@Rita Lo It is very difficult to use a bank when it comes to auctions. They won't lend the money out until you have the property and they will typically need 30 days to close the deal. Even HMLs won't lend on auction properties. And if you get involved in tax auctions they come with up to a 2 year redemption period that clouds the title. The paperwork is super simple. You hand over a chasier's check for the amount of your bid or greater and they give you a constables deed (tax) or deed of trust (I believe this is what you get from the foreclosure auction). This is how auctions all over the country work for the most part. You have to have the cash up front and only have a day or less to get the funds to the group running the auction. In Texas, all auctions are live (not online) and must be done in person or through someone that you work with that is their. You can get properties pretty cheap but you are going in completely blind on if the property is occupied, the condition, and any other things that would be typically found through title or an inspection. It is a gamble, especially if you are out of state.
@François DesCotes When you buy at the tax auction MOST liens are dissolved. Mortgage liens will all go away as well as mechanic liens. IRS and a few other municipality liens do not get cleared and must be paid by the new owner. It also becomes very difficult to get clean title until the full redemption period is up. In Texas this is 6 months if there was no homestead exemption or 2 years if there was a homestead. Where it can become really tricky is that I have heard of one instance where the delinquent owners didn't file the exemption then after the sale and 6 month period were able to claim some reason as to why they weren't able to file the exemption and were able to get their property back after improvements were made.
The court does require that anyone redeeming a property pay 25% interest on the purchase price plus expenses to maintain and secure the property (not upgrades). If it is after the first 6 months the interest jumps to 50% so it is rare that any property is ever redeemed during this period.
This is all for tax auctions. Foreclosure auctions in Texas do not have any redemption period. The home is your free and clear after the deed from the auction is filed (typically within a week).
To answer the last part of your question, you would need to do a title search (cost $150+) just to check on liens. You can also do it yourself using Court House Direct. It is a Texas based company that has digital copies of court house records. You can pay for the records or you can just do a grantor and grantee search to see what liens are on the house and what liens may be there. You have to search both indices to see what they granted to others and what others may have filed on them. It takes some practice but it gets you good results for free.
Ryan is right on the money with all of his comments. The only correction I will add is that in Texas the interest jumps to 50% after the first year. As for homes with mortgages, they almost never go to tax auction because the banks have systems in place to alert them if the taxes are delinquent and they either foreclose on the home first or pay the taxes and the property gets pulled from the sale. That is why most banks require you to keep an escrow account so they can make sure they get paid. I have heard of rare cases when lenders and owners drop the ball in which case they will redeem it and you make 25% (in Texas).
@Rita Lo I suggest going to a tax and/or foreclosure sale just to watch and observe. It won't cost you anything besides your time. The biggest con to buying properties this way is that you usually do not get to go into the property before you buy so you could have some nasty surprises when you do get in so your rehab budget has to have a lot of wiggle room.
Yes the high value ones usually get removed prior to the sale. If they do make it to the sale, the price will be bid up very high-sometimes all the way to market price. If the sale goes through and gets redeemed by the owner, they have to pay 25% interest on the price paid at the auction, not just what was owed in taxes. HOA dues are not a tax sale though and do not wipe out liens like the tax auction does.
@François DesCotes It has already been answered but banks normally do what they can to check that this doesn't happen. That being said, homes with mortgages are foreclosed on by taxing entities more than you think. Still not tons but it happens. From what I understand after talking with two different mortgage companies about this, the process of verifying taxes is manual and time consuming.
A taxing entity will typically give you at least a year before they start foreclosure processes, the longest I have seen is waiting 4 years. When it is a shorter time period, it can slip through the cracks at a bank or mortgage processor. After the sale, they can use the redemption period to get the home back but will have to pay the 25% which isn't always in their favor because of the possibility of the home getting bid up. At this point, the balance of the loan becomes a loss.
The reason this is rare (though it does happen) is because if someone is more than a year behind on their property tax, they probably haven't been paying their mortgage either. Mortgage companies don't wait a year plus, they will start foreclosure after as little as 2-3 months. This means that their foreclosure will happen before the tax foreclosure.
Thanks for the explanation guys!
I am going to the Sheriff's sale tomorrow just to see how it works. I can't wait to see what happens to the $250k house on the block for HOA dues. I went to see it yesterday and it is a very nice house, with someone still living in it. I am hoping to talk to some of the people who show up and learn even more.
Have a great day!
@François DesCotes I didn't mention earlier but for most Texas tax sales you need to get a pre-approval letter from the county clerk stating you are current on all properties owned and paid on all properties previously owned. You will want to find out what is require by Denton County to be eligible while you are at the sale tomorrow.
@Ryan Blake Great info! Thanks!