What do I need to know about buying tax lien properties?

Question

Hello everyone!
I am planning on buying a 3 bed 1 bath house from a tax lien/sheriffs sale and I was just wondering if anyone had and tips I should know about before going through with this? I understand I will need to have the cash readily available and pretty much all you get to look at is the outside. I also know that someone could still be living there but the house doesn't really show that and I have knocked and checked to see if anyone would answer and haven't gotten anything.
Just wondering if you guys had some advice since this will be my first experience with this type of sale!

Michael Eskenasy · Answer

Eli — before you bid, I’d separate this into two completely different underwriting exercises:

1. Am I actually buying a good house at a good basis?2. Am I buying the right to own that house cleanly?

People spend 90% of their time on #1 and get smoked by #2.

First, make absolutely sure you know what this sale legally is. “Tax lien,” “tax deed,” “sheriff’s sale,” and “foreclosure sale” are not interchangeable. Depending on the jurisdiction, you may be buying the property, buying a lien that can later be foreclosed, or buying subject to redemption rights or other surviving interests.

Then I’d build the diligence stack from the outside in.

Title first.Pull the parcel, owner history, mortgages, judgments, municipal liens, HOA/condo claims if applicable, federal liens, code enforcement, utility balances, probate/succession issues, and anything else recorded against the property. I would want to understand exactly what gets extinguished by this particular sale and what can survive it.

Do not assume “auction = clean title.”

Occupancy second.An empty-looking house and a legally vacant house are different things.

Who is the record owner?Where are their tax bills going?Is there a lease recorded or otherwise discoverable?Are utilities active?Any eviction history?Any mailing address different from the property?

You are trying to figure out whether you’re buying a renovation or buying a renovation plus an occupancy/legal problem.

Then underwrite the structure like it hates you.

If I cannot get inside, I assume:

roof is near end of life,HVAC is dead,plumbing has problems,electrical needs work,water intrusion exists somewhere,kitchen/bath are full replacement,flooring is gone,there may be mold/pest damage,and I carry a contingency on top of all of it.

Not because all of that will be wrong.

Because the auction discount is compensation for uncertainty.

I’d also look hard at what the outside can tell you:

roof lines and sagging,foundation movement,window condition,electrical service,HVAC equipment age,drainage, grading,tree/root issues,visible plumbing penetrations,additions that may not be permitted,fire damage,boarded openings,and whether the neighborhood supports your finished value.

Then establish your maximum bid before auction day.

Not “what would I be willing to stretch to?”

A hard number.

Something like:

conservative finished value– worst-case rehab– title/legal/possession cost– holding + financing cost– selling/closing cost– contingency– minimum profit required= maximum acquisition basis

And if somebody bids $1 over it, let them own it.

That discipline is especially important at auctions because everyone gets seduced by the spread between the tax amount and the Zestimate. The amount owed has almost nothing to do with what you should pay.

The other thing I’d do is underwrite multiple exits before buying.

If the flip market softens, can you rent it?

If rehab runs 25% over, does the deal survive?

If possession takes six months, do the numbers survive?

If you cannot immediately get marketable title, what does that do to your refinance/resale timeline?

A great auction deal should still look pretty good after you beat it up.

Now if you really want to party, send me the address of the house.

I’ll look at the actual property, neighborhood, value range, visible condition, likely rehab, ownership trail and the deal structure with you. That’s where this gets fun.

MichaelChefreyOS

Joshua Pfeffer · Answer

Like Ned said above, check the specific rules for your county/state. My county sells the tax debt, but gives the owner 12 months to pay it back + 10%, and if they don't, then you can foreclose on the property. That looks much different than buying at a foreclosure sale, which is what everyone seems to expect with these.

good luck!

Ned Carey · Answer

You don't say which state you are in. Tax sale laws and procedures vary dramatically from state to state.  While it Can be lucrative, there are lots of pitfalls and risks in buying tax sale properties.

First and foremost is the actually a tax lien or a tax deed sale? If you are buying a tax lien, you do not own the property only a lien against it. You may be able to foreclose on that lien but no guarantee you will get the property. If it is a tax deed, you are actually buying the property.  However each state has different rules regarding your rights. There may be a "redemption period" for example. You need to know the rules in your state and local jurisdiction to understand the hidden costs and risks.  Good luck.