Purchasing Tax Delinquent Properties

[Shane Bishop]

Does anyone have any experience purchasing tax delinquent properties? A new build next to us has been on the market for a few months and hasn't sold. The other day a note was placed on their door from the county tax office stating the property was seized and to be sold for delinquent taxes. The property was listed for $300,000 and the property taxes are roughly $1,000. What are some things to consider before attempting to invest in this tax lien?

[Dylan Holzemer]

Not a tax sale investor, but I work in this area so can give some info from the other side of things. Tax sales can be rules-intensive, so research on the front end is ALWAYS a good idea to know what you're getting into. Every state has different laws around how tax sales/liens work, and counties within the same state may have different quirks or peculiarities in their process even if they all follow the same laws. You'll likely want to talk with a real estate attorney and the local county office or court that handles the process to get a good picture, but here are some things to think about:

1. What are you buying (property vs. lien)? In some states, a tax sale is a foreclosure and you're buying the property at auction (e.g., TN). In others, you're buying the tax receivable for a certain year; you pay the taxes to the city/county in place of the taxpayer, and now the taxpayer owes you instead of the gov't. Eventually if you do this for a few years consecutively you can get a tax deed to the property (e.g., MS). Know which is which.

2. Is the process administrative, or judicial? In TN, the tax sale process is a lawsuit the county files in court, so there are attorneys and motions and court hearings on almost every aspect. Some other states may just do tax sales/liens administratively, where you're just dealing with a local county office and filling out some forms/contracts and won't necessarily have to worry about the possibility of needing an attorney for court appearances.

3. What happens AFTER you buy it? Know what you're buying, and know what happens after you do. In some states, the taxpayer has the ability to redeem the property for [insert time period] after the tax sale. Know if that's a possibility, how it works, and what that means for your investment. You'll also want to talk to an attorney to find out what you can or cannot do to the property after you buy it, especially in a redemption period if one exists. Also, just know how the post-sale process typically works; sometimes there's lag time between when you "purchase" the property and when you actually get a deed/title document to it.

4.. Legal Risk. This is kind of implied in the other points, but talk to an attorney and know what legal exposure you might be looking at. Landlord-tenant/eviction issues, lawsuits to set aside the tax sale, code compliance, etc. Your new build may be in good condition, but a lot of tax sale properties are not in the best condition (people who can't/don't pay their taxes also often can't/don't take care of the property). Learn what happens to other liens or encumbrances on the property. 

5. Title Insurance. Talk to a title attorney and find out what kind of title insurance you can get on the property. Often, these are some of the hardest properties to get title insurance on for various reasons, and your policy may not be quite the same coverage-wise as what you'd get on a "normal" purchase on the MLS. You may have to go to court and get a judgment quieting title, or you may be able to work with the insurance underwriter and not have to pay all those legal fees. Get a title search, or see if the county does one and if you can get a copy; it may be considered attorney work product and non-public, but you can always ask.

Also, see if you have any local investor groups and if so, if anyone has experience and can walk you through some of it.