In Texas, if property taxes are not paid, a tax lawsuit is filed to collect the taxes. Basically, the tax suit is a lawsuit filed on behalf of the county in order to compel the payment of property taxes. If these property taxes are not paid, the county has the court-mandated right to sell the property for the back tax amount.
In other words, the county will offer the tax delinquent property at a public tax sale auction. The opening bid will typically be set at the amount of back taxes owed. This amount usually consists of:
• Delinquent Property Taxes
• Interest Charges
• Penalty Fees
• Legal Costs
• Administrative Charges and Fees
When a tax deed is sold, the purchaser acquires the rights held by the county or taxing unit. Tax sales may be held monthly, quarterly or annually. There are very few restrictions regarding bidding at these sales (i.e., you do not have to be a real estate agent, professional investor, etc.). However, you usually must be able to pay the bid amount within a short period of time, and you cannot be delinquent in taxes in that particular county.
After the sale and for a specified period of time, the delinquent taxpayer has the right to buy back or “redeem” the property. This is called the right of redemption. In many cases, this redemption period may be as short as 180 days for certain property types in Texas. If the delinquent taxpayer does not redeem the property during the specified time, the successful bidder is entitled to the property regardless of the purchase price. That means, at least theoretically, that a successful bidder could become the owner of a $150,000 property, even if the bid purchase was for $15,000.
That sounds great, but what happens if the delinquent taxpayer decides to exercise their right of redemption? Does the investor lose the money they spent at the action? The answer is no. In that situation the delinquent taxpayer must pay the investor an interest penalty charge in order to redeem. This interest charge could be as high as 25 percent in the first year or up to 50 percent for second-year redemptions. What this means is that the investor will generally get back the original investment plus the interest penalty charge.
If the delinquent taxpayer wishes to redeem, they must pay a penalty return within a certain amount of time. Generally, in Texas the period is either 180 days or 24 months. The amount of time will depend on the type of property that is sold at the tax sale. Investors who want the shorter redemption time period, 180 days, will target certain types of properties at the tax sale.
Is Texas a “tax deed” state or a “tax lien” state?
Texas is a “hybrid” state, although you won’t find that word in the Texas Property Code. In reality, Texas combines some of the aspects of tax lien states and some of the aspects of the tax deed states. For example, the successful bidder obtains a tax deed at the auction and receives full responsibility for the property. This is very similar to the process in traditional tax deed states. Nevertheless, in Texas the winning bidder is not guaranteed eventual ownership of the property. This is because the delinquent taxpayer still has a redemption right. This is very similar to the procedure in a tax lien state.
Because Texas allows investors to either receive full ownership of the property or a large interest penalty from homeowners who redeem, Texas tax deeds are gaining more attention from investors.