Buying Property at Tax Sale (Texas, specifically Harris Co.)

[Cynthia Martinez]

Looking to hear others' experience and insights -  

-How to quickly diligence outstanding liabilities (e.g. mortgages) that would not be wiped out by the sale?  

-Minimum red flag diligence to determine a max bid and cover major risks, while still being an efficient use of time?

-For residential property - expectations for the property while prior owner has redemption right - challenging to resell or lease during this period?  likely scenario to evict / lease-back property to prior (tax delinquent) owners?

-Specific to Harris County, TX -  is this sale too competitive to find a good deal? If so, which surrounding counties would you consider, if any?

-If you have pursued tax sales (especially if in the Harris county / surrounding county areas) - did you find success with this approach or did you abandon it?

Thank you! 

[Roy Oliphant]

Hi Cynthia,

You have a number of great questions.

Specifically on Harris County it can be very competitive and, with as many as 8 concurrent auctions, confusing as well.

Mortgages are usually wiped out at a Texas Tax Sale so I assume you are new to this.  Tax Sales in Texas can be a great way to invest but there are enough challenges and specifics to Texas that you should look for some training and education before jumping in.  The best of that for Texas I have come across is via Texas Tax Sales Resource Group and Arnie Abramson.  You can find his site via Google.

Good luck and much success!

[Bruce Lynn]

Good questions....but no easy answers.

1. Nothing quick about checking liabilities....this is time consuming.   You have to do a title search and other searches like bankruptcy.  You have to either pay for title searches or learn to do them yourself and feel comfortable you really know how to do it with the resources you have.  Chances are there are no mortgages that will actually go to sale and get sold.  If it is a nice house with a mortgage, chances are the owner escrows, or if not the lender will pay Monday before or morning of the sale, and property will get pulled.  Pretty much all governmental liens will stay with the property like mowing, demo, code violations.

2. You have to determine what your risk tolerance is.  Everyone is different.  Everyone has different skills and headache tolerance.  Just to give you an example...I don't like old single wide mobile homes.  I can't ever imagine I would buy one even if it is $100.   There are plenty of people who buy these.  I've seen $50 lots for sale.  I don't want to mow or have those mowed for the next 5 years and owner finance $1000 lots in small towns that have not had any homes built in 20 years and probably don't have utilities to them or if they do it is 80-100 year old water and sewer lines that you'll mess up when you try to connect.   Those are just headaches I don't want to have at this point in my life.   There are people who do like these headaches.

3. For the most part you won't be able to sell any of these properties for 2 years. Just keep that timeframe in line. Forget the six month idea. Chances are no title insurance for 2 years, so with no title insurance, no one will probably lend on them. Certainly no normal bank mortgage financing. Why would I buy with a profit to you if there is a chance any spread I pay you could/would get wiped out if owner redeems or challenges the sale. Sure if you buy for $50 and sell to me for $100, maybe I take that chance and you double your money, but when and where does that risk stop. I'm not probably going to buy for $200,000 if you bought for $100,000 and risk loosing $100K if owner redeems....no matter what ARV is. Are there exceptions, sure...but they're more the exceptions than normal reality. Almost nothing that sells is occupied, so don't really plan on that. If it is occupied, rare is it the owner. Can you lease, sure, but in reality most and I mean like 99% are not move in ready. You probably won't get reimbursed for the improvements you will need to make to get them ready to lease, so if you improve them enough to get them leased you add risk. If you do lease them, you probably want to do it on a month to month basis with the full understanding that the property could get redeemed next month and tenant then has to move out...could be 2-3 months, could be 24 months, just never know. I would expect you would not get full area rent for most property. Maybe you have to rent 1/2 price or 1/3 price of area comps to encourage someone to take on that risk of short move out. My normal advice is plan on holding them without income for 2 years. Plus you will have taxes, insurance and potentially some maintenance for that two years.

4.  Harris County is probably the most competitive in the state, perhaps with Dallas, Bexar, Fort Bend, and Bell.  Not sure there are stats or real data to back that up, but you might see 300-500 people at Harris, 300 people at Dallas.   Of course there are a ton of properties on the list in Harris...so more properties, more population, more bidders.   Smaller counties typically have fewer bidders.  I have a nice story about one deal I bought where the sale started with 2 people, me and one other guy.  When he learned about minimum bids he had to bail as he thought bids started at $1.  So I was the only one left.   That's pretty rare.  Depends on what you want to buy, but I would say most sales are competitive.   There are deals, but you really have to do a fair amount of work to find them.

