Texas Tax Sale: Lender strategy

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Texas Tax Sale: Lender strategy

Robert Steele
Investor · Lucas, TX · Member since 2010 · 620 posts · 352 votes

A friend asked me about a SFH being auctioned on the court house steps in a Texas county. At the conclusion of the sale I understand that the mortgage is no longer attached to the title. It becomes an unsecured loan (by the way the owner has no other real estate assets to get a judgement against). If the property is at say 65% LTV and we are talking a half million property what does the lender do prior to the auction - which is only a couple of weeks away?

Do they just let it go? If they do and the amount is for more than the taxes doesn't that money go to the owner?

Do they pay up the taxes and foreclose?

Do they go to the auction and bid? How much do they bid up to? It's not like they can do a full credit bid as they didn't win the judgement - the county taxing entity did.

All the tax sales that I have seen don't have mortgages because the lender would never let the process go this far and risk losing their security.

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Roy Oliphant
Rockwall, TX · Member since 2014 · 380 posts · 211 votes
10y

@Robert Steele

While I agree the statute does not specifically give the mortgagee a redemption right, it is well established in case law (all the way to the US Supreme Court).  Generally, courts have interpreted the tax foreclosure statutes with a finger on the scales on the side of the previous owner and not the investor.  So long as the investor gets the statutory return (In Texas that is a 25% annual penalty rate) courts will try to find a way to return the property to those previously involved.  Maybe owners vote and banks contribute while investors just enrich themselves. 

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  • Roy Oliphant
    Rockwall, TX · Member since 2014 · 380 posts · 211 votes
    10y

    Our experience is the lender will usually try to pay the taxes before the auction.  However, there are times when they miss getting that done and the property goes to auction.  When this happens the lender will usually redeem the property after the sale, depending on the numbers.  We've had a few like this and they get redeemed pretty quickly. 

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  • Robert Steele
    OP
    Investor · Lucas, TX · Member since 2010 · 620 posts · 352 votes
    10y

    @Roy Oliphant Thanks for commenting. I don't see how the lender can redeem the property though? The Texas Property Code Sec. 34.21. Right of Redemption only mentions the owner. The lender is not the owner.

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  • Roy Oliphant
    Rockwall, TX · Member since 2014 · 380 posts · 211 votes
    10y

    @Robert Steele

    While I agree the statute does not specifically give the mortgagee a redemption right, it is well established in case law (all the way to the US Supreme Court).  Generally, courts have interpreted the tax foreclosure statutes with a finger on the scales on the side of the previous owner and not the investor.  So long as the investor gets the statutory return (In Texas that is a 25% annual penalty rate) courts will try to find a way to return the property to those previously involved.  Maybe owners vote and banks contribute while investors just enrich themselves. 

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  • Robert Steele
    OP
    Investor · Lucas, TX · Member since 2010 · 620 posts · 352 votes
    10y

    @Roy Oliphant

    Makes sense. Well 25% return in a few weeks is a pretty good investment still!

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  • Robert Steele
    OP
    Investor · Lucas, TX · Member since 2010 · 620 posts · 352 votes
    10y

    Oh one more thing. Let's say this house is worth $500K and the taxes due is $50K. Someone bids it up to $250K. Now my understanding is that the previous owner gets the $200K remainder after the taxing entities get paid. 

    So later the lender comes in and wants to redeem the property. They pay $312K. The lender has an asset worth $500K but they lost their original mortgage, say $250K. They sell for $500K and get all their investment back with no profit.

    It seems like the previous owner just made out better than all of us. :)

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    I believe they would credit bid the amount of their mortgage.. and I would think once overages have been paid out it would be tough to unwind..

    I agree with @Roy Oliphant the courts will side with the old owner or lender far before the interest of the investor.. I have personally done it as a lender in another state.. were we missed it.. lost it petitioned the court and got it back.. Investor not happy at all... LOL>

    in CA this would not happen .. you lose it you lose it.. NO right of redemption for anyone.

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  • Robert Steele
    OP
    Investor · Lucas, TX · Member since 2010 · 620 posts · 352 votes
    10y

    @Jay Hinrichs

    When you personally did it as a lender you still had to pay the redemption interest to the investor correct?

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Robert Steele  correct !!!  but it was better than getting wiped out  :) and it cost about 3k in legal fee's..

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  • Bret Allen
    CA · Member since 2016 · 71 posts · 48 votes
    10y
    Originally posted by @Robert Steele:

    Oh one more thing. Let's say this house is worth $500K and the taxes due is $50K. Someone bids it up to $250K. Now my understanding is that the previous owner gets the $200K remainder after the taxing entities get paid. 

    So later the lender comes in and wants to redeem the property. They pay $312K. The lender has an asset worth $500K but they lost their original mortgage, say $250K. They sell for $500K and get all their investment back with no profit.

    It seems like the previous owner just made out better than all of us. :)

    The surplus funds (difference between the 50K owed and the 250K sales price) are paid upstream in priority of the liens, then the to home owner.  Usually the lender will get the surplus.  However, I have seen cases where the Lender didn't have an assignment on file and the prior lienholder (now bankrupt) was noticed of the surplus funds.  The current lienholder didn't respond and the money went to the borrowers.  The Lender was out of luck and the price + the penalty was too high to make good business sense.  In this case the owners made a killing being foreclosed on. 

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  • Bruce Lynn
    Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
    9y

    @Robert Steele what I see most often is that the lender at the very last moment will step in and pay the taxes + all the fees associated with the suit and it gets pulled from auction.  Even the morning of the auction.   Not everything on the initial list will get auctioned.

    You might be right about excess funds, however the previous owner very rarely knows about this and there is a pretty tight time limit.  I think 30-60 days.  To the best of my knowledge the county or taxing authority does not have to notify them about this.  Even if they did, they probably would ignore it as they have not taken care of any of the previous issues.   You can also think about notification issues....too often they can be found or don't want to be found.   They're probably ignoring all the notices anyway.

    Lenders are notoriously inefficient...but I have yet to see one with a big mortgage get sold.   I can think their attorney's might load you up with law suits too if they messed it up, so even if you are right, they make you give up.   Every now and then you can see some screw-ups, but pretty rare.

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  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
    9y

    The petition to the court for excess proceeds must be made within 2 years

    Back in the 90s while at The University of Texas, I used to buy lots in an area around Austin for $25 or in many cases free and sell them for $500 or so.  Approx 7 years later, an Attorney contact me about some excess funds as apparently I forgot that I still owned a few.  He did the petition for 20% of the proceeds and I received a nice check for a few thousand dollars !

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