Buying Property For Back Taxes: A Comprehensive Guide

Quick answer

• You can buy properties with back taxes through tax lien sales or tax deed sales.
• These sales are conducted by local government entities to recover unpaid property taxes.
• Understand the difference between tax liens (a debt on the property) and tax deeds (ownership transfer).
• Research the property thoroughly, including its condition, liens, and potential for redemption by the owner.
• Be prepared for competitive bidding and the possibility of unforeseen costs.
• Consult with legal and financial professionals before participating.

What to check first (before you buy property for back taxes)

Understanding the Sale Type: Tax Lien vs. Tax Deed

Before you even consider bidding, you need to know how your local government handles the sale of properties with delinquent taxes. There are two primary methods: tax lien sales and tax deed sales.

• Tax Lien Sale: In this scenario, you are purchasing a lien on the property. This means you are essentially lending money to the property owner to pay off their back taxes. If the owner pays you back within a specified period (the redemption period), you receive your original investment plus interest. If they don’t, you may have the right to foreclose on the property and gain ownership.
• Tax Deed Sale: With a tax deed sale, you are directly purchasing the property itself. The government conveys ownership to the highest bidder after foreclosing on the property due to unpaid taxes. There is typically no redemption period for the original owner after the sale.

What “good” looks like: You clearly understand which type of sale your local jurisdiction conducts and the specific rules governing it.

Common mistake: Assuming all tax sales operate the same way. This can lead to mismanaging expectations about your rights and the process of acquiring ownership.

How to avoid it: Visit your county treasurer’s or tax collector’s website and look for information on delinquent tax sales.

Researching the Property and its History

Buying a property with back taxes is not like a typical real estate purchase. You are often buying the property “as is,” and the government is primarily concerned with collecting unpaid taxes, not guaranteeing a clear title or a property in good condition.

• Title Search: Even though the government is selling the property, it’s crucial to conduct your own title search. There could be other liens or encumbrances on the property that the tax sale process might not extinguish. This could include mortgages, judgments, or other tax liens.
• Property Inspection: If possible, try to inspect the property. Properties sold for taxes can sometimes be neglected or in disrepair. Understanding the potential costs for repairs is vital for your financial planning.
• Delinquent Tax Amount: Know exactly how much you’ll need to pay to acquire the lien or deed, and understand any premium or interest that will accrue.

What “good” looks like: You have a comprehensive understanding of the property’s legal standing, any existing liens, and its physical condition.

Common mistake: Skipping due diligence and assuming the government guarantees clear ownership or a property in good condition.

How to avoid it: Hire a title company or an attorney to perform a title search. If allowed, arrange for an independent property inspection.

Understanding Redemption Rights

In tax lien sales, the original property owner usually has a period to “redeem” their property by paying the back taxes, interest, and any penalties. This redemption period varies significantly by state and locality.

• Redemption Period: Know the length of the redemption period. Some states have short periods (e.g., a few months), while others can extend for several years.
• Interest Rate: Understand the interest rate you will earn on your investment if the property is redeemed. This is often set by state law and can be a significant part of your return.
• Foreclosure Process: If the owner does not redeem the property within the allotted time, you will need to initiate a legal foreclosure process to gain full ownership. This process has its own costs and timelines.

What “good” looks like: You are fully aware of the redemption period, the interest rate, and the steps required to foreclose if redemption doesn’t occur.

Common mistake: Not understanding or preparing for the redemption period, leading to unexpected delays or the loss of your investment if the owner redeems.

How to avoid it: Carefully review the specific laws of the jurisdiction where the sale is taking place regarding redemption periods and foreclosure procedures.

Budgeting for All Costs

Buying property for back taxes involves more than just the winning bid amount. You need to account for a variety of potential expenses.

• Purchase Price/Bid: This is the amount you pay to acquire the tax lien or deed.
• Interest and Penalties: If you’re buying a lien, you’ll accrue interest until redemption or foreclosure.
• Legal Fees: Foreclosure proceedings, title searches, and legal advice all incur costs.
• Property Taxes: If you acquire ownership, you’ll be responsible for future property taxes.
• Insurance and Maintenance: You may need to insure and maintain the property from the moment you acquire a lien or deed.
• Recording Fees: Government agencies charge fees for recording the sale and any subsequent legal actions.

What “good” looks like: You have a detailed budget that includes the initial purchase, potential interest, all legal and administrative fees, and ongoing property ownership costs.

