Texas Tax Sale Newbie Questions

26 Replies

I'm trying to understand how tax sales work in Texas to see if it's something I want to pursue further. I'll appreciate corrections or confirmations on the things I think I know and answers to the things I don't.

I understand that in Texas you're bidding on the property itself, not a lien on the property. If you win the auction, you own the property, but during the redemption period of six months to two years, the former owner has the right to buy it back from you for your purchase price plus some percentage.

Questions and Concerns

What happens to the original tax bill? Is that cleared when you win the auction or do you now have to pay that on top of your winning bid?

What happens to other liens, like a mortgage?

Does the county evict the previous owners before the sale or could they still be living there? I'd expect them to not be too happy about losing their property.

What rights do you have during the redemption period? It seem that everything you might want to do during that time has a big asterisk next to it, "subject to the original owners not taking back the property."

So the upsides are that you either make a good return on your money or you end up owning the property outright. Right?

The downsides... You overpay, either because you didn't research it well or you let another bidder run your bid up. Previous owners damage the property. You have to tie up your cash until the property's redeemed or you can cash-out refinance. You're responsible for other liens? Anything else I'm missing?

Thank you,

Scott

Hi Scott. I am not an attorney, but I am an experienced tax deed investor in Texas.

What happens to the original tax bill is largely dependent on how the tax suit is constructed. You can ask the officer conducting the sale how much additional taxes are due upon purchase. I often see them sell properties "subject to 2012, 2013, and 2014 taxes" which means you will have to pay all taxes, interest, penalties, and fees for that period.

As for other liens, that again largely depends on how the tax foreclosure suit was prepared and processed in court. First, there are liens that cannot be extinguished by the sale because other government offices are superior to the county and other local taxing authorities. Some examples are federal tax liens, state child support liens, and epa liens. Do yo see the pattern there? All of those are higher authority government offices. The types of liens that are extinguished, if the lienholder is properly notified in the tax suit, include corporate liens like mortgages, and individual liens like a mechanics lien. Do you see the pattern there too?

You are responsible for evicting your new tenant once you purchase a property at the sale. I have purchased a few of these. I tend to be softhearted, probably too soft at times, so I let them stay for a while and even help pay for them to move out. Similar to the "cash for keys" method discussed here on BP.

During the redemption period, you have every right an owner would. You may make repairs, change the floorplan, etc. However, keep in mind that all your repairs may be redeemed and then enjoyed by someone else, at your expense! One great way to work past this is curing the title. You can negotiate for the redemptive rights. They can be purchased. I believe there is a legal remedy too, but I do not have experience with it. A quiet title suit may be able to pass the redemption right to you. 

As far as having anyone redeem, I have never had anyone redeem. I have asked other investors who have over thirty years experience in this area, and they claim one in a hundred redeems. Most of the newer guys doing it have never had one redeem. 

You are very unlikely to get financing on these properties for two years or more after purchasing one. If you manage to get one that is free of other liens after the tax sale, you still have to get title insurance. Title companies will not insure them without exclusions, and banks do not like the exclusion for a tax deed. You may be able to sell to a cash investor, or owner finance the property to someone. Otherwise, plan on holding it for a while.

I hope I helped, and let me know if you have any more questions. Lorilyn B. had some similar questions in another post. Check it out: http://www.biggerpockets.com/forums/70/topics/143363-tax-deeds-in-texas?page=1#p953732

I'm not a "Texas tax sale" investor however I can offer some general thoughts to ponder that apply to most every foreclosure-type auction.

The purpose of the foreclosure is, in its basic element, to provide a means to force a sale and liquidation of an asset, in this case, defaulted property taxes owed for a certain period of time. 

Most defaulted tax foreclosures result in the elimination of junior liens, that is, property taxes are senior in claim and both voluntary liens like mortgages and trusts deeds (signed by record owners) and involuntary liens like judgments are wiped off title (but may, in fact remain as a debt of the foreclosed out former owner). 

