How to Buy Property with Delinquent Taxes in Texas
It isn’t always easy to understand Texas property taxes, and there’s even more to dig into to understand what goes into purchasing property with delinquent taxes. We all hear terms like foreclosure, tax liens, and tax sales, but what do these terms actually mean? Why would someone ever want to buy a house with back taxes?
Being the second largest state means there are plenty of property tax sales, but you need to gain familiarity with the process, the pitfalls, and the potential profits before you dive into the world of buying tax deeds in Texas.
What is a Property Tax Sale?
If you own property in Texas, you must pay taxes. The money from property taxes is used to fund public schools, roads, parks, and a multitude of different public services. If you are delinquent on your property taxes in Texas, you could potentially lose your home to tax foreclosure and sale.
When a homeowner doesn’t pay their property taxes, the overdue amount becomes a lien on the property, making the property act as collateral for the debt. If the homeowner cannot pay off the overdue amount and does not have a valid defense against the foreclosure, then the property will be sold off at a property tax sale where the lien on the delinquent property is auctioned off to the highest bidder.
If a homeowner finds themselves in this situation, the only way to stop the sale is to cure the delinquency by paying off the amount of the judgment (plus penalties) any time before the sale. Curing the delinquency will release the tax lien and stop the foreclosure process.
Buying Tax Liens vs. Buying Tax Deeds
If the delinquency is not cured before the property tax sale, the government makes a claim on the property, and the property tax lien is offered for public purchase as a tax lien sale or tax deed sale. A tax lien sale is a sale giving the buyer the right to collect past due taxes, plus interest. When you buy a tax lien, you technically aren’t buying the home; you’re buying the right to collect the debt and can, if the owner doesn’t redeem the house, start foreclosure.
The other option is a tax deed sale. Unlike a tax lien sale, which takes months to complete, a tax deed sale auctions off the property itself and ownership is immediately transferred to the tax deed purchaser. According to Section 34.21 of the Texas Tax Code, the original owner has the right to redeem the property, but not the right to use or receive income from it during the redemption period. The new owner may start eviction proceedings immediately.
When purchasing a property through a tax deed sale, the purchaser must be more attentive to the property’s financial and physical condition as this form of investment is more deliberate. You will not have time to back out of this option if you have not done your due diligence and thoroughly investigated the details of the property.
An important note for the potential investor: Texas does not actually sell tax liens. All foreclosure sales are tax deed sales.
If I Pay Back Taxes on a Property, Do I Own It?
No. Paying a property’s property taxes doesn’t automatically make you the owner of the property. To establish legal ownership of a property in Texas, you must have a clear title to the property. A clear title is a term used to describe the legal documentation of property ownership.
A clear title essentially proves that no one besides the owner has a financial interest in the property, and there cannot be any other party who can make a separate clear claim to the land. An owner’s yearly tax bill, appraisal documents, or any other document cannot establish clear title, even if you do pay the property taxes. To establish clear title, you’ll need to be able to show that the ownership history of a property can be traced to you through property deeds recorded in the county property records.
What is a Redemption Period?
In Texas, delinquent taxpayers can get time during which they can “redeem” the home after a tax sale and resume ownership of it. This period is two years for homestead properties and agricultural land and 180 days for commercial properties.
To reclaim the home during this redemption period, the redeeming taxpayer must pay the buyer the amount paid at the sale, the amount of taxes and penalties owed, a deed filing fee, any costs the buyer incurred (such as necessary repairs), and a 25% or 50% redemption premium, depending on which year of the redemption period it is.
The state of Texas also allows delinquent homeowners to pay off the overdue amounts and redeem the home before the sale even takes place. However, to redeem, the homeowner must still pay the amount of the judgment, including taxes, interest, penalties, and costs.
Redeeming will release the tax lien and stop the foreclosure process.
Why Buy a Property with a Tax Lien?
In many cases, buying a property with a tax lien can provide knowledgeable investors with excellent rates of return. In a tax lien sale, most investors make their money based on the tax lien’s interest rate, which will vary depending on jurisdiction and state. It’s also possible for lien investors to foreclose and take possession of the property if the owner doesn’t pay the debt.
With a tax deed purchase, you either get paid extra within two years, or you get the property. If you purchase a tax deed, the owner still has the redemption period to redeem the home—but if they do, the investor receives their money back plus 25–50%. If the owner does not redeem the property, then the property belongs to the investor, creating an opportunity for a fix-and-flip or other investment strategy.
Because the taxing authority selling the property is primarily interested in recovering the delinquent taxes, foreclosure sales allow investors the opportunity to purchase a property at much less than its actual value. Investors can potentially purchase a property at 10 to 30 cents on the dollar, yielding a great profit with relatively little risk to prepared buyers.
A caveat, however: don’t ignore the right to redeem. Redeeming homeowners are only required to reimburse necessary expenses, such as bringing a property up to code. Cosmetic fixes aren’t included, so if an investor begins a fix-and-flip immediately and the owner redeems, the investor will be out their money.
How do You Find Properties with Delinquent Taxes?
It should have become apparent by now that purchasing a delinquent property in Texas is nowhere near the standard homebuying process. Before you can go to auction and purchase a property, you must first know where to find a list of delinquent properties and how to go about the purchasing process.
It's generally simple to find a list of tax sales and their location. Most cities or counties will publish a list on their website, the tax assessor-collector website, and even in the newspaper. Harris County, for example, publishes their foreclosure auctions in the Daily Court Review and has information about the process on the Harris County Tax Assessor-Collector website.
What to Know Before You Bid on a Property with Back Taxes
Due diligence is key when investing in a property with back taxes. Most mistakes that occur during a tax deed sale happen when an underprepared investor goes to bid on a property at auction.
Investors should be very familiar with the actual property upon which the lien has been placed (though due note that the property’s inclusion in a tax sale list doesn’t mean you can trespass on the property). A dilapidated property in an undesirable neighborhood is likely not a good purchase. In some instances, there could even be other liens against the property that could prevent the bidder from taking ownership of it. It is also crucial to know if the current value of the home is less than the amount of the lien.
Buying Property with Delinquent Taxes in Texas
There are a lot of layers to uncover when it comes to buying property with delinquent taxes in Texas. However, purchasing property tax deeds can be a lucrative investment when you take the time to do your homework and understand the process. Knowing how to find delinquent properties, the benefits of buying them, and what to do when you get to an auction are crucial to your success as a potential property investor.