Texas Tax Deed Auctions

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).

Favorable Texas Laws!
At this point I am sure that most of you understand tax delinquent property in Texas is sold for back taxes at a public auction. Now lets cover some of the interesting distinctions and benefits that the Texas tax sale market can offer:

I. At Interest Rates of 25% to 50% Texas Provides the Highest Profits if a Redemption Occurs: In Texas, if the delinquent taxpayer wants to obtain their property after your purchase at sale they must pay you either 25% (for first year and 180 day redemptions). In some situations a 2 year redemption will apply, but don't worry because in this situation the investor is paid a whopping 50%! This represents one of the highest rates of return available in ANY tax lien or tax deed state.

II. The Redemption Amount is Calculated Based Upon the Price the Investor Has Paid at Auction: This is an astounding aspect of the Texas procedure! For example lets assume that John attends a tax sale in Harris County:
John researches a property which is scheduled to sell at a Harris County tax sale. The opening bid for the property is $5,000. The property is offered for sale and is bid up by other investors who are also interested in the property. John takes part in the bidding and wins the property for $15,000. One month later the delinquent taxpayer, Sheila contacts John and informs him that she would like to redeem the property. Sheila will have to pay John a 25% penalty calculated from the $15,000 that John paid at the tax sale NOT the original opening bid price of $5,000!

As you can imagine this presents a significant return for John, because he is earning interest on all the funds invested including the overage he paid due to the competitive bidding. If the property has a market value that is reasonably higher than $15,000 (and proper research was conducted) then John cannot lose. He would have either obtained the property for cents on the dollar or obtains a 25% or 50% return on his investment. While most tax lien states are paying 2% to 5% in interest to the investor, Texas still pays a FULL 25% to 50% on redeemed deeds.

III. Additional Fees and Costs Are Included in the Amount Required for the Delinquent Taxpayer to Redeem:
According to Chapter 34.21 (b) of the Texas Tax Code:

The owner of real property sold at a tax sale may redeem the property by paying the purchaser:
1) The amount the purchaser bid on the property
2) The amount of the deed recording fee
3) The amount paid by the purchaser as taxes, penalties, interests and costs on the property, and
4) The penalty return amount

What this means is that the investor will also obtain the penalty return (i.e., 25% or 50%) on the deed recording fee, the amount paid to preserve and maintain the property and any later taxes paid on the property. For the investor this represents a significant return with very little downside. Impressive to say the least.

IV. Texas Uses a Full Interest Penalty Return System Unlike the Majority of Tax Lien States: In Texas, if the delinquent taxpayer wishes to redeem the property, they must pay a full interest penalty calculated from the final price paid by the investor at the auction. For example, if the delinquent taxpayer wishes to redeem the property 3 weeks after the tax sale, they must pay the full 25% return in addition to the costs and fees described above. This is very different than most tax lien jurisdictions in which a quick one month redemption might total a modest 1% in interest or even less!

The same rules would apply for a $100,000 dollar investment in which the delinquent taxpayer redeemed quickly. A full 25% return would be earned on the $100,000. Now the $125,000 could be re-invested back into the Texas tax sale system for even greater returns. Combine this with a tax-deferred, tax-free IRA and the results are nothing short of staggering!

V. Texas Has Monthly Sales: The vast majority of tax lien states have rapidly eroding interest returns and annual sales which herd investors into a giant yearly tax sale. This can create excess competition, confusion, and limited opportunities for investment. Texas statutes allow counties the option of utilizing monthly tax sales. According to Texas law, the tax sale may take place on the first Tuesday of the month. This can provide the investor with numerous opportunities to invest in the Texas system many times during a given year.

VI. Texas Has 254 Counties and Each Will Conduct Tax Sales: Texas also has a vast number of counties 254 to be exact. Not every county will have monthly tax sales. Generally, only the larger counties will hold sales every month. However, the smaller counties offer the benefit of infrequent tax sales which can lead to lessened competition. Also the smaller counties have lists of properties which were once offered at tax sale, but for whatever reason did not sell. These are called strike off properties and will be discussed below.