Any debts to the Federal government typically remain, subject to a redemption period. Because property taxes are county-related, there may be other agency liens that have a super-priority to other voluntary and involuntary liens, but which remain if not part of the property taxes. In my state, CA, some of these might be related to water districts and similar agencies.

There's certainly a lot to know. Again in my state, we have three different types of property taxes that I know of (assessed, supplemental and escaped). Each are specific to time and events that trigger them. Avoiding reassessment, hence major tax hikes, is big business in California.

An online search deep into the bowels of your state's website(s) will probably reveal the Texas state tax codes, maybe even a policy manual that you download. That would be your rule book for creating a checklist of items to subject each of your deals to. I hope you follow through, become a successful expert, and find a way to share your knowledge with others who are serious investors.

@Scott Pigman  

  if I was working that market I would want to be buying the redemption rights prior to the tax sale...

One of these days someone is going to come up with the strategy to follow these sales buy redemption rights and sit and watch the property then when the investor has fully rehabbed got it tenanted then swoop in and redeem...

Same thing when an unknowning investor buys a second works on the house only to get foreclosed out when the first forecloses.. I have bought more than one first that this scenario took place.

@Josh James

Thank you for the detailed response! If I may, there's a couple of things I'd like to get clarified. 

"The types of liens that are extinguished, if the lienholder is properly notified in the tax suit..."

Hrm, so there's the potential that something like a mortgage lien may not be extinguished if the bank wasn't properly notified? Do you see that happen often?

What steps can you take to find out if there are superior, inextinguishable liens? I'm guessing the county doesn't have much incentive to do much digging. Do you run a title search on properties you're interested in? Or is allowing for that potential something you bake into your maximum bid?

"You are very unlikely to get financing on these properties for two years or more after purchasing one. If you manage to get one that is free of other liens after the tax sale, you still have to get title insurance. Title companies will not insure them without exclusions, and banks do not like the exclusion for a tax deed."

Is the two years because of the redemption period or is it because of a "seasoning" requirement? I see properties listed with a six month exemption period; does that reduce the waiting time to get financing or is that irrelevant? I presume that you're saying that you need title insurance if you want to refinance or sell to conventional buyer.

It seems like the biggest risks are unexpected liens and determining the repair costs when all you can see is what you can see from a drive by. It some ways it seems that bidding on raw land may be preferable. Short of dumping hazardous waste there's less you can do to damage land.

Thank you for the link to the other thread. I had searched for similar threads but didn't find that one.

Originally posted by @Rick Harmon:

An online search deep into the bowels of your state's website(s) will probably reveal the Texas state tax codes, maybe even a policy manual that you download. That would be your rule book for creating a checklist of items to subject each of your deals to. I hope you follow through, become a successful expert, and find a way to share your knowledge with others who are serious investors.

That's good advice. I've learnt in other areas of my life that the secret to becoming an "expert" is often as simple as being willing to RTFM* 

*Read The Fine Manual

Originally posted by @Jay Hinrichs:

@Scott Pigman 

One of these days someone is going to come up with the strategy to follow these sales buy redemption rights and sit and watch the property then when the investor has fully rehabbed got it tenanted then swoop in and redeem...

I guess that could work, but it seems like a d*** move that won't win you many friends at the REIA meetings.

@Scott Pigman  

Here's a couple of links that will give you the official answers...

There is a law firm in Texas that handles the Tax Foreclosures for most of the counties.  This is the link to the FAQ's from their site. 

http://www.publicans.com/services/tx_tax_sales.htm

Here is a little different presentation of the auction details.  This is a link to Dallas County specific information...

http://www.dallascounty.org/department/pubworks/documents/ResalePolicy20120905.pdf

A lot of great questions and ideas. About lienholders not properly notified, or not notified at all; this sometimes happens. In my county, and each county is different, the law firm that conducts the tax suits and sales is fairly diligent about notifying the proper parties. That said, I always do my own research. 
In Texas, lienholders can be found in the records of the County Clerk. Not all lienholders will file their liens <eye roll>, but that is another story for another day. 

