Is buying a house by paying the back taxes possible? Yes – and I’ll cover eight things you need to know about this kind of investing and home buying, including the benefits and risks.
The topics I’m going to cover are:
- A Government-Ordered Tax Sale Auction is Safe
- The 2 Kinds of Sales Selling Tax Sale Property
- What is a “Right to Redeem” a Tax Lien?
- What are the Risks of Buying Tax Delinquent Properties?
- Other Taxes Must Be Paid on Tax Lien Properties
- Inspect the Property Before Buying It at the Tax Auction
- Potential Issues With Tax Sale Property
- A Word of Warning About Tax Auctions
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A Government-Ordered Tax Sale Auction is Safe
To start with, this kind of home buying is safe. Government-ordered tax sales have to be safe. Local governments rely on property taxes for the money to operate. Without that money, they can’t offer the services citizens demand.
When the property taxes are not paid, the governments take steps to collect that money. This is done by selling the past due taxes at a public auction.
Yes, these property tax auctions are legal. The US Supreme Court has a long history of ruling on past due property tax collection efforts. The High Court has consistently ruled the sales are legal.
If this kind of investing were not safe, no one would attend the auctions and spend their money.
Buying a house by paying back taxes is also profitable. Homes sell for pennies on the dollar.
The 2 Kinds of Sales Selling Tax Sale Property
There are two kinds of sales offered to people buying a house by paying back taxes, which I explain here. The local tax office can tell you which kind of sale a community has. The type of sale is determined by state law. When the sale is held can be set by state law, local law or custom.
In Georgia, for example, each tax-collecting government decides when to hold a sale. It can be any time of year and some communities do not have a tax sale each year.
Understanding the difference in the two kinds of sales is important, but not critical to this kind of investing. It’s important because a tax lien sale means you can’t get the house immediately; your money is still safe.
If you want to buy a house immediately, then you need to find a tax deed sale, a short sale or buy a house through more conventional channels.
If you are buying a house by paying back taxes as an investment property, to rent or resell, then tax lien sales are an excellent way to make money.
What is a “Right to Redeem” a Tax Lien?
If you are interested in making a profit, then actually getting the house through the auction should be considered a bonus. Many tax auctions include a right to redeem as part of the sale.
This means the homeowner has a certain amount of time to pay the back taxes plus interest to whoever bought the lien at the auction. The amount of time allowed for redeeming the property varies. In Alabama, the redemption period can be as long as three years, says an article at Nolo.com.
This may sound like a bad deal for an investor. True, the money is obligated for up to three years, but it’s also earning interest, at a good rate too.
In the above example, the Cotton State puts a 12 percent interest rate on property tax liens sold at auction. So the homeowner has to pay back the original amount of the taxes, plus 12 percent interest to the investor. Fees and any other penalties must also be repaid.
Alabama has a fixed rate of interest on tax lien sales and allows people to bid up the principal amount to invest. The state even allows an investor to earn interest on part of the investment that goes over the past due tax. The Nolo article does a good job of explaining how that works.
Some states have a reverse-interest bid. Investors gradually lower the amount of interest they are willing to accept on the investment until the bidding stops.
The fixed interest rates vary and can be as high as 36 percent.
More than 90 percent of properties sold at tax auctions are redeemed, making this an excellent way to invest. When the properties are not redeemed, the buyer gets to foreclose on the house and gets the property.
What are the Risks of Buying Tax Delinquent Properties?
Any kind of investment carries risks. You need to walk into any plan to spend money with one eye on what you will gain from investing that money v. not having the money.
This is true if you are walking through the grocery store, buying stocks or buying a house by paying back taxes. Let’s take a look at some of the things you need to be aware of.
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Other Taxes Must Be Paid on Tax Lien Properties
Just because you pay off one set of taxes, does not mean all the past due taxes on that property are paid. In some states, more than one board collects taxes on the property. Some examples of separate tax collectors with overlapping jurisdictions are:
- County or parish government
- State government
- School system
- City
- Special tax district. These can be for fire departments, downtown business zones and others.
You can buy a tax debt at a sale held by one tax collector and taxes will remain outstanding at the other agencies. Finding out about other past due taxes is part of your due diligence.
