What is a tax deed? How tax deed properties work

A tax deed is a legal document that transfers property ownership after a local government forecloses for unpaid property taxes. Many counties then auction these properties to recover the tax debt. If you’re considering bidding, understand how auctions work, exactly what you’re buying, the redemption rules in your state, how to check title and property condition, and the real costs and risks you’ll face after the sale.

Key takeaways:

• Tax deed sales let you buy real estate when a local government forecloses on a property for unpaid taxes. You can often buy below market value, but properties are sold as-is and may come with title issues.
• Before bidding, research local auction rules, the property’s title and condition, and the redemption period during which former owners can reclaim the property after the sale.
• While tax deed investing can offer strong returns, it carries risks. Buyers should budget for title clearing, repairs, and holding costs.

Tax deed defined

A tax deed is a legal document that grants property ownership to a government body after a tax foreclosure. Once a local government takes ownership of the property, it typically auctions it to recover the unpaid taxes.

Tax deed vs. tax lien

It’s easy to confuse tax deeds with tax liens. Both involve bidding at public auctions held to compensate local governments for unpaid property taxes. However, you’re bidding on different things.

What do you buy with a tax deed?

When you buy a tax deed, you buy ownership of the property. However, it may be subject to house title defects, possible claims, and a redemption period.

What do you buy with a tax lien?

A tax lien investor buys the right to collect only the tax debt plus interest. If the homeowner pays the debt, they keep the home. If the homeowner doesn’t pay, the investor may have the opportunity to foreclose and take possession of the property. Tax liens are not allowed in all states.

How tax deed sales work

Here are the steps involved in a tax deed sale.

What happens before the auction

Before a property is auctioned in a tax deed sale, the homeowner receives notice that their property taxes are past due. If the tax remains unpaid long enough, the tax authority will send a notice of a pending foreclosure and tax sale.

Rules and timelines will vary by jurisdiction. For example, tax foreclosures in Washington state aren’t initiated until property taxes have been delinquent for 3 or more years.

Once the tax foreclosure is complete, ownership of the property transfers to the government or agency that initiated it.

What happens during the auction

Tax foreclosure properties usually are sold at auction.

Bidding typically begins at the amount that covers the delinquent taxes plus interest and any penalties or administrative fees. The winning bid receives the property title.

Auctions may take place in person or online. Consult local governments to learn when and where tax deed sales are held in your area.

What happens after you place a winning bid

Auction winners typically have 24 - 72 hours to pay in full. Once the payment clears, the county issues the tax deed and transfers ownership to you.

If the winning bid covers more than the tax debt, it’s called a tax sale overage. This amount typically is held for a time by the government authority for the previous homeowner and any other lienholders to claim. The rules vary by state.

Redemption periods explained

A redemption period allows homeowners in most states to reclaim their property even after it’s been sold at auction by paying the unpaid taxes, interest, and the costs incurred by the tax deed purchaser. The deadline for exercising the right of redemption often is 1 year, but timelines vary. Verify the rules in your state before bidding on a tax deed.

Risks of buying tax deed properties

Before investing in tax deed properties, it’s important to weigh the risks.

Title issues and quiet title action

A tax deed sale may not erase all claims on a property. Consequently, you may need to file a quiet title action, which serves as a lawsuit against anyone else who has a claim to the property. If you win, you secure a clean title against which no challenges can be made.

Liens, HOA dues, and other claims

The property may come with liens, past-due HOA fees, or other claims you may become responsible for paying off.

As-is property condition

Auction properties are typically sold as is, meaning the seller won’t make any repairs to the property. This adds risk for the buyer, especially if they aren’t granted access to view the property’s interior or order a home inspection before bidding.

State-specific risks

Finally, tax deed investment risks vary by jurisdiction. Research local rules and consult local tax authorities, clerks, title specialists, or a real estate attorney before bidding.

How to find tax deed properties for sale

Assuming you’ve weighed the risks, here’s where you can find tax deed properties for sale:

County tax authority websites

Check your county tax authority’s website or contact the local clerk to ask about upcoming tax deed sales.

