CFI Blog

The Tarrant County Texas Tax Sale

Say that five times fast…
–Many people

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.

Tarrant County Texas Tax Sale

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 sale 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.

The listing for 3116 Strong Avenue

I could immediately rule this out because the market value was the same as the minimum bid. I’d be paying $12,707 (at least) for property which was nominally worth $12,707. No bargain there. However, for the sake of explanation, let’s continue down the path of examining what is involved in this property.

First, I went to the Tarrant County Tax Sale Assessor’s site to see what I could find.

The tax assessment for 3116 Strong Avenue

This property was worth, according to the county assessment, $12,707, just like the notice said it was.

This person hadn’t paid since 1988, apparently.

Forgot about the tax sale man, didn’t you?

Yes, the total due was $22,449.71 on a piece of property worth $12,707. That’s why the county was willing to sell for market value, I guess.

Tarrant County Texas Tax Sale

I then looked at the online deed room to see what I could find. I found a substitute trustee’s deed, which, generally would mean a foreclosure, but, apparently, the bank never got around to actually claiming the foreclosure. I’m not sure how that happened. Maybe an attorney with experience in real estate law could explain how there could be a recorded substitute trustee’s deed in what was clearly a foreclosure but the original owner still shows up on the property record. Again, this is an indicator that it would be a property I’d not touch unless I had access to some very wise counsel.

Don’t worry, so did the bank.

Then, I looked up the actual address to see if I could find any information out about the property. Normally, Zillow would be a good starting resource to at least get a ballpark estimate on the value and whether or not I should check it out. However, in this case, it seemed that the property was commercial, which makes sense, given that it was deeded in a person’s name and a DBA – doing business as. The top results were loopnet and, again indicative that this was a commercial property.

Here’s our model!

Maybe this was a bar at some point. Who knows?

It’s a cheap model!

As I mentioned previously, I noticed that many of the properties were held by estates. Checking the records showed either out of state mailing addresses or the same address as the property. My guess is that in these cases, the descendants got a property they didn’t want, probably tried to sell it, and then just let it go to the county. There were a few cases where there was a difference between the market value and the tax lien value, but further inspection through Zillow showed an old, dilapidated house which would require a lot of work to rehab.

There was one case which was quite intriguing to me. The owner of the property was a real, bona fide bank, and the property itself was residential. I quickly inferred that the property had been foreclosed upon, and had been lost somewhere in a paperwork shuffle. Because of the foreclosure, there was no junior lien from a mortgage to worry about.

An intriguing possibility

Bad bank. Citi hadn’t paid the property taxes since 2007.

Bad major large multinational bank!

Apparently, Countrywide owned the mortgage, and somewhere in the acquisitions, this one got lost in the filing cabinet.

This got lost in the circular file

By the way, searching the online public records of Tarrant County is GODAWFUL. The website is built using 1993 technology, apparently. It is designed to keep title search companies in business, I am convinced. It’s horrible. It’s yet another reason this is not for novices. Ugh.

I jotted down notes on the properties I would be interested in were I bidding, and headed to the appointed time and the appointed place.

The place was packed. Parking was a nightmare. I drove around for fifteen minutes looking for a parking spot located in approximately the same county. As a result, I got there a couple of minutes late and missed the opening explanations and instructions. Here’s what I saw:

A few other people had the same bright idea as I did.

Furthermore, there were several other foreclosure auctions happening at the same time. I had a hard time figuring out which was which, but, finally, I got to the right one.

The tent was filled with probably 50 people with another 25 to 30 milling about outside. There were a few like me who weren’t really serious about bidding, but there were definitely some serious bidders.

Most of the properties were, as I mentioned earlier, pretty much worthless. Those properties were read out, the opening bid of the due taxes was made, and nobody bid on them. The county then took those properties back and struck them off.

When the county strikes a property off, that means it’s no longer available for auction. Investors can inquire about buying struck off properties and can usually buy them for less than the taxes which are due. Still, almost all of the properties which get struck off are struck off for a reason – nobody wants them. I wouldn’t take any of the struck off properties for free because I’d then start incurring property taxes, and I’d have no way of making income off of them.

Due to the glacial pace of the auction, I couldn’t stay to see them all. There was one property which got quite heated bidding. The process of an actual auction where there is a bid, instead of the auctioneer shouting prices and people affirming the bids, the auctioneer in this auction required the bidders to shout their prices, and the bidders could increase in $1 increments. This made for some long auctions. I discovered that on the properties which actually had value (e.g. were homes), the price tended to be about 60% of the market value.

By the time you account for getting an attorney to quiet title, doing whatever is necessary to evict residents, if required, and fixing up the place, the discount from market value is going to be between 20% and 30%.

Here are my tips if you really want to go to try to purchase a property at a tax auction in Tarrant County, Texas:

  • Pre-register early. You have to get a writ from the county stating that you don’t owe back property taxes yourself. They don’t want you robbing Peter to pay Paul. This process must be started well in advance of the auction; there are usually cutoff times posted which are between two and three weeks before the auction itself.
  • Have plenty of capital and plenty of time to take a shot with this method. You have to pay with a money order or a cashier’s check. I think they’re a little flexible on having the money right there (since you don’t know how much you’ll need), but you do have to pay quickly. Furthermore, your money could be tied up for quite a while unless the deed is redeemed by the previous owner. This isn’t a quick flip situation. Furthermore, you’re going to have to pay more than just the tax deed bid; you’ll have legal fees and probably repair costs to factor in.
  • Get there early. Parking is a nightmare and standing room is at a premium. You might want to bring a camping chair with you so you can sit down and wait out the crowds. They do thin out after a while.
  • Do your research. Be thoroughly prepared. The auction will probably represent a quarter of the overall time you should be spending in acquiring a property if you truly are set on getting a property this way. Know the title history. Check the day of the auction to make sure there were no last-minute bankruptcy filings. Make sure you don’t have superior lien holders against you.
  • Don’t get into a bidding war. It’s an auction. It’s meant to get your adrenaline up so that you overbid because Monkey Brain took over during the yelling and screaming. Have a walkaway price which is based on strong analytics and not a gut feeling. Don’t go above the walkaway price. You set it for a reason. Keep to that reason.
  • Don’t forget about the previous year’s taxes. All of the minimum bids were stated as subject to the previous year’s taxes, meaning, as I understood it, that you still had to pay the previous year’s taxes as well as whatever you bid.
  • Change the locks as quickly as possible. It’s your place. You’re responsible for its upkeep. You need to take measures to secure your property.

If you’re patient, and adequately capitalized, it appears to be possible to get a property at a reasonable discount to a market value. However, due to the other risks, I think if you have a good bird dog who can find distressed properties for you, you’ll probably be able to get similar deals without the hassle and the risk. On the other hand, if you’re aiming to try to get a redemption, and taking over the property as a rental or potential flip is an acceptable secondary investment proposition, it might be a good way to try to get a break and get a 25% or a 50% return. It does come with risks, though, and you’d be well-advised to speak with an attorney who has experience in tax deeds as well as potentially getting a little education on title searches before you truly commit money into trying to buy tax deeds.

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John Davis
John Davis is a nationally recognized expert on credit reporting, credit scoring, and identity theft. He has written four books about his expertise in the field and has been featured extensively in numerous media outlets such as The Wall Street Journal, The Washington Post, CNN, CBS News, CNBC, Fox Business, and many more. With over 20 years of experience helping consumers understand their credit and identity protection rights, John is passionate about empowering people to take control of their finances. He works with financial institutions to develop consumer-friendly policies that promote financial literacy and responsible borrowing habits.

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