When a property owner falls behind on his property taxes, the local municipality can eventually place a lien on that property. In some states, that lien is sold to an investor, who can then make a profit on the interest. Texas doesn’t sell tax liens, but it does sell tax-delinquent properties at auction, with a redemption period during which the previous homeowner will have to pay a 25 to 50 percent penalty to recoup the home.
Texas and Tax Liens
If you’re delinquent on your property taxes in Texas and attempts to collect the money are unsuccessful, the state will eventually sell your home at auction. This can happen at any time after your taxes are late, but you will be given written notice of the impending sale before it happens. You’ll also have the opportunity to defend your case in court before the judge rules on a foreclosure.
Here’s where the investment opportunity comes in. The person who buys that property at auction could potentially earn penalties of 25 to 50 percent if the original owner of the property chooses to redeem her property. This is in addition to any costs you paid to purchase the property at auction, so you only stand to gain if this happens.
Curing the Delinquency
Even after a foreclosure has begun, laws on Texas tax liens and foreclosures allow a homeowner to cure the delinquency before the foreclosure becomes final. To do this, the owner will simply pay off the judgment. At that point, the lien will be released and the foreclosure will be halted.
By the time you, the investor, show up at the auction, the homeowner will already have let it progress beyond the court date and all the way to the foreclosure sale. The owner, in that case, has declined to cure the delinquency. At that point, the home is being sold to pay the total amount of the judgment or the cost of the home, whichever amount is less. The winning bidder will be awarded the title to the home.
Redeeming the Home After Foreclosure
When a home is sold due to Texas tax liens, the original homeowner still may have a right to take the property back in most areas of the state. For up to two years after your purchase, the homeowner can redeem the home, which allows the person to buy back the property by paying off all back taxes. This person must also reimburse you for all your costs, as well as paying a penalty.
The penalty is where a winning auction bidder can make income on that investment. If the original homeowner opts to redeem the home within the first year, that homeowner must add 25 percent on to the money he’s paying you. During the second year, that penalty increases to 50 percent.
Period of Redemption in Texas
The good news is that in Texas, most properties have a drastically shortened window in which redemption can take place. Unless the property qualifies as a homestead or agricultural property, the previous owner will have only 180 days to speak up. In many cases, a previous owner will choose to refinance the home in order to afford to take the property back. In addition to the refinance tax implications, this means also that the person will have to qualify for the loan and even if she can, it will take time.
Even if a property qualifies for two-year redemption rights, there will be a qualification process. That means in addition to the refinance tax implications, the previous owner will have to demonstrate that the property was, indeed, considered a homestead or agricultural property by the local government at the time a lawsuit was filed on the overdue taxes.
Investing in Texas Rental Property
In some cases, the property you’re buying is already a rental. The good news is, you as the buyer will have the right to collect rent for anyone living in the property when you take it over. However, it also requires you to deal with all of the tax implications of owning a rental property, including rental property depreciation.
In addition to rental property depreciation, you’ll also have to deal with the implications of collecting rent if the previous owner chooses to redeem his interest in the property. Any rent you collect will have to be credited to the previous homeowner at the point of redemption, so be prepared for that money to come out of any proceeds.
Flipping a Foreclosed Property
When a property has a redemption period, it can be a drain on the investor. You’ll be on hold for the redemption period on the off chance that the previous homeowner will want to buy it back. This means if you plan to fix it up and flip it, you’ll have to wait, as you won’t be able to put it up for sale until you are sure the previous owner won’t request to take it back.
Another consideration is that making major modifications to the property is probably a bad idea until you know for sure that the previous owner won’t request a redemption. Any money you sink into the home will be lost if you end up turning the house back over to the previous owner. If you plan to make the property your own and live there, you may want to eventually refinance. In addition to any refinance tax implications, you’ll also risk interest rates rising in the time you’re waiting for the previous owner to make a decision.
Investing in Tax Lien Properties
The state of Texas has more than 250 counties, each of which has its own processes for selling tax-delinquent properties. If you’re interested in investing in tax-delinquent property in the state, you should first narrow it down to specific counties. You can then search for upcoming property auctions in that county. Smaller counties often bring less competition, but they may also not have tax sales as often.
Under Texas law, no matter how often a county has a tax sale, it must be held on the first Tuesday of the month. This means you’ll likely have multiple opportunities throughout the year during which to buy a tax-delinquent property. If a home doesn’t sell on the first try, authorities are allowed to either list them at a later official tax sale or put them on the market, so you may be able to find a tax-delinquent home listed among regular properties.
Before investing in any foreclosed property, make sure you do due diligence. Research the property to determine how much you can put into it and still make a profit. If you plan to rent the home, factor tax costs like rental property depreciation into your purchasing decision.
Foreclosed Homes and Residency
In some states, the homeowner is allowed to remain in the home, rent-free, until the redemption period ends. Texas is not one of those states. If you purchase a foreclosed home in the state and someone is living there, you have the option of either letting them stay and collecting rent money or evicting them.
However, just because you can evict someone doesn’t mean that process will be easy. You’ll need to provide a notice to vacate, typically offering the resident three days to leave. If you have to proceed to an eviction, it will cost you, so you may want to pay moving expenses if the resident can’t afford them, as that amount will probably be cheaper than court costs and legal fees.
- FitSmallBusiness: Everything You Need to Know About Tax Lien and Tax Deed Investing
- TXTaxSales.com: Tax Deeds in Texas
- NOLO: What Happens If I Don't Pay Property Taxes in Texas?
- NOLO: Getting Your Home Back After a Property Tax Sale in Texas
- LoneStarLandLaw.com: Redemption Issues for Investors After Purchase at a Tax Sale or HOA Foreclosure
- TexasLawHelp.org: Foreclosure - Fact Sheet
- Plumas County California. "FAQs - Tax Sale." Accessed Sept. 27, 2020.
- Leon County, Clerk of the Circuit Court and Comptroller. "A Guide to Tax Deeds." Accessed Sept. 27, 2020.
- California State Controller. "County Tax Collectors’ Reference Manual - Chapter 8000: Sale of Tax-Defaulted Property." Pages 52 and 53. Accessed Sept. 27, 2020.
- Texas Constitution and Statutes. "Title 1. Property Tax Code. Subtitle E. Collections and Delinquency. Chapter 34. Tax Sales and Redemption. Subchapter A. Tax Sales." Accessed Sept. 27, 2020.
- Justia. "O.C.G.A. 48-4-5 (2010) 48-4-5. Payment of excess." Accessed Sept. 27, 2020.
- Idaho Legislature. "Idaho Code Sec 63-1007. Redemption - Expiration of right." Accessed Sept. 27. 2020.
- Justia. "IA Code Sec 447.9 (2014): Notice of expiration of right of redemption - county right of redemption." Accessed Sept. 27, 2020.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.