The Tarrant County Texas Tax Sale
“Say that five times fast…”
I’m a fan of residential real estate as a part of a diversified portfolio investment strategy. In general, rents go up with inflation, and you get to expense depreciation for the first 27.5 years of owning a rental property. If you have a mortgage, the interest is also deductible. So are property management expenses, the cost to call the plumber to go over in the middle of the night to fix the clogged toilet, and on and on. You even get to take a trip to go see your property once a year and write that off. Hello, vacation discount!
Yet, for the novice, residential real estate can be a trap. It’s easy to get sucked into watching HGTV and thinking that you can make a mint just by slapping on a coat of paint. It’s not that easy. If you buy from a homeowner who loves his or her house, you’ll pay too much, and if you don’t do your due diligence, you may wind up dealing with a lot of repair, or worse, court issues that you never anticipated.
My wife and I invest in real estate nowadays for cash flow. Any appreciation that we get in the future is simply gravy, but we want our investment to return a stream of income for as little of an investment as possible. That’s why we shop at the bargain bin for real estate. There’s simply no point in paying for other people’s emotions about a piece of property which, for us, is a business transaction.
One of the most potentially intriguing bargain bin situations I’ve seen is the tax sale. In general, there are two types of tax sales – the tax lien sale and the tax deed sale. The concept behind these sales is that a local taxing authority, usually either a county or a school board, doesn’t get the property taxes which are due because the owner of the property has failed to pay those taxes. In order to attempt to recoup those lost taxes, they sell off the liens to others in exchange for payment of the back taxes. The buyer then either can collect interest on the liens, in a tax lien state, or they buy the deed and proceed to either foreclose or evict.
Before I move on, let me address a concern that people might have about investing in these instruments – kicking out homeowners.
I have two counterarguments to this. First, the homeowner knew that there was property tax on the house. Just like if the homeowner goes to the bank and gets a mortgage, it’s no surprise that there are property taxes and mortgage payments. It’s a risk you take when you buy a house – that you may not be able to make payments at some point down the road. Secondly, these activities provide tax revenues to the local authorities – tax revenues which go to maintenance, roads, schools, and the like. I don’t like paying taxes, but if the system is there, I’ll abide by it.
Furthermore, a huge majority of the tax liens were either on estates or on worthless land. More on that later.
Texas is what is described as a hybrid state. It sells a tax deed, meaning that once you make the purchase, you have the right to occupy the house, collect rents, etc., but there is also a right of redemption. The right of redemption means that the person who originally owned the house has a certain period of time to pay the back taxes and penalties and can reclaim and reoccupy the house.
The right of redemption is six months for non-homesteaded properties and two years for homesteaded properties. A homestead property, according to the property code of Texas, is:
(a) If used for the purposes of an urban home or as both an urban home and a place to exercise a calling or business, the homestead of a family or a single, adult person, not otherwise entitled to a homestead, shall consist of not more than 10 acres of land which may be in one or more contiguous lots, together with any improvements thereon.
There are some exceptions for rural dwellings, but the basic idea is that a house is a homestead and land and commercial property are not homesteads.
The penalty required to catch up on back taxes sold at a tax deed auction is 25% for one year and 50% for more than one year. This is not a pro rata penalty, either. If you win an auction for $1,000 and the homeowner exercises the right of redemption the day after you win the auction, the homeowner owes $1,250 to make good. If it’s one year and one day, it’s $1,500.
Additionally, you can claim fees and expenses to maintain the home, and the penalty is tacked onto those expenses as well. This doesn’t mean you can go in and remodel the kitchen during the right of redemption and claim it as an expense, but if there’s a hole in the roof, you can patch it.
If there is an existing tenant in the house, then you must abide by the existing lease, if one exists. If it does not exist, then the lease is considered month-to-month and you must give proper notice. If the residents are the former owners, then you can move to evict them, as they’re now on your property. A Writ of Possession is required to legally remove the residents – see Section 33.51, which says that they have 20 days to leave, assuming that you follow the appropriate guidelines.
You can also rent out the property during the redemption period. Section 34.21(h) provides that the purchaser of the tax deed is authorized to collect rents. This could apply to whomever is in place already or someone you put into the property.
The deed that you receive is a sheriff’s deed. This is one of the areas in which investing in these can get hairy. In order to receive an actual clean title, you’ll have to go through a process of receiving a quiet title, which is, essentially, where you publicize for anyone else who might have a rightful claim to the property to assert their claim. You do have superior position against almost any lien, including mortgages, but that doesn’t mean you’ll get the house. The tax sale can be voided if the proper notice wasn’t provided. The owner could have gone into bankruptcy, tying everything up. There are several landmines to dodge in researching the title before you buy at a tax auction.
If the redemption period passes without the previous owner redeeming the property, then it’s yours, assuming you have been able to quiet the title and get a free and clear deed. You can also contractually buy the right of redemption and then redeem against yourself, giving yourself the title. You’d definitely want to engage an attorney to make sure you got the contract language right.
This seemed like a pretty high risk/high reward scenario to me.
Still, I at least wanted to check out the auction and find out how it worked. I live in Tarrant County, Texas, which services Fort Worth and Arlington, two of the larger areas of the DFW metroplex, but did not serve Dallas. If I wanted Dallas properties (I did not), I’d have to go to Dallas County. Tarrant County holds its tax deed auctions on most months on the first Tuesday of the month. It is the same with all counties in Texas – they hold the auction on the first Tuesday of the month when they have enough properties to auction. This means that the larger counties (Tarrant, Dallas, Harris, etc.) will hold almost monthly, but some of the smaller counties may only hold an auction once a year.
Tarrant County used two law firms to file notice for the auction I went to. On the county website, all that was listed was the cause number, the account number, and whether or not the auction was still live. As of the day before the auction, there were still 66 tax deeds listed as being for sale.
I then went to the two websites of the law firms to discover more about these properties. One firm, Linebarger Goggan Blair & Sampson LLP, did a much better job of putting detailed information about the action being brought against the homeowner. They listed who the action was against as well as other lienholders. The other lienholders were listed as “in rem only,” which means that the suit was adjudged against the property, but not against the individual. This gave me an idea of who else might be holding liens, and if they were in inferior or superior positions. Naturally, the only way to truly determine the position of the liens would be to conduct a proper title search with the county.
Let’s take one which I was not interested in as an example of the steps to winnow down properties I might be interested in bidding on.
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Jason Hull is a Fort Worth fee only, hourly financial planner who serves clients in Fort Worth, TX and Dallas, TX as well as serving clients nationwide.
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