He’s been buying properties at tax sales for the past 20 years. It’s safe to say he knows a little bit about the business. Arnie tells us a great deal about buying properties at tax sales in Texas. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Arnie Abramson Background:
-Founder of Texas Tax Sales Resource Group Been buying properties from tax sales for the past two decades
-Helps investors buy tax sale properties in Texas with turnkey services and training
-National speaker on Texas tax sales and has been quoted in U.S News and World Report
-Based in Dallas, Texas
-Say hi to him at www.txtaxsales.com
-Best Ever Book: Atlas Shrugged
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff. With us today, Arnie Abramson. How are you doing, Arnie?
Arnie Abramson: Fine, how are you?
Joe Fairless: I’m doing well, and nice to have you on the show. A little bit about Arnie – he is the founder of Texas Tax Sales Resource Group. He’s been buying properties from tax sales for the past two decades. He is a national speaker on Texas tax Sales and has been quoted in the U.S. News and World Report. Based in Dallas, Texas. With that being said, Arnie, do you wanna give the Best Ever listeners just a little bit more about your background and what you’re focused on?
Arnie Abramson: Well, I originally was a financial planner for what seemed like 100 years, and during that time real estate kind of called to me as the best investment… So I made that transition in the early ’90s, and I happened to go to a real estate club meeting where someone was talking about the various ways you could get involved in real estate, and one of them was buying properties at tax sales. About four people raised their hands and said they had done that before.
After the meeting, my wife nudged me in the ribs and said “Let’s go talk to that guy over there. He raised his hand up and it sounds interesting.” So we went and we ran into this man who had just moved to town. He was working for a dotcom company and he didn’t have the time to do this, but he knew what to do because he had been doing it. We had the time and didn’t know what to do, so it was a perfect fit, and we formed a joint venture and I learned by him mentoring us and showing us what to do for 2-3 years, and it kind of stuck.
Joe Fairless: Yeah, clearly, for 20 years you’ve been doing it. Educate us – or at least educate me, please, on the pros and cons of buying at a tax sale, and maybe start out by saying what is a tax sale.
Arnie Abramson: Well, first of all let me also say that every state is different.
Joe Fairless: Okay.
Arnie Abramson: The tax sales are when people don’t pay their property taxes – ad valorem taxes they call them – and eventually they’re taken over by [unintelligible [00:04:29].17] in the state… And some of the states are what they call “tax lien states” and some of the states are what they call “tax deed states.” The difference is this – in a tax lien state, let’s say you have a property worth $100,000 and you owe $8,000 in taxes. In a tax lien state, at the auction the sheriff is going to conduct, he’s gonna sell that lien of $8,000 to the person who will take the lowest interest rate. Somebody may say “I’ll take over that lien for 12%”, somebody else says 10%, somebody says 8%, etc. Now, that’s a tax lien state.
In a tax deed state, as Texas is, same scenario – $100,000 house, $8,000 owed in taxes, the bidding starts with the $8,000 that you owe in taxes, and the highest bidder, they get the deed to the house.
Joe Fairless: Okay, good distinction.
Arnie Abramson: That’s the distinction. We concentrate on Texas, because Texas has some of the better features compared to the rest of the states that do similar things.
Joe Fairless: Unless you’re behind on your taxes, then Texas has the worst process possible.
Arnie Abramson: Well, actually that’s not necessarily the truth, because the objective of the tax sales is to collect the back taxes and to keep someone [unintelligible [00:05:51].01] that will pay the taxes. In Texas, what they do is if they lose their house at the tax sale, they have either six months or two years that they can buy it back, they can redeem it, and they have to pay that premium to the person who bought it, but they get the opportunity to do that. So it’s not all bad.
Joe Fairless: Oh, really? How does that work?
Arnie Abramson: For the investor or for the guy who lost his house?
Joe Fairless: Well, both, because it sounds like their worlds can collide. If I am behind on my taxes, I live in Texas, you go to the tax sale, you buy the tax deed for whatever I owe, you now own it, and then I get some money from my uncle 18 months later and I’m like “Hey, Arnie, I want my house back. I know you bought it for, say, $8,000, because that’s how much I owed. How do I get my house back from you? How do they calculate the premium and how does that work?”
Arnie Abramson: 25% more than what I paid for it if it’s within the first year, and 50% if it’s within the second.
Joe Fairless: Okay, that’s interesting.
Arnie Abramson: I have to caution you that you’re gonna have great questions, but there are no short answers in this, okay? That was the short answer, but it’s not complete. [laughter] Let’s say it is in the first year and you have to pay me back my $8,000 plus 25%, plus any of the certain costs or other things that I would have had to pay… And here are the three magic words: to maintain, and keep it safe. Maintain the property and keep it safe.
