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What Happens When You Buy a House in a Tax Sale?

What Happens When You Buy a House in a Tax Sale?

By on Sep 12, 2019 in Homeowners, Tax | 0 comments

Real estate agents often tell their clients to simply avoid houses with tax liens filed against them. Conventional wisdom seems to suggest that they’re simply too much trouble. However, there’s also a fair amount of money to be made by buying homes with outstanding taxes.

Some investors have even drawn handsome profits simply by buying liens and then profiting through the transaction. While this might seem like it’s too good to be true, crafty individuals who know how to play the system have been doing it for years.

Since Success Tax Relief is dedicated to helping all sorts of taxpayers, we’ve seen our fair share of these real estate transactions. This question tends to come up quite often as a result.

How Tax Sales Happen in the First Place

The process that real estate agents refer to as a tax sale can take one of two different forms:

  • Tax lien sales occur when liens are auctioned off to the highest public bidder. The bidder then has the right to collect the lien as well as any interest payments. If the original homeowner isn’t able to pay the lien, then the new owner can foreclose the property.
  • Tax deed sales involve properties with completely unpaid taxes. When one occurs, the house itself is sold in entirety at auction. You’re not buying a lien in this case. Rather, you’re buying a physical piece of property.

In either case, the taxes in question are generally related to property taxes as opposed to various fees assessed by the IRS.

Collecting Money on Tax Sales

If you’re lucky enough to be involved in a tax deed sale, then you should generally end up with the house you’re buying afterward. Once you’ve paid the money you bid, the house is yours. Unfortunately, things aren’t always so easy.

Keep in mind that even if you do get the deed to the property, it may not be worth very much. Sometimes, homes go down in value since they were originally counted as a distressed property. Investors often see this as an opportunity to get a house at a great deal, which they then will sell at some point in the future once they’re able to file a much better asking price for it.

Buying the rights to a tax lien is a bit more complicated, and it can differ to some degree in various jurisdictions. Generally, it starts with a property owner failing to pay taxes for a long period of time. Eventually, the unpaid taxes get auctioned off at a lien sale.

The highest bidder now suddenly has the rights to the lien, which are essentially forfeited by whatever government agency originally intended to collect them. Since the buyer has to pay money to cover their bid, tax collectors use this to compensate for the fact that they haven’t gotten the taxes they were trying to recover in the first place. While the bid is usually much lower than what they’re owed, tax collectors are generally happy to just get something out of the deal.

Eventually, the homeowner is supposed to pay the lien holder back the original principal plus interest. That’s how an investor makes money. It can be impossible to collect the money, in which case they’re allowed to foreclose the property.

Risks Involved with Buying Homes in Tax Sales

Even though a foreclosure auction looks like a good deal because you can gain instant ownership of a home, it’s a risky proposition. Governmental authorities generally don’t allow bidders to even examine the house from the inside, which means you’ll have to guess what it looks like inside. It could be in decent shape, but it could also be moldy. To make matters worse, there’s no home inspection so you’ll be on the hook if there’s a structural problem with the house.

Radon inspections don’t take place either, so you might have to install a mitigation system if it turns out that there’s a problem with the home’s lower level. Some homeowners will damage property before they vacate it during a foreclosure, which can cause further headaches.

Naturally, there’s a great deal of money to be made in these transactions if you know what to look for. However, there’s always the other side of the coin as well. If you’re at risk for having a lien placed on your property, then don’t wait to start looking for help.Contact us online today at Success Tax Relief, and we’ll work to help you get the fairest case possible.

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