Are tax sales a good investment?

The volatility of the stock market and interest rates have many investors interested in real estate investing over the stock market as a safer and more lucrative option. One overlooked real estate investment strategy is to buy property at delinquent property tax sales.

How does it work? Every year, millions of property owners default on their property taxes. In order to collect on delinquent taxes, counties often auction off a lien on the property or the property itself, depending on the state. South Carolina is a tax deed state, meaning that the county auctions off the deed to the property rather than the right to foreclose on a lien to the property.

The opening bid for every property at a tax sale is the amount of delinquent taxes and fees. If no bidders are interested, the property can literally be purchased at a 96% discount, depending on the supply of properties and demand from investors. The supply of properties is most often impacted by the local factors, such as an increase in local property taxes or a decrease in jobs. The demand is more often impacted by national factors, such as interest rates and stock market volatility.

The Fine Print

After a delinquent tax sale auction, the successful bidder/investor must wait for expiration of a redemption period before taking ownership of the property. This redemption period is a 12-month period during which the defaulting taxpayer, any grantee from the owner, or any mortgage or judgment creditor may redeem the property by paying the delinquent taxes, costs, assessments, and penalties, plus interest. The interest is paid to the successful bidder/investor upon redemption of the property. The total amount of interest is due on the amount of the delinquent tax bid based on the month during the redemption period the property is redeemed according to the following schedule:

  • First three months – three percent (3%)
  • Months four, five, and six – six percent (6%)
  • Months seven, eight, and nine – nine percent (9%)
  • Last three months – twelve percent (12%)

*Caveat: in every redemption, the amount of interest due cannot exceed the amount of taxes, assessments, penalties, and costs due (i.e. the amount of interest owed by the defaulting taxpayer is capped by the amount of the opening bid).

After expiration of the redemption period, the county will convey a quitclaim deed to the successful bidder without the requirement to go through a formal judicial foreclosure, as is the case in tax lien states. Moreover, the purchaser is not responsible for paying any pre-existing mortgages, liens, deeds of trust, or other such fees.

Buyer Beware

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All properties are auctioned as-is. In other words, what you buy is what you get… even if the information posted about the property is misleading at best. There are no guarantees that the acreage, owner, or location of the property is accurate. Further, the list of properties for sale often isn’t finalized until the morning of the tax sale, which means that even the most prudent investor cannot conduct thorough a due diligence of the property.

What could go wrong? Here are nine pitfalls that can cause a deal to turn into a disaster:

  1. Existing easements and restrictions of record that prevent or restrict the intended use of the property:
  2. Environmental contamination giving rise to federal liability;
  3. Local nuisances that drive down the property value;
  4. Existing title defects that deprive the successful bidder of rightful ownership or marketable property, such as a reverter of a life estate interest;
  5. Trespasser/invitee liability;
  6. Adverse possession claims;
  7. Challenges to the validity of the tax sale;
  8. Zoning restrictions; or
  9. Federal tax liens.

Each of these defects can produce a wide range of outcomes. The good news is that these defects can all be addressed, mitigated or avoided with the right approach.

So how do you end up with a deal and how do you avoid a disaster?

Here are a few tips:

  1. Know thyself (and thy wallet). Don’t get in over your head by maxing out your budget on the first bid.
  2. Research the properties ahead of time and, if possible, view the properties in person or hire an agent to examine the properties.
  3. If the property is located in a densely populated area, ask neighbors about the history of the property.
  4. Set aside funds for unexpected expenses associated with the properties.

Regardless of the property, we recommend hiring an attorney to help you clear a tax deed title, fend off third party claims and maximize your return on investment.

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