Thinking About Buying at a Tax Auction? Read This Before You Bid

Buying property at a tax auction in Hawaii might sound like a shortcut to a great deal, but it can come with serious risks if you don’t know what to look for. Over the years, I’ve seen plenty of eager bidders walk into tax sales expecting a bargain, only to discover unexpected complications after the fact.

Before you raise your paddle, here are a few things you absolutely need to understand.

Years ago, during tax sale season, our office near the airport would see a steady stream of hopeful bidders looking for advice and maps. Most were excited about getting a deal, but few had done the deeper research.

The notices always clearly stated that properties were sold “as is and without any warranties as to title or physical condition.” Unfortunately, that warning is often overlooked in the excitement of the auction.

What is a Tax Deed?

A tax deed is like a quit claim deed (you get whatever the County has) with the caveat that the property has a 1 year right of redemption. This means the foreclosed owner can redeem the property for up to a year. Simple, right? You bid, you win, you wait the year and do what you wish…NOT SO FAST!!!

Title Issues

Before you bid, you should determine the state of title. This requires a CURRENT preliminary (prelim) title report. As the proud new owner, you could be responsible for clearing any IRS or State Tax Liens, child support liens, mortgages, past due association dues and, in some cases, dealing with heirs/additional owners (beware of “exceptions;” this innocuous word could refer to hundreds of potential unknown heirs). The County requests a prelim on each property. This means you will need to determine which property you are bidding on in advance. But wait…there’s more.

Title Insurance Challenges

You should know that when it’s time for you to convey (sell) the property, it’s very difficult to get title insurance. Some title companies will not provide it at all, and some want to wait 10 or even 20 years before they will issue a title policy. It’s impossible for your buyer to get a loan without title insurance. Even cash buyers want title insurance. Title companies generally want to be sure that the delinquent taxpayer received actual notice (not just notice in the paper) of the upcoming sale.

An over-payment by a bidder and a cashed check could suffice, but it’s really up to the title company. There is no requirement for any title company to issue a policy. Remember, the county allows anyone to pay taxes. In other words, the actual title holder may not be paying the taxes.

Ownership Complications

Agreements of Sale are a bit more tricky. With those, the note/mortgage holder retains actual title while the owner of record has equitable title. Again, it would be up to the title company to determine if the person who received service is sufficient. Without sufficient service, even heirs of a deceased owner could step in to re-assert ownership.

Due Diligence Matters

Tax auctions can offer opportunities, but they’re not the easy “deals” they’re often made out to be.

If you’re considering bidding on a property, it’s worth taking the time to understand the risks and do the proper research upfront.

If you have questions about a specific property in Hawaii or want guidance before you bid, feel free to reach out. A quick conversation can save you from a very expensive mistake.