The two years waiting is for conventional financing, and any financing through a bank or institution which will require clear title. Title insurance is the linchpin here. I do not think you can specifically buy redemption rights prior to a sale, but you can approach those owners of record and attempt to purchase the property. Be very careful doing this! There is a lot to understand, and it can get expensive hiring professionals to walk you through it.  Often times a property is going to tax sale for other reasons. The taxes due may be only part of the picture. An already clouded title would be one reason, which a sheriff's deed may actually provide clearer title than before the sale. 

Let me discuss for a minute one part of my strategy concerning repairs. I have a strong background in construction. When I drive by the house, I get a general idea of the condition of the property. I use a square foot metric for each property to estimate repairs. A minimum of $20/sq. ft. If I can see visible structural damage, that goes up. Is the roof good? Maybe it has been leaking and I can expect water damage inside. My repair cost goes up. If you can look in the windows safely without trespassing, go ahead. However, do not attempt to enter the property! You are trespassing, and could get shot! We are talking about Texas after all. No investment is worth your life. Even if the property looks vacant and the door looks open, do not go in. I have seen many properties occupied by vagrants, druggies, and other criminal types. An prudent investor will assume a vacant property likely needs the utilities to be repaired, which will be very expensive. Price this in. A quick drive through the alley can reveal if the power lines are even still connected to the house. Is there a gas meter on the property? I call the city to determine of there have been and citations or damage reported. Sometimes  you can get lucky and learn that there was a water leak and there is an outstanding balance due to that water meter or property address. Any little insight will help you make a smart decision. 


 

Thank you, everyone, for the crash course.

I think that although this is on my bucket list of things to try, it's not something I should be pursuing now. For one thing I don't have any experience in estimating repair costs or the resources to recover from a major miscalculation. For another, this isn't something I'd care to do as a full time job; I actually like my day job. My goal in real estate is to buy and hold rental properties. I don't think buying at the tax sale is the best way to go about that, at least when I'm starting out.

@Scott Pigman  

You can recover all basic repairs(like leaking roof, broken windows..Etc) to the property from the previous owner during the period of redemption,

 you will lose out on all rehab(granite counter top) if the owner redeems during redemption.

If the suit file during the year that the previous owner has file for homestead or farm land,  the redemption period is two years. otherwise it is six months.

It is perfectly legal to try and obtain redemption rights, this is usually done through quit claim deeds. There is a gray area in repairing for code compliance and repairing for rehab to sale. It largely depends on the Judge you get as you will end up in court over anything that is not repaired to bring the house up to code.

It is best to find a national title company that can search multiple state records. I have found liens filed in California for properties in the DFW area. Josh hit it on the head about a hierarchy of liens, and notifications. 

There are several attorneys that represent taxing units throughout the state. Smaller taxing authorities may represent themselves for cost reasons. Tom forgot Royalty Interest also has 2 year redemption period. 

@Scott Pigman I am sorry you feel discouraged. There can be several really nice properties that come to the tax sale. Last month Parker County had a property listed as vacant land 4.5 acres, valued at 15,000. It was actually a $381,000 SFH 5 Bed 6 Bath 3 car garage home (Aledo, TX). Tarrant County in the July sale had three homes all assessed @ $150K+, one was a model home that sold for $77K and only needed $5K in repairs (Replace AC and 1 Fence Panel).

I realize that was the past; I just don't like seeing potential investors scared away, because it seems like it is daunting. Especially, if you do your homework and find good representation, you should make money. 

Scott, I realize this is an old post, but i have a followup question to one of your replies.    I am looking at buying a piece of property at a tax sale that has an old mobile home on it.  The current owner is still living in it and i suspect she will be at time of sale.    She has a Homestead exemption on her property taxes so i realize their will be a two year redemption period.

