Tax deed states: A complete guide for investors

For real estate investors seeking deals, purchasing houses that were foreclosed on due to unpaid property taxes might present an interesting opportunity. Within tax deed states, counties can sell off real properties when the owner hasn’t paid the required property taxes for an extended period of time. While this outcome might be painful for the property owner, it gives real estate investors an opportunity to purchase homes below market value.

This guide explores tax deed states and how tax deed sales work.

What is a tax deed state?

A tax deed state allows county governments to sell a property to the highest bidder when the property owner falls behind on their property tax bills. Property tax revenue often allows the local government to provide services, like maintaining public schools and paying public safety workers.

Homeowners have some time to catch up on their past due property tax bills. For example, in Florida, property owners have at least 2 years after their tax bills became delinquent to catch up on their property taxes before the county can pursue a tax deed sale. But, eventually, the county government can foreclose on the property in order to pursue a tax deed sale

During a tax deed auction, the government makes an effort to recoup the lost property tax revenue. Generally, the highest bidder at a tax deed sale wins the property deed. From there, the new property owner takes possession of the real estate and the county walks away with a check.

Tax deed vs. tax lien

A tax deed isn’t the same thing as a tax lien. A tax deed legally transfers ownership of the property from the original owner to the tax sale buyer or the government.

In contrast, a tax lien involves the local government putting a legal claim on the property when an owner falls behind on their property taxes. The local government can sell the tax lien to an investor or not. In either case, the property owner can repay the tax lien in order to retain the property. If the homeowner cannot repay the lien, then the lienholder can take possession of the property through a foreclosure process.

How tax deed sales work

Although the details of tax deed sales look different in different counties, the basic mechanics remain the same. Here’s a look at the process:

• Owner misses property tax payments: The process starts by the homeowner falling behind on their property tax bills.
• County initiates tax deed proceedings: After a predefined period of delinquency, the county begins the process of selling the property.
• Auction: The house goes to public auction with a minimum set bid price.
• Bidding: Interested buyers attend the auction and make bids.
• Winning bid: The highest bidder wins the auction and gets ownership of the property after they make their payment. But, if the current owner exercises any available redemption rights, essentially by paying what they owe, then the winning bidder is out of luck.
• New owner can use the house as they see fit: Depending on the situation, the winner may rent out the property, live in it, or flip it.

Redemption periods

The original property owner may have redemption rights. The right of redemption means the original owner has an opportunity to safeguard their property by paying back what they owe.

Although the rules of redemption vary by state, homeowners may have some time to gather their funds and potentially avoid losing the property. Generally, the rules lay out a specific timeframe that the original owner must make a payment within in order to retain ownership of the property.

Of course, if the owner can reclaim their property rights, this puts the winner of the auction in an uncertain position. Luckily, there’s usually a clear timeline in place, which means the winner will know exactly how long the previous owner has to make a last-minute payment.

If the original owner does come up with the required funds, the auction winner will likely receive their entire payment back. In some cases, the auction winner might even be entitled to a penalty fee.

Which states are tax deed states?

States can choose how to manage property tax repayment issues. Some use tax deeds. Some use tax liens. Others allow both. For example, Nevada, Florida, Ohio, Pennsylvania, and New York each allow local governments to pursue either a tax deed or tax lien solution.

Below is a look at the tax deed and lien states:

Tax deed states with a redemption period

Although the redemption period for tax deed laws varies by state, it’s often equal to 30 days or less. Not all tax deed states include a redemption period.

Below is a look at the redemption periods for tax deed states:

Tax deed states with no redemption period

Not all states offer a redemption period for previous owners to come forward with a property-saving payment. For investors seeking to avoid the hassle of potential redemptions, investing in states without redemption rights could make things easier.

Here’s a look at the tax deed states without a redemption period:

• California
• Idaho
• Utah
• New Mexico
• North Dakota
• South Dakota
• Kansas
• Minnesota
• Wisconsin
• Michigan
• Arkansas
• North Carolina
• Virginia
• Delaware
• Massachusetts
• Maine
• New Hampshire
• Nevada
• Ohio

Deciding whether to invest in a tax deed property

Investing in a tax deed property could represent a good opportunity. But it’s not the right fit for every investor. It’s helpful to consider the following details before moving forward:

• Add up all the costs: Start by weighing the numerous costs, including the bid amount, title certification, holding costs, capital gains taxes on your future sale, and potential renovation costs, against the potential returns.
• Consider the time commitment: Beyond the financial costs of buying a tax deed property, fixing up a property is often a significant time commitment. Confirm you have room in your life to take on a project before moving forward.
• Research before jumping in: When possible, do your research on properties before bidding. Otherwise, you might get stuck with unexpected renovation costs or hidden title issues.
• Consider the market: Current market conditions can have a big impact on whether your investment is a boom or a bust. If possible, consult with a real estate expert for guidance on the best and worst-case scenarios.
• Keep redemption rights in mind: Dig into your local laws to determine what the redemption rights are in the area. It can give a better idea of what to expect.

If you decide you want to move forward with a tax deed property purchase, you can find information about upcoming tax deed sale auctions through the county website. Generally, local governments announce the upcoming tax deed auctions and conduct them on a regular basis.

The bottom line: Buying properties in tax deed states can pay off

Although not every state is a tax deed state, many are. Investors willing to do their homework in order to understand the rules surrounding tax deed properties in their state could find a lucrative opportunity.

For investors interested in moving forward with a rental property purchase, consider applying for a mortgage with Rocket Mortgage® today.