How to Buy a Property with Delinquent Taxes?

Owning real estate comes with the tax burden of property taxes. In cases where property owners encounter financial difficulties, these taxes may go unpaid, leading to what are known as delinquent taxes.

Delinquent taxes on a property occur when the owed property taxes have not been paid by the deadline. Sometimes, the best option for these owners is to sell the property. But that leaves sellers wondering how to buy a property with delinquent taxes.

Properties with delinquent taxes represent attractive purchase options for investors and homebuyers. They are often undervalued because they come with the burden of unpaid taxes, which many potential buyers avoid. Savvy buyers can acquire properties at a lower cost and manage tax liabilities effectively.

This article aims to give buyers the tools to buy property with delinquent taxes. We explore the differences between buying through tax lien certificates and tax deed sales and provide a step-by-step approach to navigating these transactions effectively.

What Does It Mean If a Property Has Delinquent Taxes?

Local governments impose property taxes to fund various public services such as education, infrastructure, and emergency services. When a property has delinquent taxes, it means that the property taxes that are due have not been paid by the specified due date.

When property taxes aren’t paid on time, they accrue late payment fees. Late payments on property taxes lead to accruing penalties and interest, which can substantially increase the amount owed and make it difficult for property owners to get current.

The local government may place a tax lien on the property if taxes remain unpaid. A tax lien is a legal claim against the assets for unpaid taxes, making it difficult to sell or refinance the property without clearing the debt. A tax lien makes it difficult for property owners to sell or refinance their property because it must be paid off before the property can be transferred or a new mortgage can be put in place.

If delinquent taxes remain unpaid and the situation is not remedied, it can ultimately lead to a tax foreclosure process, which the local government initiates. If the owner fails to clear the debt within the redemption period, the property may be put up for auction.

Ultimately, if the property goes to auction and is sold, the original owner loses ownership. The proceeds from the sale are used to cover the unpaid taxes, and any excess funds may be returned to the former owner after other liens and legal costs have been settled.

Tax Lien Certificate Sales vs. Tax Deed Sales

Tax lien certificate sales and tax deed sales are two distinct methods through which investors can acquire properties or profit from property tax delinquency. Each method offers different rights and responsibilities, as well as varying levels of risk and potential return.

Whether a local government uses tax lien certificate sales or tax deed sales primarily depends on the state’s laws governing the collection of delinquent property taxes.

Tax Lien Certificates

In states that use tax lien certificates, the government sells a lien on the property to an investor for the amount of the unpaid taxes plus any interest or penalties. Some of the estates that use tax lien certificates include:

• Arizona
• Florida
• Illinois
• Iowa
• Maryland
• Nebraska
• New Jersey
• New York

A tax lien certificate is a vehicle that allows governments to recoup unpaid taxes by parties other than the property owner. When property taxes are delinquent, some local governments sell tax lien certificates to investors.

An investor buys a tax lien certificate by paying the amount of the unpaid taxes to the government. The investor then holds a lien against the property for the amount of the taxes paid.

The property owner has a set period to pay the investor, including the original amount plus interest. The interest rate can be relatively high, providing the incentive of a potentially attractive return to the investor.

Should the owner fail to repay the debt within the stipulated period on the tax lien certificate (the redemption period), the investor can initiate foreclosure proceedings to acquire the property.

Tax lien certificates do not provide immediate ownership rights. Instead, they offer the right to receive repayment with interest or potentially acquire the property through subsequent foreclosure.

Tax Deed Sales

In tax deed sale states, the local government will sell the property itself, not just a lien, at a public auction. Some states that use tax deed sales are:

• California
• Georgia
• Michigan
• Texas
• Washington
• Wisconsin

When property taxes go unpaid, the local government may seize and sell the property at a public auction as a tax deed sale. The highest bidder at the auction gains immediate ownership of the property, free and clear of most other liens, mortgages, or encumbrances. Unlike tax lien sales, this process transfers full property rights, where ownership is not immediate.

Typically, once a tax deed has been sold, the original owner has no redemption period. This means that once the property is sold, the previous owner cannot reclaim it by paying back taxes. Tax deed sales can offer larger investment rewards than tax lien certificates but also come with greater risks, such as handling evictions or managing poor property conditions.

How to Buy Property With Delinquent Property Taxes 

If you want to buy a property with delinquent taxes as an investment property, you must purchase tax lien certificates or participate in a tax deed sale. However, either of these options requires understanding your real estate market and making sure you are not making a bad investment.

Buying a property with unpaid property taxes is a slow process. You will likely have several months to familiarize yourself with the asset and real estate market conditions.

Hire a Real Estate Agent

When considering the purchase of a property with delinquent taxes, enlisting the services of a knowledgeable real estate agent is crucial. Your agent provides valuable insights into market conditions and the complexities of tax-delinquent properties. It is helpful to find an agent who specializes in helping real estate investors with tax sales.

The benefits of working with a real estate agent are that they:

• Can help pinpoint properties that have significant profit potential.
• Provide guidance on the legal processes, including the steps required to the title once the property is purchased.
• Do a comparative market analysis to make sure you don’t overpay.

Find agents who have successfully closed deals on similar properties and check their credentials and client reviews. Discuss their experience with tax-delinquent properties, their approach to finding and evaluating opportunities, and how they handle the challenges that arise during such transactions.

