Buying Houses With Outstanding Back Taxes

Quick answer

• You can buy properties with outstanding back taxes, but it requires careful due diligence.
• Understand that the tax lien or deed holder typically has priority over other liens.
• Research local tax sale laws, as procedures vary significantly by state and county.
• Be prepared for potential redemption periods where the original owner can reclaim the property.
• Factor in the cost of paying off the delinquent taxes, interest, and penalties.
• Consider consulting with a real estate attorney specializing in tax sales.

What to check first (before you buy a house with back taxes)

Filing status

While your personal filing status doesn’t directly impact your ability to purchase a property with back taxes, it’s a good reminder to ensure your own financial house is in order. A clear understanding of your personal tax obligations can help you better assess the financial commitments involved in acquiring a distressed property.

Income sources

Your income sources are crucial for determining your financial capacity to undertake such an investment. Can you afford to pay the delinquent taxes, cover potential renovation costs, and manage the property until it’s sold or rented? A stable income stream provides the security needed for this type of venture.

Withholding or estimated payments

This relates to your personal tax situation, similar to filing status. Ensuring your tax withholdings are accurate or that you’re making timely estimated tax payments means you have a clearer picture of your available funds for investment. If you’re struggling with your own tax payments, taking on another financial burden like a property with back taxes might be ill-advised.

Deductions and credits

Understanding potential deductions and credits you might be eligible for as a property owner can impact your overall financial strategy. While not directly related to the purchase of a tax-delinquent property, knowing these can help you project future profitability and tax liabilities.

Deadlines and extensions (general)

For tax-delinquent properties, deadlines are paramount. You need to be aware of the specific dates for tax sales, redemption periods, and any legal notices. Missing these deadlines can mean losing the opportunity to purchase the property or facing significant penalties. Always check the official tax sale calendar for your local jurisdiction.

Step-by-step (buying houses that owe back taxes)

1. Identify potential properties:

• What to do: Look for properties listed in tax lien or tax deed sales by your county or municipality.
• What “good” looks like: A well-maintained list of available properties with basic property information.
• Common mistake: Relying solely on online listings without verifying information directly with the tax collector’s office. Avoid this by cross-referencing.

2. Research local tax sale laws:

• What to do: Understand if your state conducts tax lien sales or tax deed sales, and the specific rules for each.
• What “good” looks like: A clear understanding of the process, including bidding procedures, redemption periods, and the rights of the buyer.
• Common mistake: Assuming all states operate the same way. Avoid this by consulting your local tax assessor or a real estate attorney.

3. Perform thorough due diligence on the property:

• What to do: Inspect the property’s physical condition, research its market value, and check for other liens or encumbrances.
• What “good” looks like: A comprehensive report on the property’s condition, marketability, and any hidden costs.
• Common mistake: Skipping a physical inspection and only relying on online photos. Avoid this by visiting the property and hiring a professional inspector.

4. Determine the total amount owed:

• What to do: Contact the county tax collector to get the exact amount of delinquent taxes, plus accrued interest and penalties.
• What “good” looks like: A precise figure that includes all outstanding amounts.
• Common mistake: Underestimating the total amount due, as interest and penalties can accumulate quickly. Avoid this by getting a written statement from the tax office.

5. Understand the redemption period:

• What to do: Determine how long the original property owner has to pay off the debt and reclaim the property after a tax sale.
• What “good” looks like: Knowing the exact duration and terms of the redemption period.
• Common mistake: Assuming you get immediate ownership. Avoid this by confirming the redemption period and its implications for your investment timeline.

6. Secure financing (if necessary):

• What to do: Arrange for funds to cover the purchase price, back taxes, and any immediate repairs.
• What “good” looks like: Pre-approved financing or readily available cash.
• Common mistake: Waiting until the last minute to secure funds, which can lead to missed deadlines. Avoid this by starting the financing process early.

7. Participate in the tax sale:

• What to do: Bid on the property according to the established auction rules.
• What “good” looks like: Winning the bid at a price that aligns with your investment strategy.
• Common mistake: Getting caught in a bidding war and overpaying. Avoid this by setting a strict maximum bid beforehand.

8. Pay the delinquent taxes and fees:

• What to do: Promptly pay the required amount to the tax authority or auctioneer.
• What “good” looks like: Receiving confirmation of payment and official documentation of your claim (tax lien certificate or deed).
• Common mistake: Failing to pay within the specified timeframe, which can void your purchase. Avoid this by having funds ready and understanding the payment deadline.

9. Manage the redemption period:

• What to do: If the owner redeems, you’ll receive your investment back, plus interest. If they don’t, you proceed with foreclosure or taking possession.
• What “good” looks like: A clear process for managing redemptions and initiating foreclosure if necessary.
• Common mistake: Not understanding the legal steps to take possession if the property is not redeemed. Avoid this by consulting an attorney on foreclosure procedures.

