No doubt you have seen the infomercials advertising some guru’s latest ‘get rich quick with real estate’ schemes, announcing that properties are being sold at pennies on the dollar. Tax deeds allow investors access to discounted real estate, but it is not quite as easy or risk-free as those ads would have you believe. A tax deed is generally one of several deeds that can pass ownership from one person to another. There are several types of deeds, but tax deeds are some of the easiest – and cheapest – to invest in. Successful tax deed investing will actually give you ownership of a property at the time you purchase it.

No doubt you have seen the infomercials adv ertising some guru’s latest ‘get rich quick with real estate’ schemes, announcing that properties are being sold at pennies on the dollar.  Tax deeds allow investors access to discounted real estate, but it is not quite as easy or risk-free as those ads would have you believe.

What Exactly Are Tax Deeds?

A tax deed is generally one of several deeds that can pass ownership from one person to another. There are several types of deeds, but tax deeds are some of the easiest – and cheapest – to invest in.  Successful tax deed investing will actually give you ownership of a property at the time you purchase it! Now, take not that a tax deed is not a lien against a property.  The county selling a tax deed on a property does so for the amount of the delinquent or back taxes owed on that piece of property, plus any fees, interest, and court costs.

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Not all states participate in a tax deed system.  In those that do (tax deed states), the property owner has what is known as a redemption period before the state schedules a public property auction and sells the property.  Typically, the redemption period on a tax deed ends one day before the property auction is held.  Auctions are announced to the public by law and the highest bidder takes the deed. 

In some other states, the redemption period (time in which the government or original owner can reclaim the property by paying off the debt) for a tax deed sale can extend beyond the sale date.  A few states have a tax redemption period of one year, while others (such as California) have periods for as long as five years.  In these circumstances, don’t plan on moving in or selling the property until the period is up – the government can reclaim the property until the right of redemption has expired.  However, many investors buy properties with the anticipation of this, as redemption carries with it a hefty interest rate – often as high as 20%.

If delinquent property taxes are not satisfied by the time the property is auctioned at a public tax deed sale or tax deed auction, the new owner can then take immediate possession. Because property taxes are a small percentage of market value, investors purchasing a tax deed can acquire full property rights at a fraction of the true market value.

Buying Tax Deeds

It is important to do your due diligence (research) prior to buying defaulted real estate.  As with any real estate property, you should thoroughly review the property for issues – researching the property beforehand reduces your risks.  It is important that you know what an investment is worth before you buy the deed!  There are advantages and disadvantages of buying tax deeds, and to be truly successful, you must know the regulations governing your state auctions and do all of your homework prior to the sale.

Some Advantages of Buying Tax Deeds vs Tax Lien Certificates

  • Potentially purchasing real estate at huge discounts
  • Gaining immediate rights to a property

Some Disadvantages of Buying Tax Deeds

  • No disclosure on condition of property
  • Potential for redemption
  • You can’t get a mortgage to buy, must pay cash
  • Purchase must be completed within 24 hours

Available Types of Deeds

There are several types of tax deeds

Warranty Deeds

Warranty Deeds generally assure the grantor holds free and clear title to the property and has the right to sell it.  Generally issued by a court action, this guarantee includes all previous owners of the property.  Otherwise, investment can potentially be completely forfeited in the case of an unclean title.  Warranty deeds are the most protective type of deed available for purchasers of real estate.  They carry covenants, or promises, which protect the buyer from most types of defects in the deed.

Note: You will never get a warranty deed at a tax deed auction!

Special Warranty Deeds

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Special Warranty Deeds are similar to general warranty deeds, except the guarantee only includes the current seller.  It does not include any of the previous owners of the property, and does not require a court action.  The special warranty deed guarantees that the grantor has received title to the property and that there were no liens or encumbrances of any sort placed on the property at or during their time of ownership.  Special Warranty Deeds are most commonly used by banks, mortgages companies, and other lenders after having foreclosed on mortgaged properties when they sell them to the end buyer.

Quitclaim Deed

Quitclaim deeds only state that the issuer has no claim on or interest in the property.  These deeds are most typically used to pass ownership within a family rather than available at public auction.  They may also be used to clear up issues on a title – someone with interest in a property can transfer a quitclaim deed and relinquish any and all future claims to the investment.   Remember that this deed makes absolutely no guarantees or representations that the title is free and clear of other liens, only that the issuer is relinquishing their claim.