How to set a max bid at a tax deed auction: a worked example

The worked example

A house in poor condition should resell for $120,000 once repaired, in about 6 months. Selling costs are 7%. Repairs are $30,000. Holding costs are $650 a month. A buyer's premium of 5% applies, recording is $450, $3,500 of liens survive the sale, quiet title budgets $3,500 and occupant removal $2,500. Your cash could earn 10% elsewhere, and you want the larger of 12% of resale or $15,000.

The target profit is $15,000, so the maximum bid is $46,034. Three bids against that:

Bidding the stretch figure looks fine against a $120,000 resale, but it leaves $8,423, under the target, and loses money if the resale comes in 10% low. A resale drop of about 13.4% erases the target profit even at the maximum bid, which is why many buyers set their real limit below it.

Run your own numbers.

Common questions

What is the maximum bid at a tax deed auction?

It is the highest bid at which you still earn your target profit after every cost of the deal: buyer's premium and recording fees, liens the deed does not remove, clearing title and occupants, repairs, carrying costs and the return your cash could have earned. Work backwards from the price you can resell for, subtract those costs and your target profit, and what is left is the most you can bid.

Do liens survive a tax deed sale?

It depends on the state and the lien. Many states extinguish mortgages and most junior liens, but some municipal liens, federal tax liens with redemption rights, HOA assessments, easements and special assessments can survive and become the buyer's problem. Run a title search before the sale and enter the surviving amount; this tool only subtracts the number you type.

Why is the quiet title cost in the calculation?

Title insurers and resale buyers often will not close on a bare tax deed until a quiet-title action confirms it. That is a legal fee and several months of delay, so it belongs in the budget before you bid, not after you win.