10. Take possession or foreclose:

• What to do: If the redemption period expires without redemption, you’ll initiate the legal process to gain full ownership.
• What “good” looks like: Successfully obtaining clear title to the property.
• Common mistake: Attempting to take possession without proper legal title, leading to legal challenges. Avoid this by following all legal requirements for foreclosure.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
<strong>Ignoring other liens</strong>	You could end up responsible for paying off prior mortgages, judgments, or other debts.	Conduct a thorough title search to identify all existing liens before bidding.
<strong>Underestimating repair costs</strong>	Significant unexpected expenses can erode your profit margin or lead to financial loss.	Get a professional inspection and obtain repair estimates before committing to a purchase.
<strong>Misunderstanding redemption periods</strong>	You might be unable to take possession or sell the property for an extended period, tying up capital.	Clarify the exact length and terms of the redemption period with the tax authority.
<strong>Failing to pay promptly</strong>	Your bid could be forfeited, and you could lose the opportunity to purchase the property.	Ensure funds are readily available and understand the exact payment deadlines immediately after winning a bid.
<strong>Not verifying property condition</strong>	You might buy a property with severe structural issues or environmental hazards.	Always conduct a physical inspection of the property.
<strong>Overbidding at auction</strong>	You could pay more than the property is worth, leading to a negative return on investment.	Set a maximum bid based on thorough market research and repair estimates.
<strong>Ignoring local zoning laws</strong>	The property might not be usable for your intended purpose (e.g., rental, renovation).	Research local zoning ordinances and land-use restrictions before purchasing.
<strong>Not consulting legal counsel</strong>	You might miss critical legal steps, leading to title issues or legal disputes.	Engage a real estate attorney experienced in tax sales to guide you through the process.
<strong>Assuming clear title after purchase</strong>	There might be undisclosed claims or issues that complicate your ownership.	Obtain title insurance to protect against unforeseen title defects.
<strong>Not accounting for holding costs</strong>	Property taxes, insurance, and maintenance costs during the redemption or foreclosure period can add up.	Factor all potential holding costs into your investment calculations.

Decision rules (buying houses that owe back taxes)

• If the property has significant other liens (like a mortgage) that will remain after the tax sale, then proceed with extreme caution or avoid the purchase because the tax lien holder’s priority varies by state, and you might inherit those debts.
• If the property’s market value is only slightly higher than the total amount owed in back taxes and potential repair costs, then reconsider the investment because the profit margin is likely too slim for the risk involved.
• If the redemption period is very long (e.g., multiple years), then analyze your cash flow needs and risk tolerance because your capital will be tied up for an extended duration.
• If you cannot physically inspect the property, then do not bid on it because you need to assess its condition firsthand to estimate repair costs accurately.
• If the county offers tax deeds instead of tax liens, then understand that you generally acquire title more directly, but the redemption period might be shorter or non-existent, depending on state law.
• If you win a tax lien certificate and the owner redeems, then you will receive your investment back plus a statutory rate of interest because this is the standard process for tax lien states.
• If the property is occupied by the owner, then be prepared for potential legal complexities and delays in gaining possession, even after acquiring the tax deed, because you may need to go through a formal eviction process.
• If you are unsure about the legal process of foreclosure after a tax sale, then hire a real estate attorney because navigating these legal waters without expertise can lead to costly errors.
• If the total amount owed is a small fraction of the property’s market value, then it might be a good opportunity, but still conduct thorough due diligence to ensure there are no hidden issues.
• If the property is in a desirable location with strong rental demand, then it can be a more attractive investment, even with the complexities of back taxes, because it offers potential for immediate cash flow or a quicker sale.

FAQ

What is a tax lien sale?

In a tax lien sale, the government sells a lien on a property for unpaid taxes. As the buyer, you don’t immediately own the property but have a claim against it. If the owner doesn’t pay the taxes, interest, and penalties within a set time (the redemption period), you may be able to foreclose and gain ownership.

What is a tax deed sale?

In a tax deed sale, the government sells the property itself, not just a lien. If you win the bid, you typically receive a tax deed, which is a form of title. However, there might still be a redemption period during which the original owner can reclaim the property by paying the owed amounts.

Can I get a mortgage to buy a property with back taxes?

It can be challenging. Traditional lenders are often hesitant to finance properties with outstanding tax liens or deeds due to the complex ownership and priority issues. You may need to use cash or seek specialized financing.

What happens if the original owner redeems the property?

If the original owner pays the delinquent taxes, interest, and penalties within the redemption period, you will typically receive your initial investment back, plus a statutory rate of interest. You won’t get the property, but you’ll be compensated for your investment and the risk taken.

How do I find out about tax sales in my area?

Check with your county treasurer’s or tax collector’s office. They usually publish lists of properties scheduled for tax sale auctions, often online or in local newspapers.

What are the risks of buying a property with back taxes?

The primary risks include losing your investment if the owner redeems, discovering significant undisclosed repair costs, encountering other liens that take priority, or facing legal challenges in obtaining clear title.

Do I have to pay off other liens on the property?

This depends on whether it’s a tax lien or tax deed sale and state law. In some cases, you may need to pay off prior liens to get clear title, while in others, the tax sale may extinguish some or all junior liens. Always verify this with a title search and legal counsel.

What this page does NOT cover (and where to go next)

• Specific state and local tax sale laws: Each jurisdiction has unique rules.
• Detailed foreclosure procedures: The legal steps to gain possession after a tax sale.
• Financing options for distressed properties: Exploring specific loan products.
• Property valuation and renovation cost analysis: In-depth methods for assessing a property’s true worth.
• Negotiating with previous owners: Strategies for dealing with occupants during or after the sale.