Common mistake: Underestimating the total cost of acquiring and potentially owning the property, leading to financial strain.

How to avoid it: Create a comprehensive spreadsheet itemizing all known and potential costs, and add a buffer for unexpected expenses.

Step-by-step (simple workflow)

1. Identify Jurisdictions Conducting Tax Sales:

• What to do: Research your local county and municipal websites for announcements of upcoming tax lien or tax deed sales.
• What “good” looks like: You have a list of potential sales in areas you are interested in.
• Common mistake: Only looking at your immediate area, missing opportunities elsewhere.
• How to avoid it: Broaden your search to neighboring counties or states if you are willing to travel or hire local representation.

2. Understand Local Sale Procedures:

• What to do: Visit the relevant government websites or contact the tax collector’s office to understand the specific rules for tax lien or tax deed sales in that jurisdiction.
• What “good” looks like: You know if it’s a lien or deed sale, the registration process, and any required deposits.
• Common mistake: Showing up to bid without understanding the registration requirements.
• How to avoid it: Read all provided documentation from the taxing authority carefully.

3. Research Available Properties:

• What to do: Obtain the list of properties being offered for sale. Review details like the tax amount owed, property description, and any known information.
• What “good” looks like: You have a shortlist of properties that meet your initial criteria.
• Common mistake: Focusing only on the property’s appearance or location without considering the tax debt.
• How to avoid it: Prioritize properties where the tax debt seems reasonable relative to the property’s potential value.

4. Conduct Due Diligence on Target Properties:

• What to do: Perform a title search, research zoning, inspect the property (if possible), and investigate any other liens or encumbrances.
• What “good” looks like: You have a clear picture of the property’s legal status, physical condition, and potential risks.
• Common mistake: Relying solely on the government’s basic property information.
• How to avoid it: Hire professionals for title searches and inspections.

5. Determine Your Maximum Bid:

• What to do: Based on your research, property value, potential repair costs, legal fees, and desired return on investment, set a firm maximum bid.
• What “good” looks like: You have a realistic maximum bid that protects your investment and allows for profit.
• Common mistake: Getting caught up in auction fever and bidding more than the property is worth.
• How to avoid it: Stick to your predetermined maximum bid, no matter how tempting it is to bid higher.

6. Register for the Sale:

• What to do: Complete the necessary registration forms with the taxing authority, providing required identification and any necessary deposits or proof of funds.
• What “good” looks like: You are officially registered and cleared to participate in the auction.
• Common mistake: Missing the registration deadline.
• How to avoid it: Register well in advance of the sale date.

7. Participate in the Auction:

• What to do: Attend the tax sale (in person or online) and bid on your chosen properties, staying within your predetermined maximum bid.
• What “good” looks like: You successfully acquire a tax lien or deed at a price you are comfortable with.
• Common mistake: Bidding beyond your limit or failing to bid at all due to hesitation.
• How to avoid it: Practice bidding in mock auctions if available or mentally rehearse your bidding strategy.

8. Complete the Purchase and Record Documents:

• What to do: Pay the required balance for your winning bid and ensure all sale documents are properly recorded with the county clerk or recorder’s office.
• What “good” looks like: You have legal proof of your ownership of the tax lien or deed.
• Common mistake: Failing to record the sale documents promptly.
• How to avoid it: Follow up immediately to ensure all paperwork is filed.

9. Manage Your Investment (Tax Lien):

• What to do: If you purchased a tax lien, track the redemption period. If the owner redeems, collect your principal plus interest. If not, begin the foreclosure process.
• What “good” looks like: You either receive your investment back with profit or successfully initiate foreclosure.
• Common mistake: Forgetting about the lien after the sale and missing the redemption or foreclosure deadlines.
• How to avoid it: Set calendar reminders for key dates related to redemption and foreclosure.

10. Manage Your Investment (Tax Deed):

• What to do: If you purchased a tax deed, you now own the property. Secure it, assess its condition, and decide whether to renovate and sell, rent it out, or hold it.
• What “good” looks like: You have a clear plan for the property and are taking steps to manage it.
• Common mistake: Not having a plan for the acquired property, leading to neglect or unexpected carrying costs.
• How to avoid it: Have a post-acquisition strategy in place before you even bid.

Common mistakes (and what happens if you ignore them)

| Mistake | What it causes | Fix