Updated: Jun 14, 2022
The number of investment options in the world of real estate is huge. And for every one of those options, there’s someone out there who’s had success with it.
Which makes it difficult for you to decide which road to take with your own investing.
1. Have you heard of tax deed investing?
Some real estate options are more common than others. Like wholesaling, passive income, and rehabbing, for example. But there are other less common investment opportunities to be found, often in the same industry as more popular options.
Most of these can be equally - if not more - lucrative than their more common counterparts.
We’re talking about buying a tax deed property.
If you’re an experienced real estate investor, you’ve probably heard some things about tax deed investing. And it’s likely that not all of those things were positive.
That’s because it’s a misunderstood and overlooked investment strategy. Let’s shine a light on what it really means to buy a tax deed property.
2. Don’t believe the naysayers
Before we get into, let’s address one thing. There are some who believe that buying tax deed properties is never a good idea. This is probably due in part because it’s usually not a good first investment.
If you’re a novice investor, it is not recommended to start here. But to say that it’s never a good investment is simply wrong. And there’s plenty of data to support that statement.
Huge numbers of people have shining, successful examples of tax deed investments in their portfolio.
It certainly requires research and due diligence, but what investment opportunity doesn’t?
Buying a tax deed property is no more risky than the majority of standard real estate investment opportunities out there.
Many investors make a living by buying tax deed properties without investing in anything else. But remember, getting into this kind of investment is recommended only for experienced real estate investors.
Yes, it has risks. And yes, it can be complicated at times. But again, you can say that about any real estate investment strategy.
These facts do not isolate buying a tax deed property as an exceptionally high-risk option. Don’t worry.
If you get good at avoiding the hurdles associated with tax deeds, you’ll find that your time spent will be very worthwhile.
3. How do tax deeds work?
A tax deed is what results when a person who owns a property does not pay their property taxes. If they don’t stay current, the local government of the county where the property resides is granted a tax deed.
It’s a legal document that says the government now owns that property.
What does the local government do with these tax deeds? They try to sell them. Why? Because every year, local governments set their budget according to the estimated amount of incoming property taxes.
If they suddenly have gobs of tax deeds on their hands, this means a loss of money they were expecting.
Also, the way county legislature legally acquires tax deeds can vary county to county and state to state.
4. The difference between a tax deed and a tax lien
Let’s clear something up before moving on. It’s very common to mistake a tax deed for a tax lien. But they are not the same thing.
Both are the result of unpaid property taxes. The county has the choice to turn a property into a tax lien or tax deed.
Tax liens are sold at auction. The winners are entitled to collect the property’s back taxes.
Tax deeds are also sold at auction. However, not until it’s formally concluded that the owner is not capable of paying the back taxes.
The winners buy the property outright by acquiring the deed. Once sold, the government uses the money acquired in the sale to recoup the lost taxes.
5. The process of buying a tax deed property
Before getting into tax deed investing, you need to learn everything you can about the process. The more knowledge you have going in, the better your chances are of coming out on top. But that goes without saying.
The people who make really good money in this are the ones who put the time in to educate themselves.
When you bid, it’s not that different from bidding on a foreclosure. Quite literally, when you win a tax deed at auction, you foreclose on that property.
However, there’s a redemption period where the owner is allowed to try and repay their tax debt. This time period is usually a number of months. It varies according to whatever the law in that particular country says.
During this time, you (the owner of the tax deed) earn any and all penalties and interest accrued.
In some states, there is no redemption period. The winner of the tax deed is also awarded the title right then and there. Now that’s an exciting investment!
6. Live auctions and online auctions
All tax deed auctions used to be live. But with the internet, most counties hold their auctions online. The larger counties, anyway. Some smaller and more rural ones still hold live auctions.
Contact the treasurer’s office to find out what style of auction exists in your county.
You can find out all you need to know about local online auctions by doing a Google search.
Look at sites like:
These sites help you find auctions, when they start, and how to join. Familiarize yourself with these resources before buying a tax deed property. Also, the county treasurer usually has a list of properties that are soon going up for auction.
