Texas sized profits in Texas tax sales

Here is a little refresher about Tax Deeds or Sheriffs Deeds in Texas and Sheriff Sales.

You buy at auction all cash, cashiers check, letter of credit. You get a sheriffs deed which gives you title to the property and extinguishes all liens. You now can do whatever you want with the property except sell it. I believe you can even rent it out.  If you do any improvements to the property you risk losing those dollars if the property is redeemed by the previous owner.

The previous owner can get the property back by exercising their right of redemption and paying you what you paid for it plus all the taxes, insurance and maintence since then. Plus a premium depending on when it is redeemed. If it was a homestead the redemption premium is 25% if redeemed in 1st yr, 50% if in the 2nd yr, otherwise its 25% if within 180days - which is equivalent to a 56% per annum ROI. In other words if your cost was 10K and it was redeemed anytime within its 1 year aniversary you would get 12.5K. If it was redeemed in its 2nd anniversary you would get 15K. If it was redeemed within a month thats 273% p.a. If it was redeemed on the last day of the 2nd year thats 22% p.a.  I suspect that the redemption period does not start when you purchase title but from back when the taxing entity got a judgement against it. So it looks like the best thing that could happen to you is that they redeem the property.

During the redemption period you won't be able to sell it. This is especially a problem with ex-homesteads as it takes 2 years before you can sell.  But apparently you can buy the right of redemption from the previous owner. Then you can redeem your own property. At the very least you could stop them from redeeming it. I bet they wouldn't take much for it either as they are most likely so broke. You would require a lawyer to draw up the contract.

Now that the redemption period has passed you can sell it. But there is another catch. The Sheriffs Deed is nowhere as good as a Warranty Deed or General Warranty Deed. It is closer to a Quit Claim Deed so your buyer will most likely not be able to obtain title insurance. If your buyer is an investor like one of  those risky "subject-to" guys or they are green they may not care. But don't despair because there are a few other remedies available. You can try to cure the title through a Quiet Title Action which could cost a few thousand dollars in lawyer fees or you could issue a Special Warranty Deed. If anyone has more details on this aspect please comment.

Unfortunately there is a lot of junk out there like you would expect as only the old cheap properties don't have mortgages. A bank won't let a property go to auction if it makes more sense to pay the back taxes and foreclose. But if you don't mind slinging around in the mud there is a lot of money that can be made.

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Disclaimer: Check with your lawyer, accountant, or other professional advisor before using this information.