How to Buy Property With Delinquent Taxes

Buying property with delinquent taxes can seem like a hidden shortcut into real estate investing. It may provide access to promising low prices, unique opportunities and, in some cases, double-digit returns. However, the process works very differently from a traditional home purchase. Whether you end up earning interest or walking away with a property depends on the type of tax sale involved.

A financial advisor can help you build an investing strategy around real estate.

What Does It Mean If a Property Has Delinquent Taxes?

Every year, property owners must pay their property taxes imposed by the county in which they live. Property tax amounts vary considerably by location and property value. With all of the other expenses that homeowners are responsible for, it makes sense that some may find themselves in a financial bind if they can’t make this payment.

Homeowners that are unable to pay their property tax bill risk losing their property. What happens after taxes become delinquent depends on state and local law. Some jurisdictions sell tax lien certificates to investors. Others ultimately sell the property through a tax deed or similar tax sale.

When an investor buys a tax lien certificate, the investor generally pays the delinquent tax amount and receives rights associated with that tax debt rather than immediate ownership of the property. The owner typically has an opportunity to resolve the delinquency under the rules that apply in that jurisdiction.

If they do not resolve the debt, the lienholder may eventually be able to pursue foreclosure or another process that could lead to ownership. Buying a tax lien certificate by itself does not automatically transfer the property’s title to the investor.

Tax Lien Certificate Sales vs. Tax Deed Sales

When you buy property with delinquent taxes, you’ll typically encounter one of two systems: tax lien certificate sales or tax deed sales.

Tax lien certificate sales allow investors to purchase the tax debt, not the property itself. When you buy a lien certificate, you pay the unpaid taxes on behalf of the owner and, in return, earn interest until the homeowner repays the debt. If the owner fails to pay within the redemption period, you may gain the right to foreclose and potentially acquire the property. This approach can appeal to investors who want predictable returns without immediately taking ownership.

Tax deed sales work very differently. Instead of buying the debt, you purchase the property outright after the owner fails to pay taxes within the legally required timeframe. At a tax deed auction, winning bidders gain ownership, sometimes at a significant discount. The property is sold “as is,” though, which means you assume any risks tied to its condition, title issues or occupants. Because of the added complexity and responsibility, tax deed investing is generally for buyers comfortable with real estate management or renovation.

Understanding the distinction between lien certificates and deed sales is essential before investing. Each path has different risks, rewards and timelines. Researching state-specific rules, since tax sale systems vary widely, can help you determine which approach best matches your financial goals, risk tolerance and interest in hands-on property ownership.

How to Buy Property With Delinquent Taxes

If you’re looking to obtain full ownership of a tax sale property, there are several steps to follow to ensure you make a smart investment. Keep in mind, though, that every county and state may have different processes for conducting a tax sale.

Research Properties

Since you have a few months to get familiar with a property of interest, take the time to do your due diligence and ensure it’s a wise investment. Research the property’s title and public records for mortgages, tax claims, judgments and other encumbrances that could affect the investment.

Do not assume that purchasing at a tax sale will eliminate every existing claim against the property. Which interests survive a tax sale depends on the type of sale, applicable law and whether required procedures were followed. Title problems can make a property harder or more expensive to sell, finance or insure after the auction.

It’s important to point out, you probably won’t be able to walk through or see inside the home before your purchase.

Budget for a Tax Sale Investment

Auctions are exciting environments, and it’s easy to let your adrenaline take over. For this reason, it’s important to set a budget for the amount you’re willing to pay on a property. If you don’t, you could bust your budget and investment.

Payment rules vary by auction. Some jurisdictions require full or partial payment shortly after a successful bid. Meanwhile, others establish different deposit and settlement requirements. Check the auction terms before bidding, so you know how much money must be available and which payment methods are accepted.

Be sure to have your strategy planned out for bidding. It’s good to know the home values in the neighborhood and the average amount the property may be worth after any remodeling or necessary repairs are complete. This information can tell you if your investment is worthwhile.

Keep in mind that there will be other real estate investors to compete against, all having an objective similar to yours. Usually, homes are sold to the highest bidder.

Follow Through With Your Investment

If you’re the highest bidder, it’s time to pony up and pay for the home. Follow the payment deadline and method specified in the auction rules. Depending on the jurisdiction, a winning bidder may have to provide funds immediately or within a short period after the sale.

Either way, you’ll want to go into the auction financially prepared. That way, if you have a successful bid, you can complete the transaction with ease.

Winning a tax deed auction does not necessarily mean you can immediately treat the property like one purchased through a conventional closing. State and local rules can provide redemption rights or require additional procedures before ownership is final. Title defects, occupants and surviving claims may also need to be addressed.

What to Check Before Bidding on a Tax Sale Property

The auction price is only one part of the potential cost of buying a tax sale property. Before bidding, review the parcel itself, its estimated market value and any available information about the condition of buildings on it. Confirm that the legal description corresponds with the property you intend to bid on. Also check for any issues, such as access restrictions, zoning limitations or an unusable parcel.

A title search can reveal claims that deserve closer review before money changes hands. Buyers should also investigate whether the owner is involved in bankruptcy proceedings and whether federal, state or local liens affect the property. The treatment of those claims can depend on the jurisdiction and the procedures used in the tax sale.

Estimate repair costs and other expenses that could arise after the purchase as well. A low winning bid may become much less attractive after adding legal fees, title work, property repairs, insurance, unpaid charges that survive the sale and the cost of holding the property before it can be sold or rented.

The county or municipality conducting the auction should provide its sale terms and applicable deadlines. Reviewing those rules before bidding can clarify registration requirements, deposits, accepted payment methods, redemption provisions and what type of interest the successful bidder actually receives.

Key Considerations When Buy a Property With Delinquent Taxes

Buying tax sales can be a competitive environment. If you’re just entering the tax deed scene, it’s easy to overpay for a property. This leaves very few opportunities for savvy investors who could yield a big profit.

Also, not every property will make it to auction. For example, if the property taxes are paid in full, or the homeowner files for bankruptcy, the county may not move forward with the auction. In some cases, you may spend countless hours researching several properties, and only one ever actually makes it to auction.

It is possible to identify an off-market property that can yield a great investment opportunity. However, not every property will provide a decent return on investment. Before you take a deep dive into this type of investment, make sure you are familiar with the tax laws and guidelines of your state and county.

Researching past sales can help you get a feel for the deals available in your area. It will also help you assess if this investing endeavor aligns with your goals and risk tolerance.

Bottom Line

Tax sales are attractive to savvy investors. However, buying a property with delinquent taxes requires a lot of upfront money and can carry substantial risks. If you don’t have the capital to invest in tax sale properties, you may consider mutual funds or ETFs instead. Doing your due diligence, or even consulting a financial advisor, is essential before investing in any tax sales.

Tips for Investors

While tax sale investments might not be practical for you, a financial advisor can help you vet options and also put together a more traditional investing plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. Then, you can have a free introductory call with your advisor matches to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Understanding your risk tolerance and investing goals is a key part of any long-term financial strategy. Take advantage of Smart Asset’s investment calculator to better visualize your goals and preferences.