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Tax Sale Properties: What Are they & What to Look Out For

by Kevin Perk on February 19, 2013 · 12 comments

  
Tax Sale

Tax sale properties can often be good real estate deals.  Tax sale properties are those that have been seized by a government entity due to non-payment of property taxes.  Many times an investor can pick these properties up by simply paying the back taxes, which can amount to pennies on the dollar.  While the price of these properties may be a great inducement to buy, investors must understand that tax sale properties do not come without potential issues.  One of those potential issues is the inability to get title insurance.

How a Tax Sales Work

Typically the tax sale process works like this.  A property owner gets behind on their property taxes.  After a few years of tax delinquency, the taxing authority will seize the property and sell it in order to recoup the taxes owed.  The seizure process is often where the problems occur.  The taxing authority cannot simply seize the property without due and proper notice to the property owner, yet often they will.

During the seizure process, the taxing authority will publish a notice in the paper, or send notices to the owner’s last known address, but they often will not actually search out who really holds ownership.  Thus, inappropriate and inadequate notice is often provided before a property is seized.  This makes the deed (here in Tennessee it is called a Clerk and Master’s Deed) the investor receives from the taxing authority for the property suspect.  Therefore many title insurance companies will not insure the title on a property that has been through a tax sale.  Banks will not finance a property without title insurance, which can be a real problem if the investor needs bank financing or is trying to flip the property to someone who will, such as a retail buyer.

An Example of a Tax Sale

As an example, I purchased a property that had been through a tax sale about two years ago.  This property had been sold at a tax sale and then resold to another investor who was going to sell it to me.  My title attorney noted the cloud (Clerk and Master’s Deed) on the title and stated that it would have to be cleaned up before I could get the financing I needed to purchase and fix up the property.  In trying to clean up the title, he found out the county had notified the wrong people about the tax sale.   However since they had their money, they refused to help in the clean up.  My attorney found the proper heirs, got them to sign quit claim deeds and I was able to acquire title insurance.  It took several months to clean all that up, but we could not close until it was completed.  Thankfully, this one got worked out.

Summary

In sum, just be aware of the old adage, “you get what you pay for.”  Yes, you may get a great price on the property, but is it a great deal if you cannot get clear title?  Be sure to protect yourself and know going in that this issue can pop up with tax sale properties.  Always get a title search done.  A few hundred bucks and some extra effort spent on the front end can save thousands later on.
Photo:Images_of_Money

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{ 12 comments… read them below or add one }

Ben Leybovich February 19, 2013 at 1:22 pm

Good info Kevin.

Reply

Kevin Perk February 19, 2013 at 10:32 pm

Thanks Ben!

I appreciate you taking the time to read and comment.

Kevin

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Tracey March February 19, 2013 at 2:27 pm

A great reminder that you definitely take a bit of a risk when you buy a property at a tax sale, and a good lesson for any sale. I used to practice real estate law and you’d be amazed how often a “cloud” on a title can clog things up. Whenever there is a title question it’s a good idea to get a lawyer involved as soon as possible — ideally, before you buy the property.

Reply

Kevin Perk February 19, 2013 at 10:34 pm

Good advice Tracey.

A good attorney who knows what to look for is worth the price.

Thanks for reading and commenting,

Kevin

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Lee Keadle February 19, 2013 at 2:30 pm

In addition to title problems, I’ve also had problems with the home inspections. Often, when the owners can’t pay the taxes, they also can’t make repairs to the home. A leaky sink or termite damage can mean major problems if they’re not fixed over a few years’ time. You’re absolutely right in saying you get what you pay for!

Reply

Kevin Perk February 19, 2013 at 10:36 pm

Lee,

No matter how good the price may be, I always go take a look. You are right. Tax sale properties may have been abandoned for years. Some properties are not a good deal at any price.

Thanks for reading and commenting,

Kevin

Reply

Julie Oldham February 19, 2013 at 3:02 pm

Wow, this is just another example of me getting answers to questions I didn’t even know to ask yet. And so appropriate, too, with the market in my area getting so competitive, it’s good to know this stuff. I love Bigger Pockets. Thanks, Kevin!

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Kevin Perk February 19, 2013 at 10:38 pm

Julie,

That is the beauty of this website. We all find answers to questions we never would have thought of.

Thanks for taking the time to read and comment,

Kevin

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dennis lanni February 19, 2013 at 10:20 pm

When you found the real owners why did that not unwind all the previous sales?

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Kevin Perk February 19, 2013 at 10:44 pm

Dennis,

The original owner died without any direct heirs. I assume that was why the property taxes were not paid. The county never took the time to find the heirs but my attorney did, a couple of sisters living elsewhere. Long story short, they did not want the property and were cool about it. They certainly could have mucked up the sale if they had wanted to and I would have had to walk away. Hence my comment “this one got worked out.”

Hope that explains it for you. Thanks for reading and commenting,

Kevin

Reply

Julie February 22, 2013 at 3:45 pm

I really like this article. We run across situations like this often with houses that are not listed. I’m curious to know how you take a clouded title like this which prevents a property from being financed to a clear title? You mentioned that you would have to buy the property and then fix it up. Is that the only thing that needs to be done in order to qualify one of these houses to be financed by a bank? That is always something I wondered is how do you take an un insurable title and convert it into an insurable one. How to take a quit claim deed and change the classification into a warranty deed…. Is that possible? Nice article again, it definitely opened my eyes to some things!

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Ned Carey May 1, 2013 at 12:15 am

In Maryland we are a lien state. It is the responsibility of the lien holder to make sure everyone is served. To make sure we have good title my attorney is very diligent, however just recently we have found many title companies will not insure a sale, from a tax lien deed holder to a purchaser for value.

I think this is just another example of how institutions are becoming much more conservative in this market.

and my attorney works very hard to make sure everyne is served

Reply

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