For example, let’s say the roof blows off and I replace it. That’s maintaining the house; the insurance premiums that I have paid, that is also maintaining it. So those types of things too, if I should spend those [unintelligible [00:07:41].13] The three magic words are to maintain, preserve, and safe keep.
Joe Fairless: Out of the 20 years you’ve been doing tax sale purchases, I’m gonna guess, and you’re probably gonna say “You’re wrong” because I don’t know much about this process, but I’m gonna guess no one has ever purchased it back from you. Is that right or wrong?
Arnie Abramson: It’s wrong.
Joe Fairless: Oh, man…! Okay, how many people?
Arnie Abramson: [laughs] About 20%-25% of the people do redeem it.
Joe Fairless: Really? 20%-25% of people?
Arnie Abramson: That’s our experience. In the state as a whole it’s 10%, and the reason it’s so much lower is almost no one redeems vacant lots, and we don’t buy those, so it doesn’t drag our average down. The ex-owner is not the only one who has that right of redemption. Anyone who has an interest in that house i.e. a lien on it (like the mortgage company) also has the right to redeem it.
Joe Fairless: Oh, okay. You said 20%-25%… Out of all the times they’ve been purchased, what percentage is the people or the entities with liens versus the homeowners?
Arnie Abramson: I would say most of them are the owners.
Joe Fairless: Really? Oh man, you keep surprising me every time. [laughs]
Arnie Abramson: Well, let me explain the reason why. The reason is most people who own a house have a mortgage. Most people who have a mortgage have the mortgage company collect taxes for them, they have them escrowed. So if they stop making their mortgage payments, the mortgage company will continue to pay the taxes, and then they can go foreclose on the person a lot quicker than the tax authorities can for lost taxes. So the bottom line is most of the properties that wind up going to the tax sale do not have mortgages on them, because if they did have mortgages and they failed to pay it, the mortgage companies would foreclose a lot quicker.
In Texas – and I’m only talking about Texas with this…
Joe Fairless: Yeah, of course.
Arnie Abramson: In Texas it’s several years usually, from the time they stop making their payments until they finally get it on a tax sale, because they have to go through a long process. They have to make sure everyone who had an interest in that property was properly notified. They have to make sure that all these i’s are dotted and t’s are crossed, and not only were they notified, but they had an opportunity to pay, and things like that. So it takes a while.
Joe Fairless: So the original owners, who’s house you buy via the tax deed sale, the 25% who purchase it back – do you rent from them in the in-between time? If so, that makes a little bit more sense to me, versus they’re no longer living in the house and then they wanna come back to the house and buy it back from you at a 25% premium. That just doesn’t make sense to me.
Arnie Abramson: Well, you’re correct, it doesn’t make sense. When I buy at the house at the tax sale, I am the owner immediately. I have the right of possession, I have all rights; every right is mine, with the one exception – they have the right to redeem it, period. That’s all.
I have the right to possess. I don’t have to give him 20 days to get out if I want, but I’m gonna go to him and say “Look, you’re the owner of the house, you have three choices: you can move out, you can redeem it, or you can sit there and pay me rent.”
Joe Fairless: Okay, now it’s getting clearer. What is your ideal outcome from a business standpoint. Not a warm and fuzzy standpoint (that might be different), but from a business standpoint, where do you make the most money on those three options?
Arnie Abramson: Well, first of all, we only do this for investors, because if I did it myself AND for other investors, it would look like it would leave itself wide open for us cherry picking, and that’s conflict of interest and that kind of thing. I’ve been doing this long enough, I don’t need any more properties. I started when the great recession started coming; I saw it was coming (or something was), and I started teaching this and I found that most people wouldn’t do all the work involved.
Eventually, we morphed into where we are now, where we do teach other people, but we do all the work and teach them how to do it, we do it for them, and we get paid IF they are successful. That’s where we really started to blossom. This is a long answer to a short question… I kind of forgot your question.
Joe Fairless: The question is after you buy it and you go to the original owner whose how you just purchased and you give them the three options – you can move out, you can rent it from us, or redeem it immediately, which option from a business standpoint makes the most money?
Arnie Abramson: Well, when we do it for the investors, obviously the best thing is, as you see in Texas, one of the things that makes it different from the other states like this is the 25% premium is not prorated. So if you buy a property with a tax sale today and they redeem it next week, you get the full 25%, not two weeks’ worth out of proration. So if you [unintelligible [00:12:48].15]
There’s a little town not far from where I live – I live in the country right outside of Dallas – and they had a property on a tax sale… It was a $300,000 house and they only owed 12k in taxes. So we knew that they’re not gonna let that go for 12k. My wife and I went there and we drove by the house, and you could see the bass jumping out of the lakes, a six-bedroom five-bath, and I told her “If this does go to sale and we buy it and they don’t redeem it, we’re moving.”
