What are Tax Deed States?

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There are multiple ways to invest in real estate. You can search available properties in your area if you are looking for a turn-key investment to use as a rental or you can explore different auctions and seized properties in order to flip houses for discounted prices. While foreclosure auctions are often the most common way to take on seized investment homes, you also might be able to procure the deed to a property at a tax auction held by your local government. 

If you live in a tax deed state, you can bid on and invest in properties that have been claimed by the government. These are houses where the owner failed to pay their property taxes on time. Learn more about tax deed states and what they mean for your investment portfolio.

What is a tax deed state?

When a homeowner fails to pay their mortgage, the lender forecloses on the house and takes control of the property. They will try to resell the house and recoup the money they lost on the loan. Similarly, there are penalties for homeowners that don’t pay their taxes. If a homeowner neglects their tax bill, the local taxing authority may be granted ownership of the property. The document that proves the ownership belongs to the city or county is known as the tax deed. 

In the same way that the bank will try to sell foreclosed properties at auction to liquidate the assets, governing bodies will also try to sell houses in order to recoup the money they lost due to unpaid taxes. This is called a tax deed sale and typically occurs in auction form.

Investors have an opportunity to bid on houses that were claimed by the government. This could be an opportunity for you to get a good deal on a house that you can fix up, resell, or rent out. 

One of the main differences between foreclosure auctions and tax deed sales is that some states offer redemption periods after the auction. This is a grace period where the homeowner can pay off the taxes they owe. If they can pay their back taxes, the homeowner keeps control of the property. If they cannot, the property goes to the winning bidder. 

How does bidding on tax deeds work?

If the government takes ownership of a property, it will evict the owner and bring the house to auction at a tax deed sale. The price of the house will be based on multiple factors, including the amount in taxes owed, the perceived value, and what the government thinks investors will pay for it. The government’s main goal is to recoup its lost tax revenue so it can balance its annual budget. 

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For example, if a house is seized that is worth $200,000 and the previous owner owes $25,000 in taxes, the government might bring the house to auction at $40,000. Multiple bidders might drive the final sale price to $60,000. The government will claim its portion and the former owner is able to claim the rest of the funds on the home sale. In this case, the owner would receive $35,000. The investor, on the other hand, gets a house at nearly half price for what it is worth and can decide when and how to sell the property. 

There are some states where the former owner has to actively claim the profits from the home sale. They also have limits (usually between two and five years) to claim the funds. However, this does not impact the investor. 

Like a foreclosure auction, the investor at the tax deed sale will pay for the house in cash and will take over the property after the redemption period (if there is one). Depending on your state, you may have to invest in the house sight unseen. These houses also might not be in the best condition. If the homeowner was unable to pay property taxes, it is unlikely they were able to afford repairs and upkeep.

What if the house sells for less than the tax bill? 

In most cases, government-claimed deeds will sell for more than the tax bill at auction; however, there are times when the government still loses money. For example, if a house sells for $30,000 and the homeowner owned $35,000 in taxes, then the government loses $5,000 on the sale. 

The ultimate goal of this auction is for the government to get back as much as it can in taxes. It is better to earn back a larger portion of the tax bill than nothing at all. The same can be said for bank foreclosure auctions. Even if the bank loses money, it can still recoup anywhere from 50-95% of the taxes owed. 

Property taxes are used to fund a variety of projects within your city. A few systems your taxes support include the roads, fire department, schools, parks, infrastructure, and government offices that provide services to residents. The more delinquent residents fail to pay property taxes, the fewer programs the government can fund. 

Investors who support tax deed sales can help local governments reclaim their tax revenue while also returning dilapidated or abandoned houses to the housing market in updated form.

What is a tax lien certificate vs. tax deed? 

Your local governing body can also place a lien on a house that connects the property to the debt. You cannot sell a house until you pay off the liens. (Most responsible buyers will do a lien search on the property or their Realtor will do this for them.) 

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The main difference between tax lien certificates vs. tax deed states is that the governing body does not claim the home in a tax lien state. However, there is still an auction. The local government will host a tax lien certificate auction where investors can bid on the tax debt and pay it off in full. The government gets its tax money while the investor gets its asset. It is now up to the property owner to pay off the debt (plus interest) to the investor. The interest is considered the profit. The amount of interest the investor can collect is set by state law.

List of States With Tax Deed Sales

There are 31 total states that count as tax deed states. Here are the current states that have tax deed procedures on the books: 

• Alaska
• Arkansas
• California
• Connecticut
• Delaware
• Florida
• Georgia
• Hawaii
• Idaho
• Kansas
• Maine
• Michigan
• Missouri
• Nevada
• New Hampshire
• New Mexico
• New York
• North Carolina
• North Dakota
• Ohio
• Oklahoma
• Oregon
• Pennsylvania
• Rhode Island
• South Dakota
• Tennessee
• Texas
• Utah
• Virginia
• Washington
• Wisconsin

If your state is not on this list, then it is likely a tax lien certificate state. Every state has different laws and guidelines. If you want to know if you live in one of the tax deed states with no redemption period, search the laws in your area. Knowing what to expect before you attend an auction can better prepare you for the bidding and claiming process. 

There are also some hybrid states that allow both tax lien certificates and tax deed purchases. You may have more flexibility in your investment portfolio by opting to bid on both tax deeds and liens.

Should you invest in tax liens or tax deeds? 

It is possible for the average person to attend auctions to bid on tax liens and tax deeds. While you are limited on the type of tax document you can bid on based on your state, there are pros and cons to both options. 

Tax liens often provide less work than tax deeds. You never need to take ownership of a property, just the debt that a homeowner accrued. Additionally, you can become an investor for only a few hundred dollars. You don’t have to buy dozens of liens and have a large investment portfolio. Instead, you can pick up one or two liens to see if this investment option is right for you. 

Tax deed sales are more complex because you take over an entire house. This isn’t too different from attending a foreclosure auction. If you take on a tax deed, you will now be responsible for the maintenance, upkeep, taxes, and other costs associated with that home. 

From there, you have a few options. You can repair the house and resell it as a home flipping project, you can use it to collect rental income, or you can hold onto it as an investment property until the market gets hot. Tax deed investing requires you to have a big-picture plan and a clear financial outlook for the property. 

Work with a Quality Realtor to Plan Your Next Investment

Home flipping reality shows make real estate investment seem fun and glamorous; however, many investors work on tight budgets. They spend several months repairing homes and quickly learn that managing tenants is a full-time job. If you are considering real estate investing – or simply want to expand your portfolio – turn to the professionals at FastExpert. 

Our database of top real estate agents can help you find ideal investment properties while answering your questions about tax deed states and auctions in the area. Try FastExpert today and form a partnership that will last.

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