How to Purchase Tax Lien Property

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As a real estate investment, many people ask about tax lien properties. They can represent a lucrative acquisition opportunity, but it is also a field filled with landmines. This article will focus on what properties are included, liens that are extinguished, the process to bid, and finally, how to obtain title insurance on the subsequent resale.

What is a tax lien property?

  • Most commonly an “ad valorem” tax that attaches to real property via an automatic lien. The taxing authority does not have to file anything in order to attach it. The taxing authority then has to initiate a judicial foreclosure action to gain authority to the title. Any additional taxing authorities must join in the suit as well. The suit is technically able to file filed on Feb. 1 of the following tax year, but many taxing authorities wait several years before the arrears reach a worthwhile amount. It is important to note that every jurisdiction and county acts differently, what may be policy in Dallas County may not be followed in Harris County.
  • Service upon the correct owners can be difficult, this also causes properties to avoid litigation. Recent legislative changes have allowed service upon Texas SOS, but it still remains an important issue as to sufficient legal notice of the judicial foreclosure.
  • A state ad valorem tax lien is a super priority lien, meaning it takes priority over nearly all other encumbrances against the property, regardless of whether they were recorded prior to the tax lien.
  • If there are additional liens such as brush clearing, rubbish, they must be included in the suit (original or amended) in order for those to be cleared.

Why is it a desirable acquisition strategy?

  • These properties can be acquired for pennies on the dollar assuming an accurate estimate of the value and rehabilitation is conducted. However, this article will examine how to obtain title insurance on the eventual resale of a tax lien acquired property.
  • Tarrant County procedures
  • “Delinquent Tax Sales”
  • Payments are only accepted in these forms: cash, cashier checks, and money orders. It is strongly recommended that purchasers bring cashiers checks of varied denominations and some cash because we will accept exact funds only. All money orders or checks should be made out to Constable Darrell Huffman.
  • Bidders must be authorized and pre-registered to participate.
  • Search listing of properties up for auction, conduct prior research, set a max bid based on your evaluation, bid on the property. If you win, you have title to the property regardless of when the deed is issued or recorded.

How to research and determine valuable properties?

  • Certain federal government liens and owner rights of redemption will not be extinguished via a foreclosure. If a homestead or agricultural property is attempting to obtain title insurance upon a sale, but within the two-year window, what can be done? It is highly unlikely that any purchaser will purchase the property knowing it can be redeemed from the prior owner. Some purchasers have tried to buy the redemption right to prevent this from occurring. During the 2019 Texas legislative session, the Texas Legislature passed SB 1642, which adds subsection (1) to Tax Code § 34.21 and clarifies that a property owner entitled to redeem property after a tax foreclosure sale cannot transfer his or her right of redemption to any other person, and any instrument purporting to do so is void.
  • It is important to note general timelines for redemption, IRS liens have 120 days, federal liens have one year, ag and homestead will have 2 years, all other properties are 180 days from the date the deed is filed.

Analysis of Legal Factors

  • An attorney will want to review the foreclosure lawsuit to determine the relative risk factor of the following: notice to correct parties, violations of automatic stays, or insufficient legal descriptions. These factors can prevent a title company from issuing insurance even if the redemption period has passed. Notice can be difficult if there are heirs or other unknown parties. If any owner has filed bankruptcy, that automatically stays proceedings even a judicial foreclosure action. The actual lawsuit will provide significant insight into the relative likelihood of obtaining title insurance upon resale.

Conclusion

  • A final word of caution: Where the redemption exception and/or the invalidity exception must be included in the policy, consider who the purchasers are. Many commercial investors are sophisticated enough to understand the importance of these exceptions and the impact they may have on future decisions, such as whether they will be able to obtain third party financing for the property. But the average individual without a realtor who is simply looking for a good deal on real property will likely not understand. They may need education as to what these exceptions mean and whether a future lender on the property will accept them in the lender’s title policy.

-Ronold Rohde

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Originally posted by @Davido Davido:

Well done Mr.. Rohde.  Thank you.

 Of course, its quite difficult to distill both the legal perspective and the mechanics of the auction purchase, but I've tried to shed some light on the process. I've had many clients who are surprised when they can't get title coverage on one property, but can obtain for another. The difference was in the lawsuit!