Consider their access to a network of professionals. A specialized realtor or broker may work with a team and be able to provide recommendations for a real estate attorney to facilitate the eviction process.

Start your search for a tax sale specialist with FastExpert. FastExpert’s agent comparison platform makes it easy to compare experience, track records, and reviews, putting you on the fast track to finding the best real estate agent representation.

Research Properties and Complete Due Diligence

Start by identifying properties that have accrued delinquent taxes. These can typically be found through county tax assessor websites or specific online platforms that list properties under tax lien or deed sale. You might benefit by subscribing to a service that provides alerts on tax-delinquent properties.

Before committing to any property or tax lien certificate, evaluate its condition with the knowledge that the property’s current condition will likely only deteriorate between now and when you take possession. While you likely won’t be able to access the property, a drive-by physical inspection can help identify major red flags or deferred maintenance.

Research the micro-market, including what other properties have sold for on the street, local government issues, educational providers, and buyer demand. If you plan to rent out the property, study the local rental market to gauge potential rental income and occupancy rates.

Once you’ve decided that you like a specific property, conduct a title search to uncover any additional liens, encumbrances, or legal issues that could affect the purchase or future sale of the property. There could be additional liens or title issues that will need to be paid off before you can take ownership. Furthermore, this can reveal how much the current owner owes and the property’s financial stability.

Throughout your due diligence, consult with professionals. A real estate attorney can help guide you on the legal considerations of tax liens and the foreclosure process, your agent will provide market insights, and a tax advisor can advise you on your future tax obligations.

Budget for a Tax Sale Investment

A tax sale is an auction environment designed to excite buyers and motivate higher bids. It’s easy to succumb to adrenaline and the drive to “win,” resulting in overpaying for a property. Tax lien sale participants must enter the sale with a firm budget in mind.

Before setting a realistic budget, you need to understand all the costs associated with acquiring and owning the property. This includes:

• Purchase price.
• Costs for title searches, attorney fees, and any other legal services required.
• Any recording fees, transfer taxes, and other administrative expenses.
• Rehabilitation costs if the property needs work.

Tax sales typically require a cash payment, meaning that you won’t be able to get a loan on the property to complete the sale. A cash payment requirement is often what limits most buyers. Before bidding, ensure you have a solid understanding of the property’s fair market value and what you need to do to the property to make it profitable. This information will influence your bidding strategy and help you become the winning bidder.

Follow Through With Your Investment

Once you win the bid at the tax sale, you’ll need to finalize the purchase. Be ready to pay the full bid amount in cash by the deadline, often immediately or shortly after the auction concludes. Next, submit all necessary paperwork and comply with local regulations to formally transfer property ownership. 

Each jurisdiction has its own process, so it’s important to work with county officials and your real estate attorney. You may have to undertake an eviction of the property’s current occupants. Talk to your real estate attorney about this process, timeline, and cost.

If the property is in a state that allows a redemption period, you need to manage this time effectively. Be aware of the length of the redemption period and any actions the original owner might take to reclaim the property.

Keep the property secure and maintained during the redemption period to prevent damage or depreciation in value. Once the redemption period has passed, you can proceed with your business plan for the property.

Most properties purchased at tax sales require renovations. Plan your project by:

• Getting a full property inspection to determine what improvements or repairs are necessary.
• Consider the potential return on investment these improvements could bring.
• Engage contractors or specialists needed for renovations.

Once renovations are completed, most investors either sell the property for a profit or find a tenant for ongoing income.

Key Considerations When Buying a Property With Delinquent Taxes

Purchasing a property with delinquent property taxes can be a great way to secure a deal, but it’s not for the faint of heart.

Each state has its own process for handling delinquent property taxes. Some states offer tax lien certificates, while others may offer tax deeds. Each type has different implications for what you actually own upon purchase and what additional steps may be needed to obtain full property rights.

Make sure you know if your state has a redemption period and exactly what that redemption period is so you can plan your investment accordingly.

Beyond the back taxes, properties may have other liens imposed on them, such as mechanics’ liens, judgments from creditors, or second mortgages. It’s essential to perform a thorough title search to identify all existing liens. Ideally, these liens will be paid off through the tax sale, but if they are not, the new buyer will be responsible for them.

Liens may still be attached to the property if the winning bid wasn’t high enough to cover lower priority liens or if you secured the property through a tax lien certificate and subsequent foreclosure process.

When buying a property with delinquent taxes owed, know that the investment always comes with risk. Mitigate your risks through careful research and planning, but understand that not every tax sale investment property acquisition is profitable.

Professional Guidance When Purchasing a Property With Delinquent Taxes

Purchasing a property with delinquent taxes can be a lucrative investment, offering the potential for significant returns on below-market-value acquisitions. However, these transactions are not without their risks. They involve complex legal considerations, potential hidden costs from existing liens or property conditions, and the need to navigate state-specific laws.

Finding the right real estate professional is crucial for those looking to venture into tax lien certificates or tax deed sales. FastExpert helps connect you with real estate experts who specialize in these areas. With FastExpert, you can easily browse through agent profiles, compare reviews, and select someone with the proven track record and the specific experience you need.

If you’re ready to explore the opportunities in tax-delinquent properties, visit FastExpert today to find your expert guide in the real estate market. Whether you are a seasoned investor or new to real estate investments, the right agent can make all the difference in your success.