The government has a considerable amount of power over Americans’ finances – just ask anyone who’s ever run afoul of the IRS. And local taxing authorities can leave many people homeless when they fail to pay their property taxes. These taxes are typically collected at the county level, and procedures for enforcement vary by state.
Texas has been referred to as a hybrid tax deed state because its laws provide homeowners with an opportunity to pay delinquent taxes for a period of time after a winning bidder takes possession of the county’s tax lien against the property. Homeowners can potentially redeem their properties by paying the past due taxes, plus some additional fees and costs.
Read More: How Does a Sheriff's Sale Work?
Tax Liens Are Filed by the State
The process begins when the county tax assessor places a lien against a property for unpaid property taxes. The county will then sell that lien to the highest bidder at an auction. This tax lien typically has first priority for payment in the hierarchy of other encumbrances that might exist against the property, such as first or second mortgages.
As a practical matter, however, many lenders include property taxes in a homeowner’s monthly mortgage payments. The tax portion of each payment is escrowed, and the lender pays the government when the taxes come due. If the taxes weren’t paid, it’s likely that the homeowner hasn’t been making his mortgage payments. The lender would probably respond to this situation by beginning foreclosure proceedings well in advance of the tax authorities getting involved.
Property can only be sold at a Texas tax lien sale when a tax lien is in place against it. In other words, a mortgage lender can’t arrange for its own foreclosure after the lien has been sold.
Buying Tax Liens in Texas
As an example, let’s say Joe Homeowner owes $10,000 in past due property taxes owed to a Texas county. The county places a lien against the property and auctions off the lien. Mary Money wins the bidding and buys the lien by paying off Joe's delinquent tax debt.
Mary now has the legal right to do whatever she likes with the property – after a period of time prescribed by Texas law. Meanwhile, Mary is now responsible for all future taxes on the property.
The Possibility of Redemption
As for Joe Homeowner, he retains the right to redeem, or buy, the tax lien back from Mary. But it’s not just a matter of handing her $10,000, the amount of the past due taxes she has paid; Joe also will have to pay some pretty steep interest.
Under Texas law, Joe will owe Mary 25 percent interest if he redeems the lien and the property within a year, plus any accrued costs and fees paid by her. These costs do not include costs that Mary might have voluntarily taken on, such as improvements and repairs that aren’t required by ordinance.
The interest rate doubles to 50 percent, plus costs and fees in the second year. At a minimum, Joe would owe Mary $12,500, plus costs, if he managed to redeem the property within 12 months, and he loses the right to live on the property unless and until he redeems it.
Time Limits for Redemption
Joe would have to redeem within six months if the property isn't legally considered his homestead, or primary residence, or if it’s not agricultural property. Otherwise, he has two years to redeem. The deadline for commercial property is six months. Mary can’t claim ownership or offer the property for sale until after the appropriate redemption period has expired.
It’s also possible that Joe can “pull” the property by paying the taxes due before the tax lien is actually put up for bids at a Texas tax lien auction.
Rules Can Vary by County
Timelines for redemption and interest rates are set by Texas law, as are auction dates: the first Tuesday of each month at each county’s courthouse, unless the first Tuesday is a holiday. In this case, the auction would take place on the following business day. Counties must publish notice of the auctions and the properties up for bid once a week for three weeks before the auction date. Homeowners are not permitted to bid on their own tax liens.
Individual counties can impose additional rules and regulations as well. Most counties require that bidders register ahead of time, and there’s typically a small fee for doing so, about $10 per form as of 2019. Each property you want to bid on might require its own form.
If a tax lien fails to sell at auction, some counties will then offer these properties for sale at any time, and they won’t be listed for a second auction date.
How and When to Pay Up
Winning bidders must usually pay up in full with cash, by cashier’s check or by money order by the end of the day of the sale. Travis County accepts credit cards, but using one comes with a 3 percent “convenience" fee.
How to Find Texas Tax Lien Properties
The Texas Press Association publishes notices of all tax sales, so it’s basically just a matter of checking your local newspaper to find out what’s available in any given month. It’s not advisable that you just show up with cash in your pockets. Successful tax lien investing in Texas requires due diligence.
Liens are sold on properties in as is condition, and no guarantees are made that there are no other liens against them, so check the properties in question. Drive past them personally. A home might have existed there three weeks ago, but now it’s a pile of rubble because it burned to the ground in a fire. If so, you’re buying a pile of ash and some land. You’ll want to eyeball the property’s condition even if it’s still standing, although this won’t necessarily safeguard against anything that might be intrinsically wrong inside.
You’ll also want to do a title search for other liens against the property, such as mortgages. This might not be an optimum investment if other liens exist. As the new owner, you could find yourself responsible for paying them, and you may not be able to turn around and sell the property until you do.
Read More: How to Waive Right of Redemption After Foreclosure
- Ted Thomas: Texas Property Tax Sales
- Travis County Tax Office: Foreclosure Sales
- Harris County, Texas Tax Assessor-Collector: Harris County Tax Sales
- Wilco.org: Tax Sales
- LoneStarLandLaw: Redemption Issues for Investors
- Bankrate: Tax Lien Investing Is Fraught With Risk for Most Investors
- Legal Beagle: How to Waive Right of Redemption After Foreclosure
- Legal Beagle: How Does a Sheriff's Sale Work?
- Legal Beagle: Why Are Foreclosure Auctions Postponed at the Last Minute?
- Legal Beagle: How to Release a Property Lien
- Legal Beagle: Legal Mortgage Vs. Equitable Mortgage
- Legal Beagle: How to Foreclose on Property as a Private Lender
Beverly Bird is a practicing paralegal who has been writing professionally on legal subjects for over 30 years. She specializes in family law and estate law and has mediated family custody issues.