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Tax Deed Properties: What They Are And How To Invest

Dan Rafter8-minute read

August 10, 2021

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

Just be careful: 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?

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

When homeowners fail to pay their property taxes on time, their counties will place a tax lien on their properties. These owners then have a set time to pay what they owe. This time limit will vary by state but can run from a few months to a few years.

If homeowners don't pay the taxes they owe? Their tax collector can then sell their home through a public tax deed sale. This is where investors can find bargains: They can bid for homes being sold at these tax deed sales, often getting them for far less than what the properties would sell for on the open market.

Not all states offer tax deed sales. If you want to buy a property at one of these sales, you'll need to do it in the following 34 states: Alaska, Arkansas, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Virginia, Washington and Wisconsin.

Tax deed sales are opportunities for real estate investors. When owners fail to pay their property taxes, their homes are sold at tax deed sales. Investors can often buy these homes for far less than what they’d pay if the properties were sold on the open real estate market.

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How Tax Deed Sales Work

A tax deed sale occurs only after homeowners fail to pay their property taxes. How the process works, though, depends on the state.

In every state that allows these sales, though, 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 is 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, with the highest bidder winning.

If the winning bidder pays more for the home than the taxes owed – which will often happen – that excess amount can be paid out to the former property owner, if these former owners request the funds. Owners typically have a time limit to request these excess funds, a limit that depends on the state. In Texas, for instance, owners can claim the excess funds within 2 years of the sale. In Georgia, though, owners have up to 5 years after a tax deed sale to claim these dollars.

Say a home has an estimated value of $150,000, and its owner owes $10,000 in unpaid property taxes. The highest bid on the property might be $50,000. If that bid is accepted, the buyer pays the county $50,000. The county would then take the $10,000 it is owed in property taxes and pay the remainder of the accepted offer – $40,000 in this case – to the former owner.

The investor who purchased the property gets a home with an estimated market value of $150,000 while spending just $50,000.

After you've purchased a tax deed sale, you're not quite done spending money. 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 main ways. You can file a quiet title action, a lawsuit that if successful gives you official title on your new home. It gets its name because doing this will quiet all other earlier claims on the home's title, including from a mortgage lender. The cost of this will vary, but you can expect to pay at least $2,000.

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. The cost of this can vary, too, but again you can expect to pay about $2,000.

Understanding Redemption Periods

Even if you submit the winning bid during a tax deed sale, you might not become the owner of the home. That's 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, a period that varies by state.

If a home's owners do repay their taxes during this redemption period, then, 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.

For instance, in Florida, you are required to make your final payment by cashier's check, money order or wire transfer by 11 a.m. Eastern Standard Time on the day after you submit a winning bid at a tax deed sale. If the home's owners pay their owed property taxes before you make that final payment, the home sale is made void.

It's important to note that in Florida, and other 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.

In North Carolina, property owners have a longer period to pay their unpaid taxes. After you submit a winning bid at a North Carolina tax deed sale, the state holds a 10-day upset bid period. During this time, other bidders are allowed to submit higher bids.

Property owners are allowed to pay their unpaid taxes and void the sale any time during this 10-day period. If no upset bids are filed, you are required to pay for the home you bought at auction 10 days after submitting your winning bid. If you do this, and the sale closes, the redemption period ends and the home's former owners lose the right to pay back the property taxes they owe.

What Is The Difference Between A Tax Lien And Tax Deed?

Don't get investing in tax deed sales confused with investing in tax liens. These are different things.

When the owners of a home don't pay their property taxes, their local government places a lien against their property. The home's owners can no longer sell or refinance their property until they pay off their owed taxes and remove the lien.

If the home's owners don't pay their unpaid taxes during a certain period, the governing body might sell the tax lien at a public auction. The city or county government that issued the lien can only do this after publicly notifying the property's owners.

Investors can bid for the tax lien at the public auction, with the winning bidders getting a tax lien certificate that allows them to collect the unpaid property taxes plus interest and penalties from the home's owners. If you are the winning bidder, you pay the municipality the entire tax bill on the home. You make your profit when the home's owners repay their unpaid taxes to you plus interest. It's the interest that gives you your profits.

Buying a tax lien does not give you ownership of the home. It only gives you the right to collect the unpaid property taxes.

The benefit of buying tax liens is that you can usually get them without spending a lot of money. Although it varies by state, the owners of a property usually have from 6 months to 3 years to pay back their unpaid taxes to remove the lien, a payment the owners make to you. They'll also have to pay interest.

There is risk, though. If the owners don't pay back their taxes during this period, you have the right to foreclose on the property and take ownership of it. You might not want that responsibility, though.

How To Invest In A Tax Deed Property

The first step to investing in a tax deed property is to find tax deed sales in their counties. Counties across the country handle these sales differently, with some holding them more frequently than others.

Finding tax deed sales also varies by state. In Michigan, for instance, you can find upcoming tax deed sales by logging onto Tax-Sale.info, which lists sales for all counties in the state. In other states, such as Florida, you’ll have to search by county. You can find tax sales in Brevard County, Florida, for instance, here, and in Pasco County, Florida, here.

If you do find an auction and win a bid in a tax deed sale, you now have options for what to do with your new property. You can take on what is known as a fix-and-flip, renovating your property and then selling it for a higher sales price and a bigger profit. You might turn it into a rental property, collecting monthly payments from renters as you wait for the property to increase in value before you sell.

Or, if you bought your home for as little as possible, you might sell your property immediately in as-is condition. This means that you can sell the home without having to make any fixes. Your buyer will often be an investor who wants to renovate the home and then sell it for a higher sales price.

For Example

Here’s an example of how a tax deed sale might work. Say you’ve saved up a chunk of cash and you’d like to invest in real estate. After scouring your county’s list of tax deed sales, you find a property that interests you. The chart below shows how the numbers might work.

 

DELINQUENT TAXES OWED

$12,000

WINNING BID

$30,000

OVERAGE COLLECTED

$18,000

TITLE CERTIFICATION

$2,000

TOTAL INVESTED

$32,000

PROPERTY VALUE AT SALE

$80,000

TOTAL PROFIT:

$48,000 (Note, this doesn’t include any fees paid to real estate agents, closing costs or holding costs.)

The Bottom Line: Tax Deed Property Investing Can Quickly Earn Profits

Buying tax deed properties can net you a tidy profit. But remember that there are risks. You might be outbid for properties. The previous owners of the homes might pay their owed taxes before you can take ownership. And you might not be able to sell your new investment for as high as a sales price as you envisioned. But if you do your research, study home sales in your neighborhoods and pay a low enough price to acquire a home through a tax deed sale? Your investment might pay off.

Tax deed sales are just one way to invest in distressed real estate, though. It pays to learn more about other types of distressed property when considering real estate investing.

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Dan Rafter

Dan Rafter has been writing about personal finance for more than 15 years. He's written for publications ranging from the Chicago Tribune and Washington Post to Wise Bread, RocketMortgage.com and RocketHQ.com.