Bought a house at a Tax Sale - now what?
This is more of an informative post than a post seeking answers but suggestions and comments are welcome. I just wanted to take the opportunity to share my experience of buying a house from a county tax sale in the hopes of entertaining and educating fellow RE investors. I apologize in advance to those of you who are sophisticated investors. I want to make the post clear for everyone. The house in question is a 2000 sq.ft. 3 bed, 2 bath in a good neighborhood in north Texas. The ARV is about $260K. More if it was done up nicely.
I did a drive by prior to the auction and searched the deed records for anything that might cause a problem, such as medical collections or federal tax liens. I noticed that the house had no mortgage so there was no chance of the bank swooping in to save the day. That's a good sign. Most houses that come up for auction never make it to the auction block. Having the Sheriff or Constable threaten to sell your house is a great motivator. People usually don't pull their head out of the sand until the last minute. I've literally seen an auction delayed because the owner was rushing with money to pay off the taxes. Anyway, I digress.
The day of the tax sale I come ready to bid up to $160K. I like to leave a very large cushion for houses I cannot see the inside of. I've done rehabs on houses, albeit larger, that have eaten up $100K. While I am milling around with the other dozen or so people waiting for the auction to start I overhear someone on the phone talking about this property and how it has a $90K IRS lien on it (which I will have to pay). Panicking somewhat I try to redo my deed research on my phone. Not very successfully I might add. Did I miss something? I still cannot find it. The auction is about to start. Do I lower my bid by $90K?
Instead I decide to trust myself. I've been doing deed searches for many years so I am confident that if there was such a lien I would have found it. The auction starts and as it happens I am only bidding against the guy who I overheard. Well he gave up and I got it for $130K. A lot less than I was expecting. He must have been adding the $90K IRS lien into his calculations.
Now what do I do? Well the first thing is I pay a title company a couple hundred to run an abstract of title on the property for me to see if I missed anything in my deed search like that IRS lien. It turns out that I did not. Whew, bullet dodged.
Next, I wait for the deed to be filed and once that is done I contact the current owners by mail sending them a copy of the deed and letter giving them until the end of the month (it was the 10th) to decide if they wanted to rent from me or move out. I even offered them $1K to help them move.
Now I know a lot of investors say do not rent to the previous owners if you obtain a house via auction and that is probably good advice but I had one sticking point. You see, I was worried about them trashing the house on the way out. As I have never seen the house and have no documented evidence I would never be able to prove what the condition was when I purchased it.
Now I've got a pretty good equity buffer here and how much damage could they really do? Well I've seen foreclosures that have been trashed on the way out and it's not pretty. Electrical junction boxes torn out, wiring pulled out of the walls, toilets removed and concrete poured down the drain. This in addition to all the normal holes in walls, windows broken and fixtures plus appliances removed. The costs can add up quickly.
Another reason that I want to rent it to them was so I won't have to worry about make ready. You see, when you buy a tax sale, in Texas at least, you have to hold it during the 2 year redemption period. You cannot sell. If the previous owner redeems it they have to pay back how much you bought it for and every necessary bill or repair plus 25 or 50%, if redeemed in the first or second year respectively. This means it can include costs such as insurance, taxes, lawn service and repairs necessary to maintain the condition of the property, like fixing a leaking roof. It does not include cleaning carpets, new paint or replacing broken appliances.
In addition, because of the fact that they can redeem the property at anytime, if I wanted to rent it out to someone else I'd have to make it a month to month lease which is not very attractive. Although I know many landlords advocate month to month I don't think they are dealing with A and B class properties. In my experience these types of tenants want yearly leases. All in all I would be looking at renting this property for well below market rent or risking some extra investment to make it rent ready.
So assuming I decided to kick them out given conventional wisdom or had to kick them out for non payment of rent what would my options be? I know that Texas law states that upon a demand to redeem from the previous owners I have 10 days to give them an itemized account of whats owed. This means that on day one I can give my tenants the 30 days notice required in lease. Once the previous owners are ready to pay I am then supposed to give them a quit claim deed. I figured I could drag that out another 20 days by not accepting payment. Lawyers don't move that quickly and by the time a law suit got off the ground the time would be up and I'd surrender the property to them. If the current tenants overstay their lease that's the previous owners problem. It says nothing in the law about having to give them back a vacant house. It also doesn't say anything about what condition the house has to be in which makes for some interesting thought experiments.
So I go over to the house several days later to introduce myself in person and get a feel for what they want to do. It turns out to be an old couple who didn't know that their house was even going up for auction. Not too surprising. In my experience the good houses that come up for auction are usually because no one knew about it. Of course they have no money but I know that the can claim the money from my bid in excess of the taxes owed, some $110K. This is another reason I am interested in renting to them. Unfortunately while it was an amenable conversation not much comes of our encounter.
So the end of the month rolls around and I am ready with the lease. They still don't have the money. I say don't sweat it. Just sign the lease and you can pay me later. Yes I know every landlord that has ever lived is rolling over in their graves right now. But it allows me to get inside to see the property and document the condition. Now I have a basis if they trash it and I know they'll have that $110K at some point so this is not like trying to get blood from a stone. I ask them when they can pay, they don't know but give me the 26th.
The 26th comes up and still no rent. They say that maybe they will be able pay on the 6th. The 6th comes by still no rent. They say that they are having trouble getting their money from the court. Apparently the court has some weird rule that you have to hire a lawyer to petition the court to get your money and the lawyer is not allowed to charge you more than $1K. I've never heard of the court imposing a restriction on how much you can pay a lawyer to represent your case. This sounds fishy. Either these tenants are blowing smoke up my *** or this is an elaborate way for the system to screw people out of money who are already down on their luck and cannot afford a lawyer.
The tenants have been telling me that an investor is interested in helping them to redeem it but is also waiting on them getting their cash from the court. I imagine this would work something like the investor getting a first mortgage on the property for the difference, about $53K by my reckoning which is a pretty good first lien position to be in on a $260K ARV house. A niche market for some of you maybe?
So now it's been 2 months since I first won the auction. I send a breach of lease demanding payment, the honeymoon is over and I haven't seen a single red cent from these people. No word. I follow that up a few days later with a Notice to Vacate. I do it in this way because Texas law states you cannot repeal the notice and accept rent if you had not previously sent a late notice. Doesn't make much sense to me and I don't think anyone would care or enforce it but I am a stickler.
I finally hear from them again crying about how scared they are of getting evicted, about how I said I was going to work with them and lamenting about how they are on their third lawyer and still no money from the court. I tell them to give their current lawyer permission to talk to me about the case and a commitment for half the current months rent by the of the month. I look up the lawyer instead of using the phone number they provided. You never know, it may have been their brother's number. The story checks out. The lawyer tells me they should get the $110K within a month or sooner.
So now I am still waiting. Normally I'd never let a tenant go this long without payment. Not even close. But the way I see it I have so much windfall I could let the property sit vacant for the 2 years and still make out like a bandit.
Speaking of being a bandit. As I come to the end of this lengthy post, sorry about that, I'd like to reflect a little on the moral implications of all this. On one hand it seems mean to take advantage of an old couple by taking their home away from them for 50 cents on the dollar. It also feels wrong to be complicit with a government that would do such a cruel thing. I tell myself well if it wasn't me it would have been someone else. Maybe someone who would have given them a 3 day notice to vacate the day they got the deed. On the other hand they made their own decisions that lead them to this point and we all have to pay our taxes. Telling myself that is not much comfort. A lot of times being a RE estate investor requires the stomach of a concrete elephant. Even if this works out stellar, financially for me, I'm not sure I would want to do it again because of the morality of it.