Oakland County, Michigan, in which we reside, held a property-tax foreclosure auction for three consecutive days in August. Over 1,100 properties were scheduled to be auctioned off.
In previous years, I had paid little attention to these auctions. And, based on previous year’s experiences, most of our investor friends in town were not too thrilled about them. Some commented that those who clearly did not do their homework were bidding the prices up too high. Others said that a few big-time investors bought up just about everything else and that there was nothing of value left for those who were small-time investors – like us. Their conclusion was that the time it takes to conduct due diligence made no financial sense vis-à-vis what you get out of them.
As a licensed REALTOR®, I was invited to watch a video training program in which the auction process was to be explained. Despite the less-than-enthusiastic reviews by our investor peers regarding the event, because of my recent decision to focus on wholesaling, I could not resist the opportunity to check it out and see for myself how it worked. I was able to sign up for the August 16th class. The auction was to start ten days later. Due to the short length of time, I looked at this year’s event as a learning experience for future auctions.
At the training session, a list of rules and regulations was provided. I reviewed all of them and put every single item on a spreadsheet. The due diligence I would need to conduct for each property was laid out in a matrix format, leaving little room for accidentally forgetting something. This would help me evaluate each property systematically for future auctions – if and when we choose to participate. For the ten-day period between the class and the auction, my every waking moment was devoted to setting up the system.
Also provided was a list of nearly three dozen “cream of the crop” residential properties to be sold at the auction. For each of those properties on the list, the County Treasurer’s Office provided a lock box – so that those who are licensed can show the property to potential buyers. David and I checked out a dozen or so properties on the list ourselves. Then I conducted due diligence on each of them. It is indeed labor intensive and time consuming.
One of the most important aspects of due diligence, of course, is to determine the bid amount. It would be a good investment when there is plenty of spread between the market value of the property and the maximum bid amount (MaxBA). Armed with the market value and the repair estimate for each property, figuring out the MaxBA, beyond which we would stop bidding, was easy.
In order for us to experience every step – from start to finish – involved in participating in the auction, David worked with his third-party custodian for his self-directed IRA to have a cashier’s check issued to the Oakland County Treasurer. Now, we were 100% ready to place a bid.
The auction day arrived. We brought with us seat cushions, bottled water, granola bars, etc. And we were all set to follow along the list of properties as the auctioneer began the bidding process in an alphabetical order of the city names.
- We learned that it might be a good idea to focus in on one city – so that we wouldn’t have to sit through the event for many cities for multiple days.
- Furthermore, doing due diligence for one city is much less complicated than otherwise.
Shortly after a half-hour-lunch break, the auctioneer started out with the city of our favorite-property choice. The excitement was building. The starting-bid amount (that the county is owed by the property-tax-foreclosed owner) was called out for “soon to be our” property. David put up his paddle, which indicated our bidder number. In a flash, the bid amounts by other bidders were far above his cashier’s check amount. (This is a fantastic way for the county to more than offset the revenue losses from the non-payment of property taxes.) Approximately 160 hours of preparation leading up to this moment (not counting the time David had spent) was over in less than three seconds with no property to show for it. At that moment, I understood what some of our investor friends were trying to tell me all along about participating in these auctions.
Although I’m licensed, I am an investor, first and foremost. So my end-customers have always been David and me. With wholesaling, my end-customers will be other investors. As a result, in the future, I will avoid checking out those properties on the “cream of the crop” list. Why? Well, many of them sold for far above the MaxBA, leaving little room for us to make a profit by bringing good deals to our end-customers. In fact, some of the “cream of the crop” properties sold close to and, at least in one case, for more than the market value!?
- The “cream of the crop” list was intended for REALTORS® to sell to retail customers. I should have known. After all, our County Treasurer’s preference is to sell to those who would live in the properties they purchase.
Overall, preparing ourselves to participate in the auction provided a great learning experience. The next and final step is to see if it makes sense for us to participate in the October event, during which the properties that did not sell in August will be auctioned off at a discount. If it makes sense, we will participate; if not, well, you know the answer. We’ll see…
Postscript: I am very proud to be living in Oakland County, Michigan, where its officials –under the leadership of L. Brooks Patterson, Oakland County Executive, and Andy Meisner, Treasurer – are taking its fiscal responsibilities on behalf of the resident tax payers very seriously.
