Introduction to 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.
Educational Resources to Avoid the Major Risks of Buying Tax Deed Properties
Buying tax deed properties requires due diligence and research. Fortunately, Tax Sale Resources has your back.
Our blog dives deep into each facet of tax deeds and liens. This section of our website is a treasure trove of information, from state-specific guides to real-life case studies and investor news.
In addition, the Tax Sale Insiders podcast conducts interviews with industry professionals. You’ll get the details on state statutes, Supreme Court cases, and services to streamline your success.
Lastly, you can join the other tax sale investors receiving our weekly newsletter. You’ll get the latest investing data and a breakdown of relevant news.
Available Tools to Help On Your Tax Deed Property Investing Journey
Additionally, Tax Sale Resources has multiple tools to increase your investing success.
Research
Tax Sale Resources’ provides information on the best investments across the country that you can review within minutes. You’ll find upcoming auctions and can filter your search to fit your investing strategy. Plus, you can use our flexible importing and exporting tools to fine-tune the data to your preferences.
Workflow Builder
Most recently, we have released a workflow builder as an automation assistant to save your precious time. This tool allows you to build workflows that automate the research process, so all you have to do is give the final review and prepare your bid file. The workflow builder can also be used in the Management platform to help automate that process as well.
Title Search
Our most popular research package includes a title search to help you avoid properties with encumbrances. You can view an example, so you know exactly what to expect.
Property Inspection
Likewise, our research memberships offer personal property inspections to mitigate the risks of purchasing a property in poor condition. You can view an example, so you know exactly what to expect.
This is a perfect option for the out of state investor that still wants to “drive by” the property before bidding at auction.
Financing
Capital from Tax Sale Resources helps you scale your investment model without requiring a FICO score or title insurance.
Funds are available within a few weeks, and you can use the loans for single-family residential, multi-family, commercial, and vacant land.
Property Valuation Report
Tax Sale Resources uses an automated valuation model and multiple listing service comparison to give an accurate estimation of property value. This way, you can walk into an auction with an overview of each property for sale.
The final report is compiled by our real estate professionals on staff, and this is also the number we will lend on through our financing program.
Property Scope Reports
These include a birds-eye photo of the home, parcel details, current owner information, valuation details, and more. You can view an example, so you know exactly what to expect.
Other Useful Tools
Running a tax deed investment business is complex. Numerous tools are available beyond the scope of Tax Sale Resources to improve your processes.
For example, Zapier and Make can help organize and automate your workflow in conjunction with the Tax Sale Resources Workflow Builder. These tools can help you integrate all your other applications with only a few minutes of configuration.
If you are a tax sale investor, and would like to learn more about how we can assist in automating your investing let’s connect and see how we can help!
Frequently Asked Questions
Here are the answers to questions investors often have when assessing tax deed property risks:
Do I need an attorney to invest in tax deeds?
While there is no legal requirement for tax deed investors to hire an attorney before bidding at an auction, working with one is recommended.
A knowledgeable attorney can familiarize you with state and municipal laws, helping you avoid pitfalls and bad investments. In other words, consulting a legal expert before heading to an auction can arm you with the information to make the right investment.
Do tax deed properties need repairs?
Tax deed properties come in all shapes and sizes. While you might happen upon a pristine tax deed property in your investment journey, the typical property hasn’t received much care or attention from its owner.
Owners usually fall behind with property taxes because they don’t want the financial responsibility of the property. As a result, the home’s condition degrades.
As a result, doing your due diligence to find out as much about the home as possible before buying can give you a good idea of what it’s like on the inside. Paying for minor repairs is usually inevitable, but you can dodge homes that have suffered severe damage or been demolished.
Where can I find more details on my state’s tax deed property codes and statutes?
The Tax Sale Resources website has a directory for tax deed statutes in each of the fifty states. In addition, you’ll find contact information for local attorneys and relevant county officials. So, you’ll be covered whether you’re investing in Alaska, Wisconsin, or any other state.
Conclusion - Avoiding the Risks of Buying Tax Deed Properties Isn’t Rocket Science, but it Does Require Discipline
Investing in tax deeds successfully means understanding the risks of the business.
Neglect from previous owners, title issues, and varying state laws can trip up your efforts.
Fortunately, you can preempt these problems through research and consulting an attorney.
Tax Sale Resources can connect you with professionals in your area, provide details on local tax deed auctions and properties, and finance your investments.
As a result, investing wisely becomes a matter of educating yourself and getting equipped with the resources you need.