My question is, if i buy it at the October tax sale, when can i evict her?  Do i need to wait until after the two year to evict her and then decide if i want to rent out or sale the property?   Or can I evict her immediately or start charging her rent or something?

Thanks

Derek,

Unless the mobile home has been designated as real property, it is personal property in Texas.  If that is the case, and it usually is, the mobile home is not something you get when you purchase the tax deed.  In fact, you may have an expense to move it.

If it is real property then the same rules apply to all real property.  You can evict 21 days after the sale.

Arnie Abramson

Texas Tax Sales Resource Group LLC

thank you for the reply.    so what happens if i evict her from the land adn she does not take her mobile home with her.  Is there an abandonment period, after wihich i can keep it?

What happens if an owner is not notified correctly or a mechanics lienholder?

Texas has no statutory right of redemption after the foreclosure. (A redemption period is the legal right of a mortgage borrower in foreclosure to pay off the total debt, including the principal balance, plus certain additional costs and interest, in order to reclaim the property.) Once a home has been foreclosed, it cannot be redeemed.

If the property was taken by the county for delinquent taxes and sold, the homeowner DOES have a right of redemption up to 2 years depending on property designation.

If the property was foreclosed on by the lender and sold at auction the homeowner does NOT have any redemption rights. However, the IRS may, depending on if there are any federal tax liens on it such as back income tax.

Lawrence Rutkowski, Real Estate Agent

@Rick H. @Jay Hinrichs Do you know any title insurance companies that will underwrite title insurance for a property that I bought at the end of 2016 from a tax sales in California? The 1-year statue of limitation for redemption in California has expired. But I am having issue finding a title company to get title insurance. Thanks

Originally posted by @Keith Pen :

@Rick H. @Jay Hinrichs Do you know any title insurance companies that will underwrite title insurance for a property that I bought at the end of 2016 from a tax sales in California? The 1-year statue of limitation for redemption in California has expired. But I am having issue finding a title company to get title insurance. Thanks

I don.t  although there is a tax sale title co.. that specializes in this.. cant recall but when I checked with different title underwriters no one was willing to write title insurance for lenders based on their policy.

We got it done because we were a large client we never even waited the 1 year once we got the deed we could sell next day and get it insured.

if your one off I really don't know who will do these

Many want you to wait 5 years or quiet the title.. which in some states is a normal process I suspect in CA its a little more complicated and expensive One simply because lawyers are more money in CA unless its rural. which this could easily be since that's where most properties that are lost are bought in Ca.

make sure you determine you truly have value to chase also.. a lot of tax defaulted properties in CA the actual street value is nebulious.  

@Jay Hinrichs thanks for the quick reply. I called many title companies and every one of them needs to have 5 years requirement for them to underwrite the insurance. I already bought the property. So I have to find another way to sell it. Thanks for your help.

Originally posted by @Keith Pen :

Jay Hinrichs thanks for the quick reply. I called many title companies and every one of them needs to have 5 years requirement for them to underwrite the insurance. I already bought the property. So I have to find another way to sell it. Thanks for your help.

 I am assuming its bare land correct ???  if so just sell it on contract with no title insurance have the contract be in 6 years then if the buyer wants insurance they can pay for it.

can't be market price though you will have to discount for most informed buyers.

@Jay Hinrichs it is a house. So we are looking to work with TTS hoping that they will help with that. Any other suggestions? 

Originally posted by @Keith Pen :

@Jay Hinrichs it is a house. So we are looking to work with TTS hoping that they will help with that. Any other suggestions? 

 wow pretty rare to actually buy a standing house in CA at tax sale.. who is TTS is that the tax sale title insurer I told you about ?  my issue with them was I could not get a lender to then loan on it with a lenders policy so was not really worth anything.  you can rent it though.

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