Delinquent property taxes can scare off new investors all too easily. It makes sense, though, as many homebuyers will want to avoid anything having to do with extra taxes and worries that their property could be taken away due to hidden back taxes. Luckily, buying a home in arrears to the tax office can be much less of a hassle than you think. So let’s dive into how to buy a property with delinquent taxes as efficiently as possible.
It’s very easy to purchase a home with delinquent property taxes. Make sure to read over your purchase contract to understand who will be responsible for getting the property in the clear (it will most likely be the seller). Also, be sure to use a title company that will do the research to ensure the property doesn’t have any liens or encumbrances attached. Once you have these two factors covered, buying a property with back taxes is a simple process like purchasing any other home.
How simple of a process? Well, that’s the complicated part, as there are a few ways to go about doing it. Let’s talk about what exactly delinquent taxes are, who should pay them, and a few different options you’ll have at your disposal to create a profit on the property.
What are Delinquent Property Taxes?
Delinquent property taxes are back taxes that the previous homeowner has not yet paid to their local tax office. There’s no set cut-off of time a homeowner has before the government seizes the home, but they’re often past due for multiple years. The local government who is owed the property tax may try to set up a payment plan, garnish wages, or even take ownership of the property if need be.
While that may sound intimidating, you have to be in pretty bad shape for the sheriff to come knocking with an eviction notice. It’s more in the government’s interest to work with the homeowner than it is to seize the property. This is good news for us as investors, as a home with back taxes due may be a property that can be sold quickly since everyone involved on the selling side wants to move on as quickly as possible.
Who Ends Up Paying the Back Taxes?
In most cases, the seller will be responsible for paying any outstanding debts to clear the title before selling, though there are a few ways they can go about it.
How Paying Back Taxes Usually Works
Let’s say that the seller has two years of back taxes due. The property taxes amount to $2,500 a year, and there will typically be some fees associated with getting the property cleared. So let’s just round it to $6,000 in back taxes for two years of delinquency.
In addition, just for fun, let’s also say the seller owes $50,000 to a bank for the mortgage.
Now here you come as a savvy property investor who agrees to pay $100,000 for the home. The seller will then take that $100,000 and pay back the bank their $50k plus pay the tax office their $6,000. The seller then nets $44,000 from the sale. The title is cleared, and you then own the property outright.
What Happens if There is No Profit for the Seller?
But what if you run into a situation where the seller will still owe money? Does that mean you’ll need to make up the difference?
Going back to our previous example, let’s say that the seller still has two years of past-due property taxes amounting to $6,000. But this time, instead of owing the bank $50,000, they owe $100,000. When the property is sold, the bank will get their $100k, but what happens to that outstanding $6,000?
There are a few things that can happen:
- The seller brings that $6,000 to the table. The property is then sold to you.
- You increase your offer by $6,000 to cover the taxes. The property is then sold to you.
- The bank agrees to a short sale to get rid of the property.
- The tax office discounts the amount of tax owed, and the seller brings that amount to the closing (this is rare).
What Options are There for Me to Purchase a Home that Has Delinquent Property Taxes?
One of the options I just mentioned involves you increasing your offer to cover the extra taxes owed. Why would you do that, especially if you’re doing this for a profit?
This is actually a strategy sophisticated investors will use if they feel the home is being undervalued. There are a few reasons they might do this:
- It raises your standing with the seller and makes it more likely they’ll sell to you. This is an excellent tactic in competitive markets.
- It removes the hassle involved with the outstanding fees. Why lose a home that has the potential to create profit for you over a measly $6,000?
This is, of course, assuming that you’ve done the math and can still come out ahead. I wouldn’t recommend increasing your offer if you’re not 100% confident that you’ll make back your money.
If you’re interested in a property and aren’t willing to increase your bid, not all hope is lost. Here are a few other ways to make it work.
A Few Other Ways to Invest in a Home in Arrears
Ask the bank for a short sale – This is where a bank will take less than what’s owed on the property to liquidate it from their inventory. There is more nuance to it than this, so check out my video that discusses what a short sale is.
Try a tax lien investment – The option to do this varies in each state, so do some research ahead of time. A tax lien investment is where an investor will offer to pay the back taxes instead of the homeowner. The homeowner then pays the investor what’s due instead of the county or city, plus interest and any additional fees. If the investor can foreclose due to the outstanding lien, they then can take ownership of the property. However, ownership is not guaranteed as many homeowners will clear the lien before you can foreclose and evict them.
Should I Avoid Properties that Have Delinquent Taxes?
I don’t think investors should avoid homes with delinquent taxes. It can be a great way to find hidden deals that haven’t yet made it to the MLS. As long as you use a standard purchase contract that stipulates the seller is responsible and you have a title company backing you, the process is pretty straightforward.
So why do I keep mentioning a title company? Well, if you close with a title company, that title company is responsible for taxes being current, not you. You’re paying them to do the research necessary (known as a title report) and making them put their money where their mouth is, which covers you should they miss something.
Overall, I think properties with delinquent taxes can be hidden gems for investors. Take the time to ensure you’re covered by working with a title company and by using a standard purchase contract which states that the seller is responsible for outstanding taxes, not you. Having these two significant factors on your side can make this as simple as it would be to purchase any other property.
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