“I must say as to what I have seen of Texas, it is the garden spot of the world, the best land and the best prospects for health I ever saw, and I do believe it is a fortune to any man to come here.” – Davy Crockett
I’ve been intimately involved in tax-deed sales and tax-lien sales for the last eight years. After working with nearly 1,000 investors, I can tell you that the opportunities and laws relating to Texas tax-deed sales are second to none.
If you’re willing to do your research, you can buy Texas real estate for just pennies on the dollar. And even if your investment doesn’t hand you ownership of the property, you can still make a hefty profit of 25 percent to 50 percent in two years or less. In some cases, the investor can make a 25 percent return in less than six months, and that’s on the low end!
Here’s how the process works:
When property taxes aren’t paid in the state of Texas, a lawsuit is filed to collect them. If the owner then fails to pay, the county has the right to sell the property for the back-tax amount.
In other words, the county will offer the property at a public tax-sale auction, with an opening bid in the amount of back taxes owed. This figure will usually consist of:
- Delinquent property taxes
- Interest charges
- Penalty fees
- Legal costs
- Administrative charges and fees
When you buy a tax deed, you get all the rights held by the county or taxing unit. There are few restrictions regarding bidding at these sales. You don’t have to be a real estate agent or professional investor. However, you must be able to pay the bid amount within a short period of time, and you can’t be behind on your own taxes in that county.
After the sale, the delinquent taxpayer has the right to buy back or “redeem” the property for a specified period of time, which can be as short as 180 days. After that, you’re entitled to the property regardless of the purchase price. For example, you could become the owner even if you paid $15,000 for a tax deed on a property that has a market value of $165,000.
That sounds great, but what happens if the delinquent taxpayer decides to exercise his “right of redemption”? That is, what happens if he pays his delinquent taxes and penalties?
You still win, because the delinquent taxpayer must pay you an interest penalty as high as 25 percent… or even 50 percent for second-year redemptions. And if the delinquent taxpayer doesn’t redeem, you get full title to the property. In the example above, that’s a potential profit of 1,000 percent.
What Makes Texas the Best Place to Do Tax Sales?
While many states offer sales of tax liens or tax deeds, Texas is by far the best place to make a profit from the process. Here’s why:
1. Texas provides the highest profits if a redemption occurs (25 percent to 50 percent). If the delinquent taxpayer wants to redeem the property after your purchase, they must pay you 25 percent when the first-year and 180-day redemption periods apply And when the two-year redemptions apply, you’ll get a whopping 50 percent in the second year… one of the highest rates of return available in any state.
2. The redemption amount is based on the price you pay at auction, not on the back taxes. While most tax-lien states are only paying two percent to five percent in interest, Texas still pays a full 25 percent to 50 percent on redeemed deeds.
3. Additional fees and costs are included in the amount required for the delinquent taxpayer to redeem. What this means is that you’ll also get the penalty return (25 percent 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… a significant return with very little downside.
4. Texas uses a “full-interest” penalty return system. This is very different than most tax-lien jurisdictions in which a quick “one month redemption” might total a modest one percent in interest or even less. In Texas, if the delinquent taxes are paid off a day after you buy the tax deed, you still get the full 25 percent.
5. Texas has monthly sales. Most tax-lien states have rapidly eroding interest returns and annual sales that herd investors into a giant yearly tax sale. This can create excess competition, confusion, and limited opportunities for investment. Texas counties have the option to do tax sales on the first Tuesday of each month, giving you the opportunity to profit many times during the year.
6. Texas has 254 counties, and each will conduct tax sales. While only the larger counties hold sales every month, smaller counties with less-frequent sales attract less competition.
7. More post-auction opportunities. Unsold tax-sale properties (known as “strike-off” properties) are often available for purchase at any time. In some situations, you can even offer less than the back-tax amount. Many of these properties will not even have a redemption period if enough time has elapsed since the original tax sale.
8. The Texas tax lien is a “super-priority” lien. The Texas tax lien generally has priority over nearly every other type of lien, debt, claim, or charge that may be attached to a property. Research is very important, however, and you’ll have to verify that “legal notice” has been sent to all affected parties.
9. The tax-sale investor also has rights to any rental income derived from a tax-sale property. At the time of this writing, Texas law allows the successful bidder any rents from the property immediately after the tax sale.
Ensure Your Profits With Due Diligence
While Texas has favorable tax laws, be sure to consider the following before investing in this market:
- Know which liens will survive foreclosure. Examples include state-tax and homeowner-association liens. Federal-tax liens also survive the foreclosure, but the federal government will simply pay you what you paid for the property at auction if they hold a lien on a Texas tax-sale property.
- View the property before the tax sale. In Texas, you have a very high likelihood of obtaining full title to the property. Make sure you see the property in person or by proxy before the tax sale.
- Know about other fees not included in the foreclosure. This is a possibility if the previous owner owes taxes that weren’t included in the tax-foreclosure lawsuit.
- Don’t do deals in your own name. Invest as an LLC (Limited Liability Company) or Corporation to avoid personal liability.
- You get full possession of the property immediately following the tax sale. This means that you must secure, protect, and insure the property without delay. At a minimum, you should install new locks, get insurance, and evict any “hostile” tenants.
Master this real estate investment strategy, and Texas will offer you tremendous profit opportunities.[Ed. Note: Attorney Darius Barazandeh holds an MBA and is an active real-estate and tax-deed investor in Texas, as well as a leading national speaker on tax liens and corporate entities for small businesses and real estate investors. Darius will share his Texas Tax Deed secrets with Justin Ford in a reservations-only webinar on Wednesday, September 19th.]