Make a phone call to the tax office and ask if there are past due taxes possibly owed somewhere else. If you don’t pay off those other past-due taxes, someone else may do so.
Find out how much those taxes are. You must figure this into your total offer. As soon as you pay for your winning bid, you need to go to the other tax office and pay for the other past due taxes as well. If you don’t someone else may buy those taxes at another auction. This could put your claim in jeopardy.
You’ll also need to pay future taxes as they come due on the property. If the homeowner redeems the house, he must reimburse you for these taxes as well.
Inspect the Property Before Buying It at the Tax Auction
When you are buying a house by paying back taxes, you need to examine the property as best you can. If you can get on the property and inspect the house, that’s the best. Use google.com street view.
But, you probably won’t be able to go on the property or go in the house to inspect it. You’ll have to do the best you can by looking at the property from the road. There are some indicators you can see from the street.
1) Yard. Is the yard well-kept, moved and attractive? If it’s in good condition, the house probably will be in good shape too.
2) The external appearance. Look at the walls, windows and doors. If the paint is peeling, that’s an indicator that some work will be needed on the inside. Broken windows are a definite indicator that the inside has issues.
3) The roof. Look for missing shingles. If some shingles are different colors or less faded than surrounding shingles, that’s an indication that the roof had issues. New shingles may have corrected this.
Estimating repair and renovation costs with just a street inspection is very hard to do but needs to be done. If you plan to rent the house, you’ll have to guess how much the repairs will run and figure that into your bid as well. If you’re going to sell the house, renovation work can be done by the buyer.
Potential Issues With Tax Sale Property
Aside from the physical property, when you’re buying a house by paying back taxes, you need to know about other liens.
A tax sale does set aside any bank mortgage on the property; this is why banks often pay past due property taxes before the sale takes place. The bank then adds the past due taxes to the mortgage. Sometimes a bank will also attend the sale and can drive the auction price up to protect its investment.
If there is an IRS lien, the tax office should be able to tell you if there is a federal lien on the property. The pre-sale research is supposed to turn up matters like this.
Bankruptcy can stop or delay a property tax sale in most cases. But if the bankruptcy filing is very close to the sale, the tax office may not find out in time to stop the auction. If you buy a property and it’s under a last-minute bankruptcy, you get your money back but don’t earn any interest.
Homeowner association dues, if applicable, are not taxes, but are a recurring expense. These must also be paid.
A Word of Warning About Tax Auctions
A word of warning when buying a house by paying back taxes. Don’t get auction fever. Tax sales are held in public to the highest bidder and bidding can get intense.
Before you go to the sale, decide what properties you will bid on. Decide how much you will spend and do not go over that. If the auction is interest rate-based, pick the lowest interest rate you will accept before going to the sale.
Some property tax sales allow online bidding. These generally require registration, so make sure you sign up ahead of time. Then, log in. If you plan to do this online, make sure you don’t have any distractions. Turn off your phone, close the door to your office and don’t play a radio or a TV.
Online auctions require you to either pay by credit card or give you a set number of days to get the payment to the tax office.
In-person auctions require you to settle your bids by the end of the sale or when that parcel’s auction closes. Some tax offices will not take a personal check. You need to call to find out what payment methods are acceptable.
Conclusion
We hope you enjoyed Ted’s lesson on Buying a House by Paying Back Taxes.
There are plenty of rewards and only a few risks associated with home purchases when paying for back taxes. If you pay attention and are careful, you can make tidy profits on this kind of investing.
If you’d like to know more about buying a house by paying back taxes, Ted Thomas provides full support and complete training with home study courses, Q&A webinars, live tutorials, workshops, web classes, and personal coaching with certified coaches.
Learn how to reap huge rewards from tax lien and tax deed investing! Get started today by taking advantage of Ted’s Free Master Class! Act now, it costs you nothing and will give you a big head start!
Ted Thomas is America’s Leading Authority on Tax Lien Certificates and Tax Deed Auctions, as well as a publisher and author of more than 30 books. His guidebooks on Real Estate have sold in four corners of the world. He has been teaching people just like you for over 30 years how to buy houses in good neighborhoods for pennies on the dollar. He teaches how to create wealth with minimum risk and easy-to-learn methods.
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