A tax deed is similar to a quit claim deed. However, unlike tax liens, which is debt simply held against the property, tax deeds give the investor ownership rights to the property in most states. There are two ways to acquire a tax deed. Either through a lien conversion in a tax lien state or through a tax deed auction in a tax deed state. A lien conversion means you are converting your tax lien into foreclosure because the redemption period has expired. For example, if you purchase a tax lien in some states from the county and it has not been paid back in three years, you can file for foreclosure and own the property free and clear.
Some state will simply sell tax deeds and they do not hold tax lien auctions. So there are no redemption periods or any tax lien conversions to keep track of. You will own the property immediately after the sale is complete.
Tax deed auctions are usually more expensive than tax lien auctions. The reason for this is because tax liens are based off how much property taxes are owed, while the price of tax deeds are typically based on the number of bidders and the perceived market value of that particular property.
If for some reason the property doesn’t sell at the tax deed auction, then the property reverts back to the county and the county can sell it in an over the counter sale. This gives the investor the opportunity to purchase the property without having to bid on it during an auction.
One really important thing to keep in mind if you are considering making a tax deed investment, the investor is not receiving a warranty deed as you would if you were making the purchase through conventional means. Instead, the investor receives either a constable’s deed, a bargain and sale deed, or a sheriff’s deed. These types of deeds come with in warranty and are sold “as is”.
The major problem with “as is” property is its resale value. You will not be able to sell it at full market value without court action or convincing a title company to issue title insurance on it. Most people who are buying property want to make sure the property they are buying is without risk, so they will probably be reluctant to purchase property that has no warranties.
You can file a quiet title suit in court which will remove any doubts about the property’s ownership. The cost of a quiet title suit is going to depend on the court and attorney fees in your area. There are also title companies that specialize in insuring tax deeds. This option is typically lower in cost than a quiet title court action.