On Tuesday, August 1, 1995, I took a group of investors to a monthly Bexar County (the San Antonio metropolitan area) tax sale to teach them how to research properties coming up for sale and to provide them with an opportunity to bid on and, hopefully, buy a property.
Like so-called deed states (such as California, Idaho, Kansas, Nevada, New Mexico, Ohio, Oregon, Pennsylvania, Utah, Virginia, and Washington), if a Texas property owner persists in not paying his or her real property tax bill, the property is eventually sold at a public oral bid foreclosure auction sale.
In California, that sale is called a tax-defaulted sale, and such sales can be conducted periodically throughout the year by the various county tax collectors. However, most of California’s 58 county tax collectors hold just one sale a year.
In Texas, if delinquent real property taxes are not paid, the property is sold by the county sheriff or marshal at a sale termed simply a “tax sale.” However, tax sales can only be held on the first Tuesday of each month (even if it’s New Year’s Day). Most county sheriffs or marshals hold a tax sale once every year or two, but some county sheriffs (like Bexar) or marshals (like Harris) hold sales every month.
In Texas (like California and other deed states), the opening bid at these sales is generally just back delinquent real property taxes, penalties, interest, and foreclosure costs. This opens up the possibility that an investor could purchase property for a mere fraction of that property’s current fair market value.
At the August Bexar County tax sale, one of my investors (a newly married couple) bought two such bargains: For $1,382.08 (the minimum bid), they bought a tenant-occupied single-family dwelling worth approximately $20,000. And for $8,100.00 (with the minimum bid was $3,498.65), they bought another tenant-occupied single-family dwelling worth approximately $30,000.
Worst case: 50% annual yield plus rents
In Texas (like California and other deed states), the high bidder gets a deed to the property. However, in Texas (unlike California and other “pure” deed states) that deed is encumbered by a “right of redemption.” That is, the property owner can purchase back the property.
For homesteaded and agricultural use properties, the right of redemption is two years; for all other properties, it is six months. Both properties purchased by my investor couple (tenant occupied) had six-month redemption periods. If either property had been redeemed during the six-month redemption period, then my investor couple would have gotten their money back plus an additional 25% penalty.
In other words, if the $20,000 property bought for $1,382.08 had been redeemed, then the couple would have gotten back the $1,382.08 they paid for the property plus 25% of that amount – or $345.52 – for a total of $1,727.60.
If the $30,000 property bought for $8,100.00 had been redeemed, then the couple would again have gotten back the $8,100.00 they paid plus 25% of that amount – or $2,025.00 – for a total of $10,125.00.
If either one or both of the properties had been redeemed, then the couple’s annualized return on their investment would have ranged from a minimum of about 50% to over 300%, depending upon the exact date of redemption! For instance, redemption after just one month would have given the couple a 25% return on their investment for that one month – or an annualized return of about 300%!
Additionally, during the period of time prior to redemption, under Texas law, my investment couple owned the property. And, as part of that ownership, they were entitled to collect the monthly rents from both tenants (approximately $300 each per month).
Further the rents collected could not have been applied against the amount necessary for the property owner to redeem. If either property had been redeemed, the couple would have gotten their 25% penalty return plus the rents collected.
Best case: (2) free and clear houses for pennies on the dollar
However, neither property was redeemed during the six-month period. At the end of that six-month redemption period, the couple’s sheriff’s deed (which had been encumbered by a right of redemption) automatically became a deed absolute. They were the sole owners of both properties.
Further still: Under Texas law, the tax lien “takes priority over the claim of any creditor of a person whose property is encumbered by the lien and over the claim of any holder of a lien on property encumbered by the tax lien, whether or not the debt or lien existed before attachment of the tax lien…”
The Texas tax lien is like a first deed of trust–only better. Consequently, when both of their deeds became deeds absolute, any and all liens outstanding against the property were wiped out. The couple owned both of these bargain purchases completely free and clear of all other liens!
When my investment couple bought the two properties at the August tax sale, they put themselves in a position to make money. Either they would get their investment dollars paid back with an extraordinarily high rate of return, or they would end up buying one or both of the properties free and clear of all liens at a super-bargain price.