J&S Blog Header

What to Know About Investing in Delinquent Taxes in Texas

Texas has some of the highest property tax rates and is one of the largest states in the nation, which means there are plenty of properties sold at auction for unpaid property taxes. A property tax sale is an auction conducted after a property has been foreclosed on due to unpaid taxes, which can create great investment opportunities. For experienced investors, this can be a good way to acquire investment properties. On the other hand, if you are new to investing, it is not always easy to understand what goes into purchasing property with delinquent taxes, and the complexity of this process. This process could cost you quite a bit if you are not careful. In this blog, we will discuss the process of investing in delinquent taxes, the benefits, and the risks involved.

When is a Property Put up for Auction?

All property owners in Texas are responsible for paying their property taxes by the deadline of February 1st each year. These taxes fund local public schools, county road construction, various public services and more. If a Texas property owner fails to pay these property taxes, they will be considered delinquent. If the property owner does not pay their delinquent property taxes by June 30th, the taxing entity may begin foreclosure proceedings. However, it often takes several years before the taxing entity begins the process, and the foreclosure process can take many months. If the taxes are not paid during the foreclosure process, the property will be auctioned off and sold to the highest bidder through a public tax deed sale. All foreclosure auctions in Texas occur the first Tuesday of the month. They may be held in person or online depending on the taxing entity.

How Does the Tax Deed Process Work?

In Texas, the starting price of a tax deed sale is equivalent to the back taxes and fees owed on the property. This includes the delinquent taxes, interest charges, penalty fees, legal costs, and administrative charges and fees. During the tax deed sale, the property is auctioned off and sold to the highest bidder. The winning bidder will acquire the rights held by the county or taxing unit and must pay the bid amount almost immediately after the sale. So, you will want to make sure you have the liquidity to pay for your purchase before bidding. In addition, most auctions require certified funds (such as a cashier’s check), so confirm ahead of time whether you will be able to get to your bank and back in time to pay.

It is important to understand that most auctions attract many savvy buyers with experience and large budgets. You may not want to start the bidding if no one else is bidding. These buyers likely know something you do not. For instance, maybe the property flooded or has serious structural problems. Bid with caution in this scenario.

The Redemption Period

After a tax deed sale, there is what is known as a redemption period. This allows delinquent taxpayers to pay back their debt or “redeem” their property after a tax sale and resume ownership. This can be as short as 180 days for commercial properties and up to 2 years for homestead properties.

To redeem the home during this period, the taxpayer must pay the investor what was spent for the tax deed plus an additional charge. This includes:

  • how much the investor spent at the sale
  • the amount of taxes and penalties owed
  • a deed filing fee
  • any costs an investor spent for the upkeep of the property (such as a new roof—cosmetic issues such as interior paint would likely not qualify)
  • and a 25% to 50% redemption charge

When a property is redeemed, the lien is released, and the taxpayer regains ownership of their property. It is possible to pay the property owner to waive this right of redemption. This requires finding the owner and negotiating the price. We advise using a knowledgeable real estate attorney to help with the paperwork in this scenario.

Why Would Someone Pay for a Property with Back Taxes?

By purchasing a tax deed, you are simply making an investment. If a taxpayer decides to redeem their property, the investor will receive their money back, plus the 25% to 50% interest charge the taxpayer is responsible for paying. Therefore, the delinquent taxpayer will get their property back while the investor yields a profit.

Another benefit of investing in a tax deed is the fairly high chance that a taxpayer decides not to redeem their property. If this happens, the investor who purchased the tax deed will be entitled to the property regardless of the auction price. So, as an investor, you could buy a tax deed for $50,000 and own a property with a market value of $150,000. Either way, you will gain a profit when you purchase a tax deed in this scenario unless the property turns out to have unexpected costs.

What Are the Risks of Investing in Delinquent Taxes?

As great as tax deed investing sounds, it’s important to understand its downsides and the amount of risk that’s involved. For example, you’ll want to become familiar with the property by doing an extensive amount of research before you bid at an auction. If you don’t, the property you’re bidding on could be in poor condition, and in the event of a foreclosure, the property would become yours. In this scenario, the cost to rehabilitate or sell the property could be more expensive than anticipated and could cost you money.

Another risk is not knowing of any other liens against the property that might survive. Most often, these are additional taxes that may remain unpaid. These liens could make taking ownership more costly. So, it’s important to do all your research. In addition to doing your own research and being responsible for the success of your property investments, you are also competing against commercial institutions that can easily outbid individual investors. These are just a few of the risks, so you’ll want to make sure you are well prepared before bidding on property tax sales.

Are You at Risk of Losing Your Home?

If you are delinquent on your property taxes, and at risk of losing your home to a property tax sale, it’s important to get help before it’s too late. There’s no need to lose a home, or to use up your savings, over a property tax bill. Instead, contact Johnson & Starr for help. We offer Texas property owners fair, flexible, and easy-to-understand loans that relieve the stress of burdensome past-due property tax bills. Reach out today, or fill out our quick and easy contact form, here.