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

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

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.