The Texas Tax Sale: A Step by Step Guide

Looking for a guide or simply a little information about Texas tax sales? Have a read!

I will try to help you understand and guide you through the process, as I have experienced it from the investor standpoint.

Why did I consider buying at tax foreclosure auctions?
I started looking into tax sales as a more profitable source of real estate deals. I owned a few rentals, and had not done any flips. I was looking for stable long term income. I heard about tax sales, and other courthouse steps foreclosures through my local newspaper. Naturally I needed more information. Where do I go? Who has experience? How do I buy? Can I see the property? In search of answers I followed several avenues. I attended a sale, I visited with several tax sale veterans in my town and asked for advice, and I read everything I could find. I asked a lot of people a lot of questions, and got a lot of different answers. My best source of answers became the Texas statutes; straight from the horse's mouth. All of the Texas statutes are freely available online, and also (possibly not for free) available in print at your local Texas law library.

Understanding the fundamentals.
In Texas, the tax foreclosure process happens for a very basic reason; unpaid property taxes. When a taxing entity has not received the full amount of taxes levied upon a property within the appropriate amount of time, the entity will pursue a lien against the property. If the lien is established and not satisfied, a foreclosure suit will be brought against the owner or owners of record, and any other parties with a claim. The suit may result in a property being auctioned on the courthouse steps. The highest bidder at this auction will be required to pay the full dollar amount bid in cash, or cash equivalent instrument, within a very short amount of time, usually one day or less. Upon payment, the purchaser receives a receipt for the payment, and is entitled to immediate use and possession of the property. It may take some time to receive the actual deed to the property. Now begins the redemption period. The statutory redemption periods are six (6) months, and two (2) years, depending on the type of property. During this period the previous owner or owners have the right, but not the obligation, to redeem the property for the amount bid, plus an additional penalty of twenty-five percent (25%) in the first year, and fifty percent (50%) in the second year.

Getting started: get acquainted with the area, people, and government offices.
Each county and taxing entity is responsible for their own sales. With that in mind, there are more taxing entities than there are counties in Texas. Some taxing entities hire law firms and some conduct their own sales. I suggest you start by contacting the county tax collector to inquire if there is a law firm who assists the county with the sales. Then call the sheriff's department and find out when and where the sales are. Make sure to inquire about registration procedures, payment requirements, and any other necessities for participation. A personal lesson learned; the location of the sale is subject to change. I always call the preceding Monday and affirm the sale time and location. A great day to attend a sale is a day that others may not want to attend. I bought my best tax sale deal in the middle of the winter when no other bidders wanted to attend the outside auction in below freezing temperatures. I was the only bidder on a two bedroom home that was one block from an elementary school.

Finding a deal and scouting the properties.
Either the law firm or the sheriff's office should have a list available for you (not necessarily for free) to review all the properties going to sale. I always go through the list and note their tax appraisal value, square footage, if they appear to be owner-occupied, and how the property was last sold or acquired. Then make your best guess of the ARV (After Repair Value), and other factors that may be important to your strategy. Are nearby schools important? How about neighborhood values? If it is unimproved land, take a look at possible commercial uses. Do as much homework as you can from the computer, then head into the field! This is my favorite part; the traveling salesman problem. Figure out the most efficient route to visit the properties you want to see. Bring your camera, and a notepad. I always make notes about the property and try to take a few pictures while I am at the property. If you can look in the windows safely without trespassing, go ahead. However, do not attempt to enter the property! You are trespassing, and could get shot! We are talking about Texas after all. No investment is worth your life. Even if the property looks vacant and the door looks open, do not go in. I have seen many properties occupied by vagrants, druggies, and other criminal types.

Figuring your return and maximum bid.
Get out the notes you took during your scouting trip. We need to budget repairs and a maximum bid. Often these properties have been neglected. If someone cannot pay the taxes, we can assume they have not made repairs to maintain the property. To simplify things I use a square foot metric for each property to estimate repairs. A minimum of $20/sq. ft. will cover the inside: bathroom(s), kitchen, paint, carpet, and other minor repairs. Beyond the inside, I look for visible structural damage, roof integrity, lawn care, signs of utility repairs that may be needed, and any other damage/expenses I may come across. All this needs to be figured into your maximum bid. Work backward from your ARV subtracting all of your expenses. You will arrive at your maximum bid after you have subtracted your desired profit.

Attend the auction.
Arrive early! I cannot stress this enough. This will give you time to network with other investors, get to know the officials, ask about procedures, and allow for time for changes in schedule or plan. If it is too cold or hot, grab a coffee and doughnut and wait in your car if you have to. As I mentioned earlier, make sure the sale will happen there and then. You should know who to call and confirm with by this point. Make sure you are registered. Larger counties will require you to register, and some smaller counties may as well. Again you should confirm this with those in charge of the sale. Some counties may require you to submit a form ahead of the auction. Some will have you sign up at the time of the auction. Some require no registration at all. The list of properties to be sold will be made available ahead of the sale. Check your list against their list; there have likely been changes and updates. Once, I arrived and signed in, only to find out my desired property was pulled from the sale a mere hour prior. When the auction begins, make sure you can be heard and seen. Bidding procedures may vary, but most of the auctions I have attended are very simple and primitive. You raise your hand and holler out your bid. Good luck! 

Claiming and securing your investment.
Congratulations, you won! Now what? If the auction is still going, wait until the end, and then it is time to pay up! Make sure you have a good understanding of this part of the process. In my home county, we are allowed to leave, get a cashiers check, money order, or cash in the appropriate amount. Some counties will accept personal checks, others will not. Some counties require you to pay immediately. Once paid, get your receipt, and have a copy made. You are now the owner *subject to the right of redemption* of a property. Time to secure it. If the property is occupied, you may need to evict. Talk with a local attorney to make sure you do nothing illegal. If you think it is vacant, be very careful. Bring a friend, or if you think there may be a vagrant call for a police standby upon first entry. Vagrants will often take residence in an abandoned property. Also aggressive animals could be there. Be smart and protect yourself when taking possession. The property may need lot of repairs, but right now you just need to get it secured. A few examples include: change the locks, board up broken windows, put up "no trespassing" signs, talk to the neighbors and make sure people know there is a new owner. This is part of your right to possession. You probably just bought the ugliest house on the street, and people will love you for cleaning it up. While it may not be required, I often clean up the yard too. This shows neighbors you are on their side. Everyone wants to live in a better neighborhood.  They don't want the vagrants either!

Making repairs, and beyond...
You might have big plans: repairs, contractors, renters, the whole kit n' kaboodle! But wait, there is a catch. Remember that right of redemption? Any expenditures or repairs you make to the property will go with it if the previous owner or owners redeem, and they may not have to reimburse you! According to the Texas code, only monies "... reasonably spent by the purchaser for maintaining, preserving, and safekeeping the property..." are required to be repaid. So where does that leave you, the investor? At a crossroads of sorts. Do you make the minimum repairs and lease the property? Do you attempt to get clear title, and proceed with your plans? Do you wait for two years?

What you do from here is up to you, and depends on your investing goals. Make sure you have a good exit plan in place before making a purchase. Understanding the redemption period laws and practices are very important. I discussed them briefly in this article, but there is much more to understand. Good luck, and happy hunting!