You can usually find contact information for the local treasurer online. If not, simply go in person to the county offices and inquire there.
7. How to find out about properties you’re interested in
First, you need to find out how your particular county handles the tax deed process. Some counties have their own way of doing it. So make sure to talk to someone who knows or call the treasury office directly for this information.
Next, you need to decide what properties you’re interested in. More than anything else, the most important thing to consider is the location of the property. In fact, there probably isn’t another type of real estate investment where location plays such a big role.
Once you decide the specific properties that interest you the most, find out about them. Do some research.
How close it to where you live?
What kind of neighborhood is it in?
How many owners has it had?
What kind of condition is it in?
How old is the property?
What’s the size of the property?
How much does the assessor say the property is worth?
What does the recorder say about any judgments, claims, or liens on the property?
What is it’s current repair value?
What is it’s after repair value?
Does the deal look like it’s worth pursuing?
These are just a few examples of many things you can find out. Also, remember that it’s unlikely that you’ll get to take an inside tour of the home. The chances of the current owner (who’s already in a tight spot) letting you in to look around is low.
Knowing this, you need to find out as much as you can about these properties on your own. When buying a tax deed property, most deals happen sight unseen. Contact county representatives like:
- the surveyor
- the recorder
- the assessor
- the treasurer
Ask these people questions about the property.
8. Get to know the tax deed system
Buying a tax deed property is not the same as a wholesale or a rehab. It’s different, but not more difficult. But the importance of knowing the tax deed acquisition process cannot be understated.
If you go in as a novice, without any previous real estate investment experience, things will likely not go well. And even if you are experienced in real estate but don’t do proper research first, success is unlikely. Study the system first.
What we really mean by getting to know the system before buying a tax deed property is this:
know your state’s governing rules
know everything there is to know about tax deeds generally
know precisely how the auction you’re joining works
Without prioritizing this information, you will put yourself at a severe disadvantage in a tax deed auction. Make you sure know these things first.
9. What happens when you join an auction?
We repeat: do not join an auction until you know that you’ve done the proper research.
Okay. Moving on.
When you join a tax deed auction, you will likely have to pay a fee. Some states require it. Others don’t.
Sometimes counties only require fees for people who actually bid on something. Others require fees of every participant, no matter what.
And some counties require a deposit from every participant as well. They do this to ensure that people have a vested interest from the get-go. Many county officials believe this increases the chances of more tax deeds being sold.
They’re probably right.
Also, know that the majority of tax deed auctions don’t operate like a traditional auction. Buying a tax deed property at an auction will play out in one of these five ways. All 5 of these can be either live or online auctions:
10. 5 different kinds of tax deed auctions
Investors place their bids in a familiar fashion. Prices increase as more bids are placed. This is called a price auction.
Instead of bidding up the price of property, investors bid down the interest rates that are acceptable to them. This is called an interest rate auction.
To counteract unrealistic bidding practices, a bid premium is instituted. This is called a premium auction.
No bidding. You put your name in a drawing for a particular property. The winner is picked at random. This is called a lottery auction.
After the auction is over, properties that weren’t bid on are sold. This is called an after-auction sale.
11. Should I get into tax deed investing?
There’s no denying that buying a tax deed property can be a very rewarding investment. However, as we’ve said many times, you won’t reap any reward without educating yourself prior. In other words, it’s an advanced investment strategy.
If you’re interested in buying a tax deed property (which you should be), get some resources.
Once you’re at a place where you can pair your previous real estate experience with sharp knowledge on tax deed investing, then go for it! Capitalize in this unique area of real estate investing that many people mistakenly ignore.
Is Tax Deed Investing Right For You? (Important Things To Know) - Conclusion
Still have questions? Reach out to us and we’ll answer them all. We want you to be successful in your real estate investment journey. And buying a tax deed property can be a wonderful addition to your portfolio.
If you do it right, this misunderstood investment strategy can yield big returns. You would do well to consider it. If not now, then in the future when you’re ready.
Because learning as much as you can about tax deed investing is so important, here are some online resources.
Watch these videos to help you get to know the world of buying a tax deed property.