5.Drive every property you plan to buy.  NO exceptions to this.  Google is your friend to eliminate properties, NOT to decide what properties to buy.   Skip this and someday you will get burned.  KNOW 100% what you are buying and your exit strategy.

6.  It's a cash business typically.  So plan on your cash being tied up for 2 years or longer.   That solves Tax Sales for most people.

7.  Just like any other niche there is money to be made, but it is work.  It's not quick and easy 99% of the time.  You research, you drive, you estimate, you go to the sale all day on a Tuesday and sometimes you win and sometimes you don't.  If you don't win,  you may do this 2-3-4 months in a row and never get one property.  At that point most people hate their life, and go home and try MLM.   If you win, then you tie up your cash for 2-3 years or longer.  Plenty of headaches along the way in many cases.   I would guess just like any other real estate niche 90% or more give up after 4 months or one deal.

Get your list, decide what you want to buy, do your research, go drive the properties, go to the next auction with your list and max bids.   Don't bid, just watch.  See what others bid compared to your max bid.  Would you have won, lost, or not even been in the game?  Then you have a better idea.

None of this is to discourage you, just to give you an idea of what's in store.

[Cynthia Martinez]

Thank you both so much for these very informative responses - much appreciated!  I will check out the Texas Tax Sales Resources Group and keep doing my homework.

[Will Sifert]

Quote from @Bruce Lynn:

Good questions....but no easy answers.

1. Nothing quick about checking liabilities....this is time consuming.   You have to do a title search and other searches like bankruptcy.  You have to either pay for title searches or learn to do them yourself and feel comfortable you really know how to do it with the resources you have.  Chances are there are no mortgages that will actually go to sale and get sold.  If it is a nice house with a mortgage, chances are the owner escrows, or if not the lender will pay Monday before or morning of the sale, and property will get pulled.  Pretty much all governmental liens will stay with the property like mowing, demo, code violations.

2. You have to determine what your risk tolerance is.  Everyone is different.  Everyone has different skills and headache tolerance.  Just to give you an example...I don't like old single wide mobile homes.  I can't ever imagine I would buy one even if it is $100.   There are plenty of people who buy these.  I've seen $50 lots for sale.  I don't want to mow or have those mowed for the next 5 years and owner finance $1000 lots in small towns that have not had any homes built in 20 years and probably don't have utilities to them or if they do it is 80-100 year old water and sewer lines that you'll mess up when you try to connect.   Those are just headaches I don't want to have at this point in my life.   There are people who do like these headaches.

3. For the most part you won't be able to sell any of these properties for 2 years. Just keep that timeframe in line. Forget the six month idea. Chances are no title insurance for 2 years, so with no title insurance, no one will probably lend on them. Certainly no normal bank mortgage financing. Why would I buy with a profit to you if there is a chance any spread I pay you could/would get wiped out if owner redeems or challenges the sale. Sure if you buy for $50 and sell to me for $100, maybe I take that chance and you double your money, but when and where does that risk stop. I'm not probably going to buy for $200,000 if you bought for $100,000 and risk loosing $100K if owner redeems....no matter what ARV is. Are there exceptions, sure...but they're more the exceptions than normal reality. Almost nothing that sells is occupied, so don't really plan on that. If it is occupied, rare is it the owner. Can you lease, sure, but in reality most and I mean like 99% are not move in ready. You probably won't get reimbursed for the improvements you will need to make to get them ready to lease, so if you improve them enough to get them leased you add risk. If you do lease them, you probably want to do it on a month to month basis with the full understanding that the property could get redeemed next month and tenant then has to move out...could be 2-3 months, could be 24 months, just never know. I would expect you would not get full area rent for most property. Maybe you have to rent 1/2 price or 1/3 price of area comps to encourage someone to take on that risk of short move out. My normal advice is plan on holding them without income for 2 years. Plus you will have taxes, insurance and potentially some maintenance for that two years.

4.  Harris County is probably the most competitive in the state, perhaps with Dallas, Bexar, Fort Bend, and Bell.  Not sure there are stats or real data to back that up, but you might see 300-500 people at Harris, 300 people at Dallas.   Of course there are a ton of properties on the list in Harris...so more properties, more population, more bidders.   Smaller counties typically have fewer bidders.  I have a nice story about one deal I bought where the sale started with 2 people, me and one other guy.  When he learned about minimum bids he had to bail as he thought bids started at $1.  So I was the only one left.   That's pretty rare.  Depends on what you want to buy, but I would say most sales are competitive.   There are deals, but you really have to do a fair amount of work to find them.