Tax deed auction websites                                          

Some counties host online tax deed auctions through websites like www.bid4assets.com. Before bidding, make sure you understand the rules of the auction and what you’re bidding on.

Tax deed sales lists

Some governments publish tax deed sales lists, detailing the properties scheduled for auction and their opening bids. You can use these lists to identify potential tax deeds to invest in, but you must still do your own property, title, and rules research.

How to invest in a tax deed property

To invest in a tax deed property, follow these steps:

Research local rules

First, verify the regulations for a tax deed sale before you bid. Auction rules, redemption periods, registration requirements, and payment deadlines vary by state and county.

Investigate the property

Next, do your due diligence on any property you’re interested in buying. This involves scrutinizing the property's tax history, liens, HOA dues, inspection reports, and other records.

Set a maximum bid

Don’t enter an auction blindly. Set a maximum bid up front based on the property’s estimated value and total expected costs, including repair, title, holding, and future selling expenses.

Register, bid, and pay

Register for the auction. Then attend on the set date and time and be ready to pay if your bid wins. Depending on the local rules, you may need to pay via cashier’s check or wire transfer. Check the rules in advance so you’re not caught off guard.

Execute your exit strategy

There are a few ways to exit a tax deed investment. You could keep the property and rent it out, fix it up and flip it, or even sell it as is.

Expenses to expect after a tax deed sale

Once you’ve purchased a tax deed property, here are some common expenses to expect.

Title clearing costs

You may need to pay for a quiet title action, title certification, and real estate attorney fees to clear the title of any liens or claims.

Repairs, maintenance, and holding costs

Since many tax deed properties are sold as is, you may need to pay for repair, maintenance, and holding costs, such as homeowners insurance, taxes, and utilities, while you renovate the property.

Closing, escrow, and agent fees

When the time comes to resell the property, you may have to pay closing costs, escrow fees, and real estate agent fees.

Tax deed sale example

Imagine you attend a tax deed auction and place a winning bid of $30,000 on a property you plan to sell for a profit. Here’s how it could play out.

Keep in mind that this scenario doesn’t account for agent commissions, closing costs, repairs, maintenance, or holding costs. Also, tax deed sales may present obstacles such as title issues, competing liens, or challenges in reselling.

Pros and cons of buying a tax deed property

Make sure to consider the pros and cons of buying a tax deed property.

Pros

• You could get a deal: A low opening bid and little buyer competition could result in your buying a property at a discount.
• Rental opportunity: You could keep the property as a rental investment post-purchase.
• Flip potential: You could renovate and sell the property for a profit.
• Portfolio diversification: Real estate portfolios can benefit from having many different properties, including tax deed properties.

Cons

• Possible title defects: Tax deed properties may come with clouded titles that complicate ownership.
• Redemption periods: The original homeowner may have the opportunity to reclaim the property even after you’ve bought it.
• Property may be in poor condition: Many tax deed properties are sold as is, so you risk buying a property in poor condition.
• An inspection may not be possible: You may be unable to inspect the interior of tax deed properties before purchase.
• Repair costs: Repair costs can be high and eat into your profit margins.
• Unexpected claims: There may be others who assert claims on the property post-sale.
• No guaranteed profit: There’s always a risk your investment won’t generate a profit.

FAQ

Here are answers to some frequently asked questions regarding tax deeds:

Where can I find a tax deed sales list?

Visit the county tax authority website or contact the local clerk to request a tax deed sales list.

Can you inspect a tax deed property before bidding?

Maybe. Tax deed properties are sold as is, and you may not be granted interior access before bidding.

Does a tax deed give you a clean title?

A tax deed transfers ownership to you but may not clear every claim, so you may need to review the title and file a quiet title action to clear it.

The bottom line on tax deed sales

Tax deed sales offer investment opportunities, but your success depends on how well you prepare. Before bidding, research the auction rules, the property’s title, the redemption period, and the property’s condition. Then weigh the cost against your own risk tolerance.

If you’re ready to buy an investment property, explore your borrowing options today with Rocket Mortgage.