will be if something like it actually comes up when you buy the house. It takes away the element of surprise and you won’t get nearly as worried when you walk through the house for the first time.
- Find your people. Ask around and find out who people are using for contractors, real estate attorneys, real estate agents, etc. Find out what the contractors charged other people for jobs that way you have an idea on what labor will cost. If you can do some of the work yourself that will save you money as well. Having an idea of these costs will also make it less risky if you buy a house through the auction.
- Do your numbers. Once you have the worst case scenario in your mind, look at what the property is listed for at auction and then calculate the estimated cost of renovation if everything about the property was bad. Look at Zillow to see how much the property is worth and what other houses in the neighborhood (of the approximate size) have sold for. Now, if you could get top market value based on Zillows numbers and your cost of renovation plus the purchase price is lower than what you could sell it for and you come out with a profit, (we aim for a $20,000-$30,000 profit), then it is a good buy.
- Make sure you stick to the number that makes sense for you. It is easy to get competitive in a bidding situation so make sure you are not going over what you know you need to stay under in order to make profit.
- Look at the exterior condition of the house. Drive by the house and look at the condition of the outside. Estimate those costs prior to buying the house. This will at least give you an idea of what you may need to handle on the outside. Look for things like roof condition, siding, gutters, garage condition, garage door condition, landscaping, fence, yard, sidewalk, etc. Have an idea of what these costs will be as well before making the purchase.
- Look for cars in the driveway or garage. You can see if someone is living there by looking for cars in the driveway or garage. Although we were fooled by our most recent purchase. The neighbor was actually parking his truck and car in the garage and driveway so we estimated the cost of an attorney and eviction in our purchase price.
Is it worth it?
In my opinion, it is 50/50 on whether or not it is worth it and it really depends on the area where you are investing. You need to be really careful where you decide to buy especially with tax foreclosure. We have seen people write on walls, damage drywall, stain carpets, let their pets do their business inside the home because they know they can’t keep the house.
It is a very emotional situation and I get it. But for you as an investor, you need to be smart with how you purchase these properties keeping everything in mind.
Tax foreclosure auctions are a great way to buy houses for cheap, but you have to keep in mind everything that could go wrong before even purchasing the property. If you do this and you can still make a profit, it is worth it.
When you are ready to list the property, make sure you know how to market it so you make the biggest impact the day it is listed. Check out these Home Selling Tips for Any Season. The posts on the website are from my friend Bill at Maximum Real Estate Exposure and there are lots of useful tips there!
You can also grab a copy of the Free checklist I created to help you estimate cost of repairs with a few tips on how to add value to a property.
You can check out the video of the property we bought at tax auction below.