5.Drive every property you plan to buy.  NO exceptions to this.  Google is your friend to eliminate properties, NOT to decide what properties to buy.   Skip this and someday you will get burned.  KNOW 100% what you are buying and your exit strategy.

6.  It's a cash business typically.  So plan on your cash being tied up for 2 years or longer.   That solves Tax Sales for most people.

7.  Just like any other niche there is money to be made, but it is work.  It's not quick and easy 99% of the time.  You research, you drive, you estimate, you go to the sale all day on a Tuesday and sometimes you win and sometimes you don't.  If you don't win,  you may do this 2-3-4 months in a row and never get one property.  At that point most people hate their life, and go home and try MLM.   If you win, then you tie up your cash for 2-3 years or longer.  Plenty of headaches along the way in many cases.   I would guess just like any other real estate niche 90% or more give up after 4 months or one deal.

Get your list, decide what you want to buy, do your research, go drive the properties, go to the next auction with your list and max bids.   Don't bid, just watch.  See what others bid compared to your max bid.  Would you have won, lost, or not even been in the game?  Then you have a better idea.

None of this is to discourage you, just to give you an idea of what's in store.

A lot of great, detailed information there. Helps me learn a lot more about Texas deeds specifically, but like most tax sales a lot of what you experience is also pretty universal everywhere.  

I believe Texas' redemption period is 6 months no homestead, 24 months with a homestead exemption?  I would imagine 99% with homestead exemptions end up getting redeemed, would assume the owner is living in the property. If they live there it must be in "liveable" condition, and they would either have a mortgage company that would step in or if it's paid for, they would sell it or do something to not lose their equity and let it go.  (However, I know that can happen as I have have it happen to me with tax liens that go unredeemed and the house was owned free and clear and the equity far exceeded what they owed me in back taxes.)  

So if you win a property at the tax sale and there is no homestead, you just have to wait out the 6 months than you own it and can start making improvements so it can be rented. After 2 years of ownership you find that title insurance is more obtainable if you want to sell it ?

[Pete Harper]

Quote from @Cynthia Martinez:

Looking to hear others' experience and insights -  

-How to quickly diligence outstanding liabilities (e.g. mortgages) that would not be wiped out by the sale?  

-Minimum red flag diligence to determine a max bid and cover major risks, while still being an efficient use of time?

-For residential property - expectations for the property while prior owner has redemption right - challenging to resell or lease during this period?  likely scenario to evict / lease-back property to prior (tax delinquent) owners?

-Specific to Harris County, TX -  is this sale too competitive to find a good deal? If so, which surrounding counties would you consider, if any?

-If you have pursued tax sales (especially if in the Harris county / surrounding county areas) - did you find success with this approach or did you abandon it?

Thank you! 

Texas tax sale are not for the faint of heart.  

I usually start out by a quick google/zillow search of the property.  Don't be surprised if the house is no longer there or the roof has fallen in etc.  You can screen out the really bad ones.  

Next I would do a search in the county appraisal district and county clerks office.  Any liens on the property will be recorded.  City fines are not cleared with sale. I purchased a vacant lot that had weed abatement fines greater than what I paid for the lot.  Fortunately I was able to argue with the city and get them removed.

Watch the redemption period.  For owner occupied the previous owner has up to two years to redeem.  As others have said you will not be able to sale until the redemption period is over.  You can't do cosmetic repairs during the redemption period.  The owner doesn't have to pay for cosmetic repairs should they decide to redeem.  You can make structural repairs to stabilize the property like a new roof that would be covered in redemption.  Check before you do anything. You can lease the property during the redemption period.  You can even lease back to the previous owner.  The Sheriff said they would fast-track evictions.

You can't go inside the property for inspections.  The best you can do is walk outside and ask the current resident if they will let you inside.  Don't assume just because a property is occupied "it can't be that bad". Learned that the hard way, after purchase we did inspection and could see daylight through the bedroom ceiling.  

Almost all the good properties get cleared off the auction list at the 11th hour.  The current owner comes up with some cash to make a payment.  You'll see the same property show up the next auction.  I've see the same property pulled three times this way.  At the auction you will see the pro-flippers show up.  They know what they are doing and gobble up the best properties.  Know your top price and don't get caught up in a bidding war with these guys.

I came up with a slightly different strategy.  With the tax sale list you have a great list of motivated buyers.  Start early enough and you can contact the current owner and offer to buy the house cheap.  For the owner they get something for the house rather than loosing it all to the auction.  You will need to pay the back taxes and avoid a bidding war with the pros.  I had one deal like this but decided to back out after I discovered the roof over the kitchen was falling in. The majority of what you will find are properties where the previous owner has passed away and there is no immediate family to pay taxes and take care of the place.  Frequently the property has many years of deferred maintained and neglect. 

