Why I’m Happy I Lost At The Tax Auction

This fall I planned to buy my childhood home at the tax auction. This plan did not work out and I ended up losing the auction to the next highest bidder, who won with a bid $1,500 above mine.  In the moment I was bummed, however I am really thankful I did not end up winning.

Look Ahead:

I bought a property at the tax auction a few years ago and have learned how to gain some advantages to the tax auctions.  In general the listing of tax auction properties is published in July, about 2 months prior to the auction date.  I have learned how to search our county’s Register of Deeds system and GIS system, and can generally see all of these properties in early April, several months ahead of time.

The Property:

When I first saw the list for the tax auction I was surprised to see the house I grew up in hitting the auction.  Our neighbors, who were wealthy Chicago people, bought the house from us in 2000 to have 2 vacation homes instead of 1.  For the most part they continued to use their primary vacation house and let this house fall into decay.  I would venture to guess that this house has been fully vacant for the last 20 years. They essentially didn’t want to have neighbors.

I had driven by it a few times and thought about offering to buy it as I have been rehabbing derelict homes for years.

The house is a 3 bedroom 1 bath house with a full basement.

The house needs a new roof, new siding, soffit, fascia, and gutters.  It needs new insulation and ceiling drywall where the roof caved in.  All new flooring is needed, the basement is full of mold and junk, and the furnace will need replaced. It is highly likely the well and septic will need to be replaced as well.  The forest has overgrown to the house and significant landscaping work is needed.  I was estimating this project would take me at least $50,000 and the better part of a year.

The house is located in the Lake Michigan Beach neighborhood near Coloma, MI.  People who own homes here can also pay to be members of the beach association which allows access to a private section of beach on Lake Michigan about 2,000 feet long.

Prepping For The Auction:

Before the tax auction I ensured I was in a spot to execute.  I had refinanced a rental property that had appreciated over time and paid down our heloc with the proceeds. I also took out a personal loan at 8% from AMEX to have additional funds available.  This wasn’t the only property we were interested in at the tax auction, but it was certainly the primary one.

I drove out to the property and took pictures on the outside to assess what repairs would be needed.

The Tax Auction:

I had high hopes for this auction.  This year it wasn’t advertised well.  Normally there are radio ads and articles in the local paper and I did not see any of those. At the auction in addition to the final auction price the winning bidder must also pay a 10% buyers premium and the most recent tax bill.  This is an online auction so people from anywhere can participate.  It used to be held in person on a Tuesday during the work day in Sodus Township.  All of the auction items run all day simultaneously.  Years ago when it was in person each lot item was sold in order, so people could budget, plan and adjust throughout the day. For someone interested in multiple properties the last 5 minutes is chaos.

The bidding for this property started slowly. The opening bid was around $7,000 and it stabilized at around $30,000 for most of the day.  During the last half hour there were multiple bidders and it quickly rose.  Mrs. C and I had agreed on a cut off of $60,000, which I had felt was extremely over priced and that we would be paying around $25,000 in a “sentimental premium”, which I was OK with.  The bidding rose up to our price of $60,000 and we bid an additional $1,000 over it.  The bidding ended at $62,500.

At first I was disappointed because I did want to own the house and I had a vision for rehabbing it and keeping it as a short term Airbnb property. I had thought about this for several months and could see the finished project in my head.

The winning bidder in addition to paying $62,500 also had to pay $6,250 for a buyers premium and the tax bill I would guess would be around $1,500, putting the cost of acquisition at roughly $70,000.  I would estimate the after repair value of this property to be around $150,000, so if he can make it happen for under $80,000 he may have not made a terrible deal.

What I found really interesting is the much larger brick house next door that my Chicago neighbors had lived in during the summer (was owned by the same people), sold at the tax auction for $115,000.  This home was in far better condition and sold for less than double what my old home sold for.  The actual value has to be closer to 3X to 4X valuation of my old house.  The person buying this house got a much better deal than the person buying my old house.

My Feeling On The Loss:

I wanted to breathe new life into this house. I hate that it was left to rot like it has over the last 20 years. I had a vision that I was confident I could make happen.  I envisioned it as a short term rental with access to the lake across the street.  I also had some long term plans to build an additional home or two on the property, as this house came with an additional two buildable lots.

I am also relieved because the prospect of tackling that large of a project right now feels daunting.  This would have easily taken us a year to rehab this house with everything else we have going on.  In addition to the total amount of work this house needs, it is also about 20 minutes from our house and 20 minutes from the nearest home improvement store, adding to the difficulty of a rehab.  There is only so much life energy available and we already have a 200% load.  Adding a project this large would have been very taxing on us. Since the auction ended we have had three long term rentals come back to us that need significant work, and have also bought a mobile home that needs substantial work.

This house is also not in line with our long term property goals. We want to focus on Multifamily properties and properties that do not need massive rehabs.  This is far from meeting that criteria.

I am happy that someone has purchased this home and hopefully it will be brought back to life.

What I Won:

As part of the value to buying this house I also needed to acquire a separate lot in the tax auction. Down the hill and across the street there is a lot in the auction that backs up to a small lake.  I wanted to purchase this as well, install stairs and a dock with a small boat and give guests waterfront access.  Because the auction items all close at the same time I was bidding on both in the last few minutes and all though I did not get the house, I did get the lake access lot for $7,500.  The lot is not buildable and will need some work to make accessible.

I am hopeful I can make this a spot for the kids to go fishing and to row around in a small boat on.

Have you attended any tax auctions? What do you think of this property?