Can I Get the Deed to a Property by Paying Someone Else’s Unpaid Taxes?

You might have bumped into a “hack” on social media: cover taxes for a home and receive the deed. A team of investigative reporters in Houston noticed get-rich-quick schemers touting the ploy in video ads. So the reporters looked into it. 

The verdict from the news station? Simply paying off an old property tax bill does not make anyone a deed holder. These video ads are misleading because there’s just a lot more to it. Making a profit out of unpaid property taxes takes a good deal of attention and time. Let’s take a look.

Tax Lien States: Where a Lien, Not the Deed, Is Auctioned

As a general matter, you don’t get a deed for paying property taxes. Every state has its own laws on this. Some states auction off claims on the title — but not the title itself.

A state will either have laws that (a) direct counties to run tax deed sales, or (b) auction off tax liens. Sometimes it’s both. That’s because in some states, unresolved liens progress into tax deed sales. So a threshold question is whether a property’s county is in a state that actually runs tax deed sales. Because some states auction off lien certificates only.

In the states called tax lien states, the investor who makes the highest bid receives the tax lien certificate in the mail. Unless the distressed title holder manages to step up to repay what’s owed, the top bidder pays the overdue taxes to the government. At that point, the government has recouped the debt. But the investor doesn’t get the title.  

What happens is the investor’s lien clouds the title. Until the title is clear, there can be no sale or borrowing against the home until the delinquent taxpayer makes good on the debt. Meanwhile, the investor should receive the interest on the debt as income. Interest rates vary by county.

Eventually, if the time to repay winds down and the tax debt goes unresolved, the investor can use the lien to foreclose, and fully pay their bid. Only after all of the above occurs can an investor walk away with a deed to the property.

In this way, getting the property deed by paying the taxes could potentially happen in a tax lien state. But there are numerous hoops to jump though. This is not exactly a get-rich-quick proposition.

To get through the process, many investors hire professional tax lien firms to handle it.  

Rites of Passage: What Happens in States That Do Auction Off Homes

Some states have auctions called tax deed sales. The key word is deed. Such a sale can eventually result in a transfer of a deed — the rights of ownership — to the successful bidder.

If you are looking for a property in a tax deed sale state, here’s how the sale process generally plays out:

• A late taxpayer gets a past-due notice once the tax deadline has passed.

• If no repayment comes, the local revenue office needs to deem the taxpayer delinquent. In this case, the state’s law may let the local government impose certain fees and penalties.

• Ultimately, a judge issues a tax lien for the unpaid sum. The title holder or heirs then get a deadline for settling the lien.

• If the county’s demands for payment continue to go unanswered, the county can rely on the tax lien to set up an auction.

Will the auction even occur? It’s not likely. Liens tend to get worked out before that point. If anyone pays the taxes, penalties and fees, the property can be deleted from the auction schedule. But that doesn’t give the home over to a third party who pays the back taxes.

Does the deed holder facing foreclosure lose all the home’s value? Usually, the government gives the distressed deed holder their surplus home equity after the overdue taxes are resolved.

Example Sale Process: Philadelphia

To see sheriffs’ sales online, you can visit Bid4Assets, a GovDeal Marketplace. Through that website, successful bidders can also update the deed and vest ownership of the property at the end of the process.

Let’s take Philadelphia City/County as an example of how one jurisdiction handles auctions on the Bid4Assets site.

To participate in a Philadelphia real estate tax auction for tax-delinquent, foreclosed homes, an investor must:

• Deposit $500 (and an additional $35 processing fee) through the website in advance.

• Undertake due diligence, as some claims and liens might not be resolved through the post-auction distribution.

• Be prepared to show proof of identity.

• Have $16K on hand for the minimum bid, and be ready to put down 10% of the purchase price.

• Pay the full purchase price 15 days post-auction.

If a winning bidder fails to come up with the total on time, the second bidder, upon matching the first one’s winning bid, may then buy the home.

The city distributes the property 30 days after a sale.

Note that not all properties which fall behind in taxes can go to private investors. The city makes clear that the Philadelphia Land Bank gets exclusive dibs to bid on certain properties.

Due Diligence: Plenty of Risks to Investigate

In tax sale states, a bidder has to be alert for a raft of possible pitfalls:

• Governments sell the homes without any warranties or guarantees.

• An investor has to do the legwork of uncovering unpermitted work in the home, hazards, or inoperative systems.

• Utilities aren’t necessarily ready to go. There might be repair work needed to get the home up to code before anyone may occupy it.

• Insurance policies can be hard to get.  

Getting a title insurer involved from the start is a key part of the investor’s due diligence. To avoid a quiet title action in court, the high bidder might need to hire a tax title clearing service.

Nick of Time: When an Owner Resolves the Debt

When a high bidder pays off someone else’s tax bill, the county government is no longer the creditor. The investor is. State law determines how long a delinquent taxpayer gets to repay an investor.

The law might give owners many months to resolve the situation during a statutory redemption period. When an owner becomes capable of resolving the debt, the real estate investor who bids on a distressed home ends up with just a refund (with interest).

In short, getting the deed isn’t an automatic result of paying someone’s property taxes.

Important note: If you have case-specific questions, speak to a real estate lawyer with on-point experience. This article does not substitute for a consultation with a financial or legal expert.