Texas - King of the Tax Sales

By John Beck (Care of Noteworthy Newsletter)

There's no doubt about it; knowledgeable investors can obtain very substantial annual yields buying tax lien certificates or tax deeds encumber with a statutory right of redemption. For instance, 16% by investing in Arizona; 18% if you invest in Florida, Illinois, New Hampshire, New Jersey and Anne Arundel and Howard Counties, Maryland. 20% in both Garrettor, Prince George's County, Maryland. 20% or more by investing in Georgia. And 24% in Iowa or the City of Baltimore, Maryland. But the King is Texas where you can get an astounding 50% or more!

Texas Tax Deeds

In Texas, if back delinquent real property taxes are not paid, then the property being taxed, as opposed to a certificate, is sold with the opening bid, generally being, just back delinquent local real property taxes, penalties, interest and foreclosure costs. If more than one bidder is interested in a particular parcel, that parcel is sold to the bidder willing to pay the highest price. The bidder receives a tax deed (typically called either a sheriff's or constable's deed depending on who conducts the tax sale.)

The Right of Redemption

However, the owner retains a right of redemption as with tax lien certificates. What's a 'right of redemption'? It's a statutory right that the property owner has to buy the property back from the successful bidder at the tax sale. For all Texas tax deeds recorded before December 31, 1993, this redemption (or buyback) period was two years. But, as result of an amendment to the Texas Constitution approved by Texas voters on the November 2, 1993 election day, there is now a two tiered redemption period.

Redemption Period for 'Homesteaded' and 'Agricultural Use' Properties New Article VIII, Section 13, Subsection (c) of the Texas Constitution states in part: 'The former owner of a residence homestead sold for unpaid taxes and the former owner of land designated for agricultural use sold for unpaid taxes shall, within two years from the date of the filing for record of the Purchaser's Deed, have the right to redeem the property...' In other words, if the property is 'homesteaded' property or 'agricultural use' property, then the redemption period remains two years.

Redemption Period for All Other Properties

The Texas Constitution goes on to state that the 'former owner of real property not covered by Subsection (c) of this section sold for unpaid taxes shall, within six months from the date of filing for record of the Purchaser's Deed, have the right to redeem the property...'

In other words, for all properties other than 'homesteaded' property or 'agricultural use 'property, the redemption period is now just six months. As a practical matter, almost all properties sold at Texas tax sales are non-homestead/agricultural use properties. Consequently the redemption period will almost always be six months.

Determining the Dollar Amount to Redeem for All Other Properties

According to Texas law if the property is any kind of property other than a 'homesteaded 'property or an 'agricultural' property, the owner 'may redeem the property within six months after the date on which the purchaser's deed is filed for record by paying the purchaser the amount the purchaser paid for the property, the amount of the deed recording fee, and the amount paid by the purchaser as taxes, penalties, interest, and costs on the property, plus 25 percent of the aggregate total.' In other words, if a property you purchase at a Texas tax sale is not a 'homesteaded' property or an 'agricultural use' property, then, upon redemption, the you get the following: 1. The money you paid for the property at the tax sale, plus 2. The money you paid to record the tax deed, plus 3. The money you paid for any subsequent real property taxes (together with any penalties, interest and costs) which became due PLUS 4. 25% of the total of items 1, 2 and 3.

An Actual Example

Let's take an actual example: At a Bexar County tax sale, Linda and Terry bought a tenant-occupied, single family dwelling in San Antonio worth approximately $30,000 at a Bexar County tax sale. The opening bid of back delinquent real estate taxes plus penalties, interest and costs together with expenses of foreclose and tax sale was exactly $3,498.65. The property was bid up at the sale; they bought it for $8,100.00. The property was neither a 'homesteaded' property nor an 'agricultural use' property; consequently, the redemption period was six months. If the former property owner redeems the property during the six month redemption period, that person would have to pay Linda and Terry the following amounts: 1. The money they paid for the property at the tax sale or $8,100.00, plus 2. The money they paid to record the tax deed or $7.00, plus 3. The money they paid for any subsequent real property taxes (together with any penalties, interest and costs) which became due, say, $500.00 PLUS 4. 25% of the total of items $8,100.00 plus $7.00 plus $500.00 or $2,251.75 for a total of $10,758.75.

If Linda and Terry's rental house were redeemed after just one month, their annualized rate of return would be about 300%! If the property were redeemed just prior to the expiration of the six month redemption period, their annualized rate of return would be about 50%. In other words, depending on the time of redemption, their return on investment would look like the following:

Months Yield Investment Held 1 300.0% 2 150.0% 3 100.0% 4 75.0% 5 60.0% 6 50.0%

Annualized yields of from 50% to 300%, or more, depending upon the date of redemption! Not bad!

But you ask: 'But what if the property isn't redeemed? Does that mean I'll lose my investment?' If your Texas tax sale investment is not redeemed, that may be the biggest investment payday of your life! If your investment doesn't get paid off, it's true you won't get back your invested cash or your hoped-for extraordinarily high rate of return. You get something far better! You get a deed absolute to a free and clear the property! The sheriff's deed with right of redemption that you received upon initial purchase automatically becomes a deed absolute (it's your property: lock, stock and barrel) nothing need be done by you! Linda and Terry will have bought a $30,000 house for just $8,100!

© 1997 John N. Beck II

WIN has a full listing of all the tax lien state summaries for all 50 states and Puerto Rico in our Members area.

Home | Visitor Page

Copyright 2001     Wealth Investment Network.     All Rights Reserved