Tax Deed Properties: What They Are And How To Invest

Looking to buy a home at a bargain price? A tax deed sale can help. Tax deed sales allow you to purchase a home whose owners have not paid their property taxes.

However, buying a home through a tax deed sale comes with more challenges than you’ll face when buying a single-family home or condo in the traditional way.

What Is A Tax Deed?

A tax deed is a legal document that transfers ownership of a property when a home has gone into foreclosure. Tax deed sales are auctions that occur when foreclosed homes are offered for sale to recoup the tax bill by the tax collector.

For example, if you buy a home, you must pay property taxes to the county that home resides in. These taxes are split up and paid to several organizations, including public schools, fire departments, police departments, public libraries, as well as streets and sanitation departments. Homeowners typically pay their property taxes once or twice a year, and how much they pay depends on the state they live in.

However, if you don’t pay your property taxes, your home can go into tax foreclosure and be sold through a public tax deed sale.

How Tax Deed Sales Work

A tax deed sale occurs only after homeowners fail to pay their property taxes, but how the process works depends on the state the property resides in.

In every state that allows these sales, a government body – usually the county in which the home sits – must first get a tax deed. This is the legal document that gives the government body the right to sell a home to collect the delinquent taxes it’s owed.

Once the government agency has its tax deed, it can put the home up for sale during a public auction. The county will usually set a minimum bid for the homes it is selling. Buyers then bid on the properties and the highest bidder wins.

If the successful bidder pays more for the home than the taxes owed – which happens often – the excess amount can be paid to the former property owner. However, the former owners need to request the funds. Owners typically have a time limit to request these excess funds, a limit that depends on the state.

Additional Expenses After A Tax Deed Sale

After you've purchased a tax deed sale, there are still additional expenses. You'll have to pay to get a clean title to the home you've just bought. Homes sold at tax deed sales have what is known as a “cloud” on their title. You won't be able to sell that property until you clear this cloud.

You can do this in one of two ways. You can file a quiet title action, a lawsuit that gives you official title to your new home, if successful. This type of lawsuit gets its name because doing this will quiet all other earlier claims on the home's title, including claims from a mortgage lender.

You can also order a title certification that will validate the tax deed sale and tax foreclosure process. A consultant will work with a title insurance agent to clear the home's title for you.

Redemption Periods During A Tax Deed Sale

Even if you submit the winning bid during a tax deed sale, you might not become the owner of the home. This is because of the redemption period.

In some states, the owners of properties sold at tax deeds can pay the property taxes they owe (plus fees and penalties) to regain ownership of the home. They must do this within a set period of time called the redemption period, which varies by state.

If a homeowner does repay their taxes during this redemption period, you won't be able to take possession of the property. You won't lose any money because you won't actually buy the home, but you will lose out on the investment opportunity.

Usually, if the owners pay their unpaid property taxes before you submit your final payment for a home, they can reclaim ownership of the home.

It's also important to note that in states that allow tax deed sales, it's not just the owners of the home who can pay the unpaid taxes during the redemption period. Anyone with a legal interest in the property, such as a mortgage company, can also pay the owed taxes to stop the sale.