What Is a Tax Deed and How Do Tax Deed Sales Work?

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A tax deed is a legal document that allows a city or county to transfer ownership of a property that has gone into tax foreclosure. This means the homeowner has failed to pay property taxes and the city or county has foreclosed on the home until taxes are repaid.

Tax deeds may be put up for auction by a city or county — allowing investors to purchase the tax deed to become the new owner of the home. The goal is for the city or county to recoup the lost tax revenue that resulted in the foreclosure, and transfer the ownership to the new property owner after the auction is settled.

How Do Tax Deed Auctions Work?

Once a home is foreclosed on by the governing body (city or county) due to back-owed taxes, the city or county obtains a tax deed on the home. Tax deeds are then sold at auction in an effort to quickly recoup the lost tax revenue.

How to Purchase a Tax Deed

The rules for obtaining a tax deed and the auction process will vary by state and county. Most counties that offer these auctions do so on a set schedule (monthly, quarterly, etc.).

• Step 1: Register for the auction online and put down a deposit
• Step 2: Place a bid.
• Step 3: If you win the auction bid, you usually have to pay within a certain time frame (a few days or less), and then the tax deed is officially yours.
• Step 4: The government first recoups its lost tax revenue from the sale of the tax deed, then any excess funds from the sale can be claimed by the previous homeowner.
• Step 5: Obtain a clean title on the home. This may include filing a lawsuit — known as a “quiet title action” — to confirm your ownership and remove all other claims on the home.
• Step 6: You may also need to work with a consultant to get a title certification — officially recording the tax deed purchase to ensure the title is wholly owned by just you.

Benefits of Buying a Tax Deed Property

There are several benefits to buying a property through a tax deed auction.

1. Buy Properties at a Discount

Tax deeds let you buy properties at auction — often for a steep discount versus the market value of a property. This can help net you a profit as an investor — or help you get a great deal on your primary residence.

2. Less Competition

Tax deeds allow you to bid on a property without competing against other buyers that are all seeing properties listed on the market. And the requirement to pay cash may help you win an auction if you have access to the funds needed to buy a tax deed property.

3. No Negotiating

While buying a traditional home requires negotiating, a tax deed property is a simple auction. If you win the auction, there is no back-and-forth negotiation with the seller — you simply pay the price that you bid in the auction.

Risks of Tax Deeds

Buying property through a tax deed auction can also be riskier than other ways to buy a property.

1. You May Not Get the Property, Even If You Win

Even if you’re the winning bidder on a tax deed auction — you still might not get the property. There’s often a redemption period that allows homeowners or even the lender to catch up on back-owed taxes. If payments are made before this period has ended, the sale is canceled.

2. You Must Bid Against Other Investors

While tax deed properties may face less competition from the overall real estate buyers market — you still must bid in an auction to get the property.

This means competing against other real estate buyers that may have more capital or means to win the auction than you do. And prices may be bid up to the point that the property you want is no longer a great deal.

3. The Property Is Sold “As-Is”

Like all auction properties, a tax deed property is sold in “As-Is” condition. This means you can’t order an inspection and negotiate, but must accept all liability once the auction is completed and you purchase the home. This could lead to you paying for expensive hidden repairs and unknown costs.

What Is the Redemption Period?

It’s important to note that each municipality will have their own “redemption period” on the tax foreclosure of a home. This redemption period allows the homeowner to pay the back-owed taxes and become current on their payments — thereby retaining ownership of the home.

If the auction is canceled, you would receive a full refund of any amounts paid for the auction.

In most states that offer a redemption period — the timeline is specified and usually must be paid before you make your final payment on the tax deed. But keep in mind — states that offer a redemption period usually allow anyone to make the tax payments — including the lender — to stop the tax deed auction sale.

Takeaway

Tax deed sales are for real estate investors or homebuyers that want to pick up a property for a fraction of the cost of buying a home that’s currently on the market.

There are a few hoops to jump through, including inspecting the home (if you can gain access), getting a title inspection and having the cash set aside to make the payment in full. Plus you’ll want to get a title certification after the purchase to prevent any additional claims on the title in the future. While tax deed sales aren’t for everyone — they can help you get a property at a low price.

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