How To Buy a Property with Delinquent Taxes

Ok, let’s kick this off by calling out the elephant in the room: Owning property means paying taxes. (Shiver.) 

But as unpleasant as paying taxes is, failing to pay can leave property owners homeless. (Scary fact.) 

See, in certain situations, the county can place a tax lien on the property … then suddenly, the property is up for sale. Now while this is, of course, not awesome for the homeowners, investors can turn it into something good for themselves AND help the homeowners out of a bind. Win/win, for sure. 

But!  Before you start feverishly searching for properties with delinquent taxes, there are a few things you need to know…

Don’t worry, we’ll explain it all.

Now get ready to dig into how to buy a property with delinquent taxes and learn about some of the potential downsides.

What Are Tax Liens?

Even if you watch house flipping shows on TV, (who doesn’t LOVE those?!) you may not be too familiar with the term ‘tax lien investing.’ 

So, what the heck does tax lien investing actually mean?

Whelp, a tax lien is attached to a property when taxes that are supposed to be paid by the homeowner are late or even full-on ignored. The lien is used to collect the back taxes, interest, and penalties. 

While the length (aka term) of the lien varies by state and occasionally county to county, most last for about a year. For example, from January 1st to the start of the following year.

The tax lien also gives the issuing county the legal right to foreclose on and sell the property without the owner’s consent. Yikes, amIright?!

What Is an Assignment Fee in Real Estate?

Ok, let’s touch on assignment fees and how they apply to tax lien deals…

In basic terms, an assignment fee is the part of the deal between the property wholesaler (you, Mr./Mrs. Investor) and your end-buyer. The fee is the compensation you — the wholesaler — receive for connecting the homeowner sellers with your end-buyer. 

Think of it as a middleman/woman fee.

Let’s throw some numbers at this to help…

Let’s say  you’ve made a deal with the homeowners to  buy the property for $75,000… and you’ve found an end-buyer who’s gonna scoop it up from you for $100,000. 

Well, when you have the property under contract, the owner gets their $75,000 (yay), the end-buyer gets the house for $100k, and the $25,000 difference goes into your pocket, as the wholesaler, (more yay). 

Think of it as your compensation for securing that end-buyer. Your $25k difference is the assignment fee charged for the deal, since you assigned the deal over to the end-buyer.

See, not so tricky.

Tax Lien Investing: What’s the Difference Between a Tax Lien State vs. Tax Deed State?

Now, you’ll likely hear some interesting terms floating around with these types of deals…

So we’re gonna check out the differences between two common terms: tax lien state and tax deed state.

Ok, a tax lien state is a certificate giving folks — esp investors — the right to collect interest on the property’s delinquent taxes. The investor buys the tax certificate and collects the back taxes. The accrued interest and penalties are the investor’s fee. If the taxes are not collected, the property goes up for auction.

A tax deed state does not place the delinquent property up for auction. Instead, the investor buys the property and is responsible for paying the back taxes. To make a profit, the investor must sell the property for more than they paid, plus the back taxes.

Still with me? 

Good, because we’re gonna get into the meaty parts now!

How to Buy a Property with Delinquent Taxes: Step-by-Step

Follow these steps as your guide…

Research Available Properties

The first and most important step as you learn how to buy a property with delinquent taxes is to do your research. You never want to rush into an investment. 

Look to see if there are any other liens on the property. When there is a tax lien, the chances of additional liens significantly increase.

You might be wondering why that matters… why shouldn’t you invest in a property with multiple liens? 

Well, the chances of you breaking even or making a profit are pretty slim. To sell the investment, all liens must be paid in full, and you can only go so high with your asking price. Eek.

And, with tax lien investing, you also want to research the property’s condition. See if you can figure if the state of the property is in the pooper, but also look for property upgrades, like a new roof, perhaps. 

You probably won’t be able to walk through the property before buying the lien, so it’s best to find out as much as you can with some online sleuthing or boots-on-the-ground bird dogs driving by the property.

Have a Budget and Stick with It

Super-important rule when buying a property with delinquent taxes: always stick with your predetermined budget. 

Auctions can be exciting, and it’s easy to get caught up in the action… 

Suddenly, you are bidding on a $100,000 property like it has a resale value of $1M! Slow down there, tiger!

So, combining the property’s resale value and the unpaid taxes will give you a good idea of how much you should invest. You also want to look at the approximate value of other homes in the area, aka comps. That way, you’ll have a ballpark figure of what the home is worth.

Be Ready to Pay on the Spot

Tax lien investing requires payment at the close of the auction for properties with delinquent taxes. 

Bring either cash or a cashier’s check (yes, those are still a thing). The auction staff will require payment before handing over any paperwork.

Are There Risks to Investing in Property with Delinquent Taxes?

Like just about anything with REI, when you ask a seasoned investor how to buy a property with delinquent taxes, you will hear a few downsides … 

Sometimes, the taxes owed are more than the property’s value. Yikes. 

You can also easily overpay at an auction. (Remember, it’s easy to get swept up in that mob-like mentality!)

And of course, you know that buying a property unseen always comes with risks. The repairs can eat up a large chunk of your potential profit.

Tread carefully, friends.

The Bottom Line to Investing in Property with Delinquent Taxes

Alrighty, you’re now armed with the basic info on how to buy a property with delinquent taxes. 

Is it worth the investment? 

Sometimes yes, and occasionally no.

Your due diligence really comes into play with this type of REI deal. Don’t rush, do your homework. Know your numbers.

But, with some smart research and the necessary funds… investing in properties with delinquent taxes could turn into quite a profitable endeavor.

What are you waiting for? You’ll never know until you give it a go!