Joe Fairless: [laughs] What’s the town? I’m just curious, because I’m from DFW.
Arnie Abramson: Commerce.
Joe Fairless: Commerce… I think they’re the Commerce Indians, right? Is that their high school mascot?
Arnie Abramson: Something like that. Well, there are 8,000 residents in Commerce, and 10,000 students at Texas A&M Commerce, so this is right out of Commerce.
Joe Fairless: Yeah, yeah.
Arnie Abramson: So the beauty of it is — I told her, I was like “They’re not gonna let this house go for 12k”, but just in case, I sent her to the tax sale because I had to go to another one. All the tax sales in Texas are all at the same time, but that’s another story.
So she goes to the tax sale and the bidding started at 12k, and we bought it for our investors for 90k. Well, the mortgage company had just screwed up and didn’t know it, or they let it slip through their fingers, so they redeemed it in 52 days for $130,000, so our investors were very happy.
So to answer your question, if they can get 25% in one month or two months or three months or less than a year, that’s pretty significant.
Joe Fairless: Right. So the ideal scenario is as soon as you buy it from the tax deed auction, that they redeem it for 25% premium immediately thereafter.
Arnie Abramson: Yeah, but that’s the story book…
Joe Fairless: It’s rare… Yeah, I get it.
Arnie Abramson: It is rare. And some of these gurus go out there and, given a lot of hype, they’ll tell you “Look, if you can buy a house and it redeems it for 25%, that’s the equivalent of 300% a year. Where are you gonna beat that?” But over 25 years in the business I’ve only had two properties that have redeemed in a month or less, so… That’s not reality.
Joe Fairless: What’s the typical scenario?
Arnie Abramson: Typical scenario is they lose the house. Now, most of the properties on the sale – let me say this – are not homesteads; most of them are rent houses, or they’re vacant lots, or they’re [unintelligible [00:15:15].18] leases, or sometimes we run across some commercial properties… They’re all over the board, but most of them are lower end houses. You do get exceptions, but that’s for the most part. They’re rent houses.
Joe Fairless: So I guess after you buy it, if they are living in the house, do you have to go through the eviction process? If they’re like “I know you bought the house, but I’m not moving.”
Arnie Abramson: Yes, you can. We have to give him 20 days notice to do that. We prefer to buy them without people in them, because if someone’s living there, I’m pretty sure most of the major systems are working and the [unintelligible [00:15:52].03] I’ll just say to the people “Hey listen, we want you to stay, because what am I gonna do? I’m gonna go rent it out anyway.” They’re already there, I’d rather rent it to them. I probably don’t have to do as much work to get it ready.
Joe Fairless: What are some downsides or watchouts that you’ve come across?
Arnie Abramson: Great question. The biggest problem is that you’re typically not allowed to go bother the people in the homes before the sale… Because just imagine if 50 people are knocking at your door – “Hey, your house is on the tax sale, I wanna come look at it.” This is Texas, how many has that happened before you come to the door with a gun?
Joe Fairless: Oh yeah, you get shot.
Arnie Abramson: Yeah, so they discourage you from doing that. So that means that you can’t see the inside of a house before you buy it, for the most part. [unintelligible [00:16:44].09] to estimate how much rehab you’re gonna have to do. That’s why I don’t, as a rule, buy vacant houses that are boarded up and you can’t see the inside. I would rather go for the ones that are occupied, because then you know most of time they’re not camping out on the floor and no utilities. So that’s one of the biggest downsides.
The other things is this, and it has nothing to do with the redemption, but this is a caveat – that is that there’s a separate law in Texas that says if someone was not properly notified of the sale, who had an interest in the property, they can contest that sale for up to 2 years, and if they prevail, they will undo the sale.
Now, the reality is this – it almost never happens, because — let me tell you, there are some safeguards to make sure somebody doesn’t frivolously call up and say “Oh, I wasn’t notified.” The first thing they’ll say is “Okay, bring us a cashier check with the amount of the taxes owed that you would have brought us had you been notified.” Then they kind of hang up most of the time.
So because they have that law that for two years they can do that, and even though it almost never happens, the title companies that give title insurance for the properties, hanging their hat on that. That means that generally speaking, most of the time you’re gonna have to hold on to that house for two years, because who are you gonna sell it to that would take it without a title policy ensuring the title?