I've purchased a couple tax sale properties but have decided the "juice is not worth the squeeze".  I've had better luck with traditional "yellow letter" campaigns on select properties found by driving for dollars.

[Bruce Lynn]

@Will Sifert   

You are correct about the redemption period....however in reality most title companies will not issue title insurance for two years for a couple of reasons.  #1 the owners or interested parties have the right for 2 years to challenge the sale (homestead or not).  Typically the challenge would be that they were not notified correctly.  My guess is if and when this happens it is not the owner, but a lender....what's the correct address for one of their 100 or 1000 entities to receive the notice...and then if the attorneys did get it correct, it probably gets lost in the shuffle until they figure out they lost the property.  If there was decent value then they challenge the sale.  #2 how do you know it is someone's homestead?   Just because it is flagged or not flagged with the taxing authority does perhaps not meet the legal threshold of it being a homestead....maybe in fact two different things.  Filing with the county might be one good indication, but that really is for tax discounts and maybe no other reason.   Ever seen an older married couple that both had their own houses both have homestead exemptions, but move in together into one house and forget to remove the exemption?   You can only have one.   Ever seen anyone move from one house to a new one, file a homestead exemption on the new one and forget to remove it from the old one?   There are also plenty of instances here and maybe in other places too where people want to vote or run for office in places where they don't live, even if that is required.  As one of my attorneys says....it is my homestead if I say it is.   So that's one of the reasons the two year rule applies.

Almost no one redeems.   If they do, it is usually a nicer home, and you're right...they're living there....but that is very very rare in my experience.  #1 almost never owner occupied, #2 minimal redemptions.  I always laugh at the teachers that come thru town preaching government guaranteed interest of 25-50%.   In reality almost no one ever gets that.

Almost nothing with a mortgage actually makes it to sale.  It gets posted, but normally Monday before or morning of the sale it will get paid by the mortgage company.   I've seen maybe a few with small mortgages from odd companies go to sale.   Probably they were not worth fighting for....like $5000 on a 1978 single wide.  Maybe it was owner financed, down payment was more than the seller paid for it, so mortgage was just gravy.  Maybe that note got sold 2-3 times and is now with someone far away and they don't want to pay $2000 to a foreclosure attorney and $2000 in back taxes to save a note worth $5000 and get a 1978 single wide back in their portfolio to mess with.

Obviously there can be all kinds of exceptions to any of this....but they seem to be more the needle in the haystack than common finds.

[Roy Oliphant]

Quote from @Will Sifert:

...  I would imagine 99% with homestead exemptions end up getting redeemed, would assume the owner is living in the property. If they live there it must be in "liveable" condition, ...

Just because it's occupied, you cannot assume it is in 'livable' condition.  I have seen many properties on the tax sale where there was someone occupying the property without all of the usual utilities.  Also, they may have 'inherited' the property and it may have years of deferred maintenance.  Remember the occupant is likely considered a homeowner - your occupant will likely be a renter (even the occupant at the time of the sale may be a renter after the sale) and most areas have some code regarding the condition of a rental property (think smoke alarms, working windows, safe electrical systems, etc.).  It may take a significant investment to bring an occupied property up to that condition.

[Will Sifert]

Quote from @Roy Oliphant:

Quote from @Will Sifert:

...  I would imagine 99% with homestead exemptions end up getting redeemed, would assume the owner is living in the property. If they live there it must be in "liveable" condition, ...

Just because it's occupied, you cannot assume it is in 'livable' condition.  I have seen many properties on the tax sale where there was someone occupying the property without all of the usual utilities.  Also, they may have 'inherited' the property and it may have years of deferred maintenance.  Remember the occupant is likely considered a homeowner - your occupant will likely be a renter (even the occupant at the time of the sale may be a renter after the sale) and most areas have some code regarding the condition of a rental property (think smoke alarms, working windows, safe electrical systems, etc.).  It may take a significant investment to bring an occupied property up to that condition.

If there is a homestead exemption the occupant "should" be the homeowner. I am sure there are exceptions where the home owner moved and turned his house into a rental and didn't notify the assessor's office to remove the exemption. But in most cases if someone is living in the house with a homestead exemption it should be the the owner. Same thing with liveable condition I am sure there are some cases where someone is living in it without utilities but in most I would think they would be on and I do use the term "liveable" lightly. I have seen the condition of properties after some tenants have moved out ;)