For the last 8 years I have been intimately involved in tax deed sales and tax lien sales. I've seen many programs covering this subject matter, come and go. I have also seen changes in the marketplace, changes in laws, and changes in the public's perception of tax sales.
After working with nearly 1000 investors, I can say with great certainty that one thing has not changed: the opportunities and laws relating to Texas tax deed sales are second to none. In this article I discuss the Texas procedures the benefits that investment in Texas tax deed sales can have for the diligent investor. I will also dismiss some the misconceptions and marketing hype surrounding this type of investment technique.
Introduction – How Does this Process Work?
Let's start with a basic introduction of the Texas tax sale process. The Texas foreclosure laws allow common citizens, just like us, to purchase tax sale properties. Here's how it happens:
In Texas if property taxes are not paid a tax lawsuit is filed to collect the taxes. Basically the tax suit is a lawsuit filed on behalf of the county in order to compel the payment of property taxes. If these property taxes are not paid then the county will have the court mandated right to sell the property for the back tax amount. In other words, the county will offer the tax delinquent property at a public tax sale auction. The opening bid will typically be made up of the amount of back taxes owed. This amount will usually be made up of:
- Delinquent Property Taxes
- Interest Charges
- Penalty Fees
- Legal Costs
- Administrative Charges and Fees
When tax deed is sold, the purchaser acquires the rights held by the county or taxing unit. Tax sales may be held monthly, quarterly or annually. There are very few restrictions regarding bidding at these sales (i.e., you do not have to be a real estate agent, professional investor, etc.); however you usually must be able to pay the bid amount within a short period of time and you cannot be delinquent yourself in taxes, in that particular county.
After the sale and for a specified period of time the delinquent taxpayer has the right to buy back or “redeem” the property. This is called the right of redemption. In many cases this redemption period may be as short as 180 days (for certain property types in Texas). If the delinquent taxpayer does not redeem the property during the specified time, then the successful bidder is entitled to the property regardless of the purchase price. Let me say that again: the successful bidder would be the owner of the property even if it was bought for $15,000 and it has a market value of $150,000!
That sounds great, but what happens if the delinquent taxpayer decides to exercise their right of redemption? Does the investor lose the money they spent at the action? No not at all! In that situation the delinquent taxpayer must pay the investor an interest penalty charge in order to “redeem”. This interest charge could be as high as 25% or even 50% (for second year redemptions). What this means is that the investor will generally get back the original investment plus the interest penalty charge. The delinquent taxpayer will get their property back.
What Happens If the Delinquent Taxpayer Does Not Redeem?
If the delinquent taxpayer does not redeem then the investor obtains full title in the property. That's right title! Remember what I said above: If the delinquent owner does not redeem the property during the specified time period then as the successful bidder, the investor would be entitled to the property regardless of the purchase price.
Is Texas a ‘Tax Deed' State or a ‘Tax Lien' State?
Texas is a ‘hybrid' state. NOTE: You won't find that word in the Texas Property Code. This means that the state combines the some of the aspects of the tax lien states and some of the aspects of the tax deed states. For example, in Texas the successful bidder obtains a tax deed at the auction. The tax deed gives the purchaser FULL RESPONSIBILITY for the property. This is very similar to the process in traditional tax deed state. Nevertheless, in Texas the winner bidder is not guaranteed eventual ownership of the property. This is because the delinquent taxpayer still has a redemption right. This is very similar to the procedure in a tax lien state. If the delinquent taxpayer wishes to redeem, they must pay a penalty return within a certain amount of time to “redeem”. Generally, in Texas the period is either 180 days or 24 months. The amount of time will depend on the type of property that is sold at the tax sale. Investors who want the shorter redemption time period (i.e., 180's will target certain types of properties at the tax sale).