Joe Fairless: Right.
Arnie Abramson: Now, if you’re selling it to another invest that understands some of the things, then you could do that as long as you disclose that, and if they don’t need financing, because a normal mortgage company is not gonna give them a loan without a title policy. But there are some other considerations too, so it’s just part of the caveat that you have to watch out for – if you’re buying it, my philosophy is if you’re gonna buy it, you should buy it with the feeling that you’re gonna have to keep it for at least two years.
I don’t wanna pay out taxes and insurance for two years, so I’m gonna wanna rent it out. We look for what kind of cashflow it can provide. That’s the big thing.
Joe Fairless: I am really enjoying our conversation, Arnie. Based on your experience in tax sales, what is your best real estate investing advice ever?
Arnie Abramson: For people in the real estate business my best advice is if you’re looking to acquire a property, [unintelligible [00:19:21].29] but primarily to acquire one, and you catch yourself trying to talk yourself into it, don’t. In other words, follow your gut. If you have to sit there and convince yourself “This is a good deal”, don’t do it. If your gut is telling you “Hey, I don’t like this”, go with your feelings. That’s the best advice I can give anybody.
Joe Fairless: And especially when you have some time under your belt and you acquire some of those life experiences with deals, your intuition will get stronger and stronger.
Arnie Abramson: Oh, exactly. That’s right. Now, let me also give you one more caveat – in Texas this is such a great deal, because 25% [unintelligible [00:20:02].09] and all this stuff, and there fundamentals here are great (the real estate fundamentals), because there’s land here that’s not expensive, there’s not state income tax for individuals, and as you may or may not know, it’s booming here. The problem with that is all the hedge funds and the REITs and the private equity firms and everybody has discovered that, and they’re coming to the sales and they’re bidding them up like crazy.
So there’s an awful lot of competition at the tax sales, like everywhere else in Texas right now. Now, the other side of that is what we’ve developed is primarily these big investors are in five major cities: Dallas-Fort Worth, Houston, Austin and San Antonio. So we’re concentrating on the smaller counties right now. We’re still in the big counties too, but we’re concentrating on the smaller counties and the smaller houses, because there’s that old baseball adage: “Hit them where they ain’t” That’s what we’re trying to do.
Joe Fairless: I like it. Arnie, we’re about to do a lightning round where I ask some quick-hitting questions… Are you ready for that?
Arnie Abramson: I’m ready.
Joe Fairless: Alright. Before we do, first a quick word from our Best Ever partners.
Joe Fairless: Alright Arnie, what is the best ever book you’ve read?
Arnie Abramson: The one I’m writing right now, on tax sales in Texas. [laughter] That’s a facetious answer… One of my favorite books was Atlas Shrugged. I read it, all 1,700 pages, years and years ago, and I’ve read it three times. It turned me into a capitalist.
Joe Fairless: What’s the best ever deal you’ve done?
Arnie Abramson: The best deal I’ve ever done was the one that I said no to.
Joe Fairless: What’s the best ever way you like to give back?
Arnie Abramson: I love to teach people how to do this, and I love questions, because that shows they’re thinking and they’re connecting the dots, and the best for me is when I see that light bulb go off when they get it. That’s the most rewarding thing.
Joe Fairless: What would you say is a mistake you’ve made on a deal?
Arnie Abramson: Not listening to my gut and talking myself into the deal when I’ve got that feeling “I really shouldn’t do this, but it looks so great.” You know, you can talk yourself into it… So that advice I gave was from personal experience.
Joe Fairless: Well, that’s the best type of advice. Where can the Best Ever listeners get in touch with you?
Arnie Abramson: Well, they can call me, or we have a website that gives a lot of information. It’s www.txtaxsales.com. If you would live to e-mail, it’s Arnie@txtaxsales.com. I made it very easy for you.
Joe Fairless: Yes, very easy, and the link is also in the show notes of this episode, so that Best Ever listeners can just click through the link on the show notes page and they can go to your website.
Arnie, I really enjoyed our conversation. I did not know a whole lot about tax sales, but now I do, and I love how you had the disclaimer first “This is Texas specific. Different states, different process.” There are tax lien and tax deed states, and Texas is tax deed… And going through the options that you have for the previous home owner after you buy it, the ways you can make money, the things to look out for, and the lessons learned along the way.
I really enjoyed our conversation. I hope you have a best ever day, and we’ll talk to you soon.
Arnie Abramson: Thank you so much for having me… And boy, you capsulized that beautifully.
Joe Fairless: I take lots of notes.
Arnie Abramson: [laughs] Thank you for having me.
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