Buying tax deed properties can be a golden opportunity for real estate investors. Properties are often available at a fraction of their market value, making them highly attractive. However, one of the biggest risks that can turn a great deal into a nightmare is hidden liens. These are claims or legal rights against a property that remain attached even after the tax deed sale. Buyers unaware of these liens may be in for a rude awakening.
Why Tax Deed Properties Come With Lien Risks
When a property is sold at a tax deed auction, the government is only clearing unpaid property taxes. This process does not necessarily eliminate all other claims attached to the property. Unlike traditional property purchases, where title insurance and escrow services help ensure a clean title, tax deed purchases are often “as-is” with little to no guarantees. This means buyers could inherit various liabilities unknowingly.
The Difference between Tax Liens and Other Liens
It’s important to distinguish between tax liens and other types of liens. A tax lien occurs when property taxes go unpaid. In most states, the government has the first claim, meaning tax liens typically take priority over others. However, many other liens can remain attached to the property even after the tax deed transfer—unless they’re properly addressed through legal proceedings or cleared by the county.
Common Types of Hidden Liens on Tax Deed Properties
Some of the most common hidden liens include IRS liens, code enforcement liens, HOA dues, mechanic’s liens, municipal utility liens, and judgment liens. Each type has different rules about whether it survives a tax deed sale. For instance, IRS liens don’t automatically vanish; the IRS may still have a right to redeem the property within a certain period after the sale. HOA dues are often collectible even after a tax deed transfer, and code violations may not go away unless explicitly cleared by the city or county.
How Hidden Liens Can Affect You as a Buyer
If you purchase a property with hidden liens, you may be liable for paying them off before you can take full control of the property. In some cases, lienholders can foreclose, sue, or prevent the property from being transferred to a new buyer. Even worse, some cities may require the new owner to clear up past code violations or unpaid utility bills before issuing new permits or allowing occupancy. All of these scenarios can cost you thousands of dollars and delay your investment plans.
Why Title Searches Are Crucial Before Buying
Conducting a title search is one of the most effective ways to protect yourself from hidden liens. A proper title search reveals recorded liens, judgments, and encumbrances that might affect the property. While most counties do not provide this service for tax deed sales, it’s wise to hire a title company or use online databases to perform your own due diligence. Skipping this step could mean walking blindly into a legal and financial mess.
Can You Get Title Insurance for Tax Deed Properties?
Most title insurance companies are hesitant to issue a policy on a tax deed property right after the auction because the title is not yet considered “marketable.” In many cases, you’ll need to pursue a quiet title action, which is a legal process that clears the title and makes it insurable. This process can take several months and cost anywhere from $1,500 to $5,000 or more, depending on the complexity and the state.
The Role of the IRS in Tax Deed Sales
An often-overlooked player in tax deed investing is the Internal Revenue Service. If the property had a federal tax lien recorded before the sale, the IRS has a 120-day redemption period to reclaim the property. Although the IRS rarely exercises this right, it legally can, and doing so can nullify your purchase. This makes it essential to check the public records for any federal liens and understand the timeline and risks involved.
What Is a Quiet Title Action and Why It Matters
A quiet title action is a lawsuit filed in court to establish legal ownership of a property and eliminate competing claims. This is often the only way to clean up the title after purchasing a tax deed property. If successful, it removes most types of lingering liens and clouds, making it possible to get title insurance and resell the property. Without it, your ability to leverage or sell the property may be severely limited.
How Local Governments Handle Code Enforcement Liens
Some cities and counties are aggressive about collecting code enforcement fines and penalties, and many of these survive tax deed sales. These can be for things like tall grass, unsafe structures, or unpermitted construction. Some municipalities will not allow you to renovate or even enter the property until these fines are paid. Others may keep accruing interest or penalties, creating a snowball effect on your costs.
Homeowner Association (HOA) Dues and Special Assessments
HOA dues and special assessments are another type of lien that may not be wiped out by a tax deed sale. Many homeowners’ associations have governing documents that allow them to pursue unpaid dues from the new owner. Even if the previous owner racked up thousands in unpaid fees, you might be held responsible. Always check the HOA’s rules and request a statement of account before closing the deal.
Navigating the Risks with the Right Strategy
Despite the risks, tax deed investing remains a profitable venture for many, as long as you go in prepared. Knowledge and due diligence are your best tools. That means thoroughly researching every property, checking for existing liens, and understanding the local rules and statutes that apply. A cautious, informed approach can help you uncover great deals while avoiding the costly surprises that hidden liens bring.
How TDHunter.com Helps You Avoid Costly Mistakes
At TDHunter.com, we’re committed to making tax deed investing safer, smarter, and more profitable. Our platform helps you research properties, analyse risk, and learn the strategies that top investors use to avoid hidden pitfalls. Whether you’re just starting out or you’re looking to sharpen your edge, we provide the insights and tools you need to succeed in this fast-moving world of tax deed auctions.
