For the last eight years, I have been intimately involved in tax deed sales and tax lien sales. I’ve seen many programs covering this subject matter come and go. I have also seen changes in the marketplace, changes in laws and changes in the public’s perception of tax sales.
After working with nearly 1,000 investors, I can say with great certainty that one thing has not changed: Texas is still the most popular tax sale state and for good reason. An investor interested in tax liens or tax deeds would do well to consider Texas first because Texas offers superior returns and investor protection.
In Texas, tax delinquent properties are essentially sold for back taxes at a public auction. However, there are some distinct advantages that Texas law offers for tax lien or tax deed investors:
1. Interest rates of 25 to 50 percent provide the highest profits if a redemption occurs
The redemption amount is calculated from the auction sale price
In Texas, if the delinquent taxpayer wants to obtain their property after your purchase at sale they must pay you 25 percent (for first-year and 180-day redemptions). In some situations, a two-year redemption will apply. In these situations, investors receive a 50 percent redemption penalty. This represents one of the highest rates of return available in any tax lien or tax deed state.
2. The redemption amount is calculated based on the price the investor paid at auction
For example, let's assume that John attends a tax sale in Harris County:
John researches a property which is scheduled to sell at a Harris County tax sale. The opening bid for the property is $5,000. The property is offered for sale and is bid up by other investors who are also interested in the property. John takes part in the bidding and wins the property for $15,000. One month later, the delinquent taxpayer, Sheila, contacts John and informs him that she would like to redeem the property.
Sheila will have to pay John a 25 percent penalty calculated from the $15,000 that John paid at the tax sale—not calculated from the original opening bid price of $5,000.
As you can imagine, this presents a significant return for John, because he is earning interest on all of the funds invested, including the "overage" he paid due to the competitive bidding. If the property has a market value that is "reasonably" higher than $15,000 (and proper research was conducted), then John cannot lose. He would have either obtained the property for cents on the dollar or earned a 25 to 50 percent return on his investment.
3. Additional fees and costs are included in the amount required for the delinquent taxpayer to redeem
According to Chapter 34.21 (b) of the Texas Tax Code:
“The owner of real property sold at a tax sale may redeem the property...by paying the purchaser:
1. The amount the purchaser bid on the property
2. The amount of the deed recording fee
3. The amount paid by the purchaser as taxes, penalties, interests and costs on the property, and
4. The penalty return amount...”
What this means is that the investor will also obtain the penalty return (i.e., 25 or 50 percent) on the deed recording fee, the amount paid to preserve and maintain the property and any later taxes paid on the property. For the investor, this represents a significant return on both the capital required to win the initial bid, as well as the capital to maintain and insure the property going forward.
4. Texas uses a "full interest" penalty return system, unlike most tax lien states
In Texas, if the delinquent taxpayer wishes to redeem the property, they must pay a "full interest" penalty calculated from the final price paid by the investor at the auction. For example, if the delinquent taxpayer wishes to redeem the property three weeks after the tax sale, they must pay the full 25 percent return in addition to the costs and fees described above. This is very different than most tax lien jurisdictions in which a quick one month redemption might total a modest 1 percent in interest or less.
5. Texas has monthly sales
The tax sale investor has rights to any rental income immediately after sale
The vast majority of tax lien states have rapidly eroding interest returns and annual sales which herd investors into a giant yearly tax sale. This can create excess competition, confusion and limited opportunities for investment. Texas statutes allow counties the option of utilizing monthly tax sales. According to Texas law, the tax sale may take place on the first Tuesday of the month. This can provide the investor with numerous opportunities to invest in the Texas system many times during a given year.
6. Texas has 254 counties, and each will conduct tax sales
Texas has a vast number of counties—254, to be exact. Not every county will have monthly tax sales. Generally, only the larger counties will hold sales every month. However, the smaller counties can offer lessened competition, due to the infrequency of tax sales and the quantity offered. The smaller counties often have lists of properties which were once offered at tax sale, but for whatever reason did not sell. These are called "strike off" properties and will be discussed below.
7. Numerous after-auction opportunities
Under Texas law, counties may choose to sell unsold tax sale property at a later sale or offer them for sale after the tax sale. These are generally called "strike off" properties. The advantage of these types of properties is that they are available for purchase (in most counties) at any time. The investor may offer less than the back tax amount for these properties in some situations. Depending on how much time has elapsed since the original tax sale, many of these properties will not have a redemption period. So for the investor with hopes of obtaining full title to a property, "strike off" sales can present meaningful opportunities.
8. The Texas tax deed is a "super priority" lien, according to Texas statute
The Texas tax lien is referred to as a "super priority" lien. This means that it generally has priority over nearly every other type of lien, debt, claim or charge that may be attached to a property. Thus the purchaser (if proper research has been conducted) can in most cases obtain the property clear of most liens and encumbrances. Research is very important, and the investor must verify that legal notice has been sent to all affected parties. Over the years, I have learned not to blindly trust the county attorney to ensure that mortgage companies have been notified.
9. The tax sale investor has rights to any rental income derived from a tax sale property
At the time of this writing, Texas law allows the successful bidder at tax sale to collect any rents from the property immediately after the tax sale. If a property is occupied by a tenant, the investor might choose to leave the tenant in the property or evict. If a suitable tenant is in the dwelling house, this can represent a significant source of cash flow.