If a state is tax lien only, that means there are no tax deed sales. The winning bidder at the tax sale is issued a tax lien certificate. This pays the city and county what is owed to them, and the tax lien holder earns interest on the delinquent tax amount until the tax amount is repaid in full.
Tax sales are typically held online through the county's auction software but may take place at the county courthouse in smaller or rural counties. Depending on the county or municipality, tax sales can be conducted daily, weekly, monthly, quarterly, or as rarely as once a year.
Most counties advertise the sale process and how to register as a bidder on their website. Otherwise, call the tax collector directly to find out the process for buying tax liens or tax deeds. County websites also often have a list of pending tax deed sales or an auction calendar showing you the properties up for auction, when they go to auction, and the minimum bid. This list can be used to identify which properties, if any, meet your investment criteria such as location, property type, or size and what your maximum bid will be.
What you need to do before buying tax deeds
While buying tax deeds can be a profitable investment, it can also be a risky one if not done properly. There are a number of things to know about and research before bidding on a property at a tax deed sale. Below are a few important things to take care of.
Determine property value
When you buy a tax deed, in most instances you are buying a property without being able to get inside. It is possible to assess the condition of the property from the exterior, but in general, you will not be able to assess the interior condition. For this reason, many tax deed investors assume the property is in poor condition when determining the value of the property using comparable properties. If the property is in better condition than anticipated, the value will only increase.
Determine your maximum bid
It's easy to get caught up in the bidding war and pay too much for a property. Once you've established a property value, determine the maximum amount you would be willing to pay for the property, considering the possible work it needs or the rental income you could collect. You may want to use the 70% rule most flippers would use or set your maximum bid at a percentage of its as-is value.
Regardless of which method you use, if you are a savvy investor, you will go into the auction knowing your maximum bid. If the bidding exceeds that price -- stop. One of the biggest mistakes you can make in tax deed investing is overpaying for a property.
Check for other liens
The process of clearing a title after a tax deed sale will wipe away certain liens, including open mortgages on the property. However, there are certain liens it will not extinguish including:
- Municipal fines.
- Code violations.
- Other tax liens.
Some counties will provide a lien search prior to the sale to help bidders conduct their due diligence on the property. This information may also be available in public records, but some code violations may not be recorded yet. It’s a good idea to call the local municipality code department to find out if there are any recorded or unrecorded liens.
The opportunity is there, but buying tax deeds can be challenging
In some counties, buying tax deeds is competitive. Florida, for example, has many of the top real estate markets in the entire country, making it a competitive place to invest. While you can find opportunities at tax deed sales, properties are often overbid by novice investors, leaving very few deals available to purchase.
Don't be surprised if the property you wanted to bid on never makes it to auction. Out of the long list of properties set for sale, only a few will actually be auctioned. The taxes may be paid off just before the sale or the homeowner may have filed bankruptcy, which temporarily pauses the collection of the unpaid taxes. You can research a lot of properties to only be able to bid on one or two.
In summary, buying tax deeds can be a unique way to find off-market investment opportunities at great prices -- but not every property is a deal. Before you begin investing, keep learning about the tax laws for the state and county of your choice. Look at recent tax deed sales to see what properties sold for and practice doing your own due diligence to determine whether buying tax deeds in your area will be a worthwhile endeavor.