VII. Numerous After Auction Opportunities: Under Texas law, counties may choose to sell unsold tax sale property at a later sale or offer them for sale after the sale. These are generally called strike off properties. The advantage of these types of properties is that they are available for purchase (in most counties) at any time. Also the investor may offer less than the back tax amount in some situations. Lastly, depending on how much time has elapsed since the original tax sale, many of these properties will not have a redemption period. So for the investor with hopes of obtained full title to a property, strike off sales can present meaningful opportunities.

VIII. The Texas Tax Deed is a �Super Priority� Lien According to Texas Statute: The Texas tax lien is referred to as a super priority lien. This means that it generally has priority over nearly every other type of lien, debt, claim or charge that may be attached to a property. Thus the purchaser (if proper research has been conducted) can in most cases obtain the property clear of most liens and encumbrances. Research is very important, and the investor must verify that legal notice has been sent to all affect parties.

IX. The Tax Sale Investor Also Has Rights to Any Rental Income Derived From a Tax Sale Property: At the time of this writing, Texas law allows the successful bidder at tax sale to collect any rents from the property immediately after the tax sale. If a property is occupied by a tenant then the investor might choose to leave the tenant in the property or evict. If a suitable tenant is in the dwelling house, then this can represent a significant source of cash flow.

You Must Perform Adequate Research!
Regardless of the benefits of the Texas procedures and their potential, favorable laws are no excuse for a lack of research and spotty due diligence. I believe the following areas are very important and just a sample of what the investor should consider before investing in this market:

1) Understanding Which Liens Will Survive Foreclosure and Conducting Adequate Research: Since most liens on a property will likely be liens from the state or a municipality within the state you must be aware of the possibility of other liens which will survive the foreclosure. Examples include state tax liens and home owner association liens. Federal tax liens also survive the foreclosure, but the Federal government will simply pay you what you paid for the property at auction if they hold a lien on a Texas tax sale property. We have a very strong understanding of these rules and routinely instruct the investor on surviving liens.

2) The Investor Must View the Property Before the Tax Sale: In Texas, the investor has a very high likelihood of obtaining full title to the property. This is why my company strongly recommended that investors view the property (in person or proxy) before the tax sale.

3) What About Other Fees Not Included in the Foreclosure? You must determine if there are any other fees or dues not included in the foreclosure purchase price. It can occur if a taxing entity that is owed money was not included in the tax foreclosure lawsuit. If they did not get notice or did not join themselves in the collection lawsuit then the amount they are owed will not have been added to the opening bid amount at auction. The Texas tax deed investor would still be responsible to pay for these fee amounts.

4) Avoid Doing Deals in Your Own Name: Why is this important? The reason is that when you purchase a property as an individual you are now personally liable for the anything that goes wrong with the property. This could include someone getting hurt on the property (yes, even a trespasser can sue you), liability from unknown liens, and a myriad of other problematic scenarios.

5) The Tax Deed Purchaser Has Full Possession of the Property Immediately Following the Tax Sale: This means that the investor must secure, protect and insure the property without delay. It also means that the investor who lives out of the state will have to manage and safeguard an out of state property. At a minimum, locks should be installed on the dwelling entry and exits, insurance should be obtained and any hostile tenants should be evicted.

I absolutely believe in covering all the positive and negative aspects of investment techniques. This does not mean focusing ONLY on the benefits or making wild claims about investment techniques. It DOES mean thoroughly covering what could go wrong and a relentless approach to risk reduction. Texas can present tremendous opportunities for the investor, but like any investment technique there are required procedures which must be mastered and the investor must stay consistent.

Attorney's Secrets to Investing in Tax Lien Certificates Looking for a way to invest your money and get a great return without having to worry about what wall street is doing?  If so then it is time for you to learn step-by-step about investing in tax lien certificates from the master.

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