Know the Risks of Buying Tax Deed Properties

With real estate properties and interest rates remaining high, property investors often turn to tax deed properties to expand their portfolios. However, a tax deed investment differs significantly from conventional real estate investing. Instead of inspecting the property and negotiating with the owner, you’re bidding on properties at an auction with limited information. In addition, you usually can’t get an insurable deed, and you risk your investment going belly up if you make an uninformed decision. That’s where Tax Sale Resources comes in. We’ve taught tax deed investors for over a decade how to invest wisely in tax deed properties. Our online database of state laws, upcoming auctions, and research solutions can help you avoid the pitfalls of buying tax deed properties. Instead, you can focus on homes that will provide solid returns. In this article, we will cover some of the risks to remember before heading to your next tax deed auction.

The Most Common and Easily Avoidable Risks of Buying Tax Deed Properties

While tax deed properties can be solid investments, they also come with specific risks. A basic understanding of the nuances can help you dodge unprofitable situations and purchase properties that will generate revenue.

First, buying tax deeds means the property owner was delinquent on their taxes for an extended amount of time. State law usually gives the owner multiple years (known as the redemption period) to pay the missing property taxes and retain ownership of the house. Tax deed investors must wait out this redemption period before taking ownership of the home.

Unfortunately, many tax deeds involve owners who aren’t interested in maintaining the property or paying taxes. So, the home sits in neglect until the redemption period expires and can suffer outer damage, pests, and more. Therefore, because a tax deed property can languish for years before it becomes yours, it’s best to temper your expectations. While you’ll occasionally find a tax deed property in good condition, most homes will require repairs and renovations before you can sell or rent them out. In other words, the risk is you generally know what you’re getting into when you buy a tax deed because you can’t legally enter the property before the auction. Once you acquire the tax deed, you might have a lot of work to do to make the home inhabitable. So, buyer beware – there are no returns after tax deed auctions. You might have taken pictures of the outside of the house, but you won’t know what the inside is like until after you’ve invested in the tax deed.

In addition, the tax deed auction doesn’t guarantee a clear title. Likewise, obtaining a redeemable deed doesn’t remove issues with the title. Unlike a traditional home purchase, you don’t get title insurance with a tax deed property. Instead, you end up with what is akin to a quick claim deed. For example, you might inherit a pile of municipal fees and interest because of an uncut lawn or a mortgage you didn’t know existed. As the investor, it’s up to you to resolve such problems, and you might be on the hook for a much heftier financial load than you first realized. So, working with a proficient attorney or title company can help you identify title issues before committing to a property.

State Specific Risks of Buying Tax Deed Properties

Each tax deed state may pose risks because of specific laws and processes.

Utah Tax Deed Sale Risks:

Utah holds auctions where you bid on a percentage of ownership instead of 100% ownership of the property. Therefore, you might win a bid on a property and have to share ownership with another party (usually the previous owner). This dynamic prevents you from making unilateral decisions and can saddle you with an unwanted business partner.

Pennsylvania Tax Deed Sale Risks:

Pennsylvania has two types of deed auctions: upset sales and judicial sales. An upset sale means buying the tax deed with any other liens (such as a mortgage) attached. On the other hand, a judicial sale means the property has gone through a foreclosure and has no other liens. So before you bid, make sure you know which type of sale it is. As a small difference can mean a substantial difference in outcomes.

Additional State Examples:

Next, Ohio and Kentucky have tax deed processes providing insurable titles. Therefore, investors can remove or avoid liens on tax deeds in these states. Furthermore, redemption periods vary by state. For example, owners have a year and a day to redeem a tax deed property in Georgia. On the other hand, Texas divides redemption periods into two categories. Homesteads have a redemption period of two years, while non-homesteads get six months.