Exclusive Insights: Is Buying Tax Liens in Texas a Smart Bet? (2024)

So you’re wondering about buying tax liens in Texas? It seems like a relatively low cost because you’re paying any liens against the property instead of buying the property itself.

It can’t be that easy, can it?

Yes… And no.

Buying tax liens in Texas isn’t ideal for new investors because it’s a complicated process that could cost you quite a bit if you aren’t careful. However, if you’re still interested in learning more about buying tax liens in Texas, keep reading!

Important Things to Know Before Buying Tax Liens in Texas

Before we can get into the nitty-gritty about buying tax liens, there are some things you need to know first.

Texas doesn’t sell the lien itself. The state sells properties that are tax-delinquent at auction. The property’s owner can redeem their property within a redemption period, but they’ll face a 25% to 50% penalty.

As the lienholder, you’ll receive the 25% to 50% penalty the original owner has to pay to get their home back on top of any costs you paid to get that property.

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What Is a Tax Lien?

All property owners are expected to pay property taxes. If the property owner fails to pay their tax bill, an assessing agency will place a lien against the property, effectively turning the property into collateral for the debt.

Until the debt has been satisfied, the property can’t be sold or refinanced.

The municipality where the property is located creates a tax lien certificate—the certificate details the amount owed and any interest and penalties due.

The lien certificate can then be auctioned off to an investor with the highest bid. Investors can pay as little as a few hundred dollars for a lien on a small property, but be prepared to spend the big bucks on larger properties.

The chart below shows how quickly the penalties, interest, and attorney fees can add up on a residential property with a $15,000 tax bill.

Credit: TaxEase.com

What is Tax Lien Investing?

As a tax lien investor, you’re paying someone’s tax bill and are given the right to collect that money (plus interest) from the property’s owner when they pay the balance.

If the property owner doesnot pay the owed taxes, the investor has the right to take the deed to the property within a redemption period.

Note: The redemption period is usually 180 days, but it can be as long as two years if the property is a residential homestead or land designated for agricultural use.

How Does Tax Lien Investing Work?

Tax lien investing begins with a homeowner not paying their property taxes. Most jurisdictions require you to pay property taxes by January 31. You are delinquent if the taxes haven’t been paid by February 1st.

Once a property has a tax lien certificate placed against it, the certificate will be auctioned off to the highest bidder. The auctions can take place online or in person.

When someone wins a tax lien certificate bid, they are responsible for paying the entire tax bill and any interest and penalties. As an investor, you make money when the property owner pays back the tax debt plus interest.

If the property owner doesn’t pay the debt within a reasonable time frame (the specific time frame will vary depending on the taxing authority and local market), the lienholder can foreclose on the property.

Note: The chances of getting a property by buying a tax lien is slim — 98% of property owners redeem their properties before the foreclosure

The Benefits and Risks of Tax Lien Investing

Like any other financial decision, you must know the pros and cons of buying tax liens in Texas. Many risks are involved, but the potential rewards may be worth it.

The Benefits

The most obvious benefit of tax lien investing is the high returns you could get if the property owner pays back the tax debt and the 25% to 50% penalty. For example, you could receive $4,312.50 to $8,625 on top of the $17,250 you paid to buy the lien.

That’s a decent chunk of change for such a low investment.

Another benefit of investing in tax liens is that you can easily calculate the rate of return. Since you’re paid a lump sum when the lien resolves, you’ll be able to figure out how much you’re getting and your rate of return.

The Risks

Although there’s a lot to be gained when investing in tax liens, the risks shouldn’t be glossed over.

One of the investors’ more significant risks is being responsible for subsequent liens placed on the property. This can be problematic because it will require more money than initially anticipated.

Another risk is that the property you’re bidding on could be in poor condition, the property may have suffered environmental damage, or chemicals, or hazardous materials could contaminate the property.

Then, there’s the problem of income. Unlike investing in rental properties that generate a monthly income, your income is one lump sum. If you’re trying to create residual income streams, this may not play into your financial plans.

What Happens If a Property Owner Doesn’t Redeem Their Property?

In the odd chance that the property owner doesn’t redeem their property, you’ll need to figure out what you’ll do with the property after the foreclosure concludes.

So, what can you do? Well, you can rent it, sell it, or keep it.

Rent the Property

If you decide to rent the property, you’ve secured a monthly income once you’ve found a tenant. Of course, you will have the headaches of being a landlord, meaning you’ll have to:

• Screen applications for tenants

• Handle complaints and repair requests

• Process evictions if the tenant is problematic or doesn’t pay rent

  See Also

  TAX CODE CHAPTER 32. TAX LIENS AND PERSONAL LIABILITY

If you like having a monthly income but don’t want to be so hands-on, you can look into hiring a property management company. They’ll do all of the work for you, for a fee. But, that may be worth it to you.

Sell the Property

If you want an immediate payday, then selling the property may be a better option. You can take the money from the sale and reinvest it however you see fit.

Let’s say you bought a tax lien for $20,000. The property owner doesn’t redeem, and you have the house appraised and worth $200,000. You could sell the house for $180,000, and your profit would be a cool $160,000!

Not bad for a $20,000 investment, eh?

Keep the Property

If you like the area the property is located in, you can certainly keep the property and use it as a second home. Since it’s yours, you also have the option to put the property on Airbnb when you’re not there. You get the best of both worlds!

What Happens to the Mortgage When Buying a Tax Lien in Texas?

Property owners who have tax liens are usually behind in their mortgage payments. Since property tax liens are a higher priority than all other liens, the mortgage is wiped away if the property is bought via tax foreclosure sale.

Interestingly, a loan servicer may advance money to pay delinquent property taxes to prevent the property from going into foreclosure. Of course, the loan servicer will require the borrower to pay the advanced monies back.

Do keep in mind that there is a mortgage contract term that requires the borrower to stay current on their property taxes. If the loan servicer does advance monies to pay the delinquent property taxes and you don’t pay it back, the home can still be foreclosed on.

Note: It’s always in your best interest to search titles for liens — both legitimate and illegitimate.

How to Find Tax Lien Properties in Texas

So… Where do you find properties with tax liens on the auction block?

Government agencies (the county recorder, clerk, or assessor’s office) in Texas offer free lien searches to the public online, as they are public records. The information you find may not be complete. Therefore it would be a good idea to go to the agency’s office to access and review the report for free.

Another website you can look at is TexasLegalNotices.com. You can search for upcoming auctions and narrow the search down to the specific county, specific newspaper, and notice type.

Note: At the time of writing, TexasLegalNotices.com is undergoing a website overhaul and may not work correctly.

In Texas, counties, cities, and school districts can hold auctions for tax-delinquent properties. The auctions must be advertised in the local newspaper once a week for three weeks before the auction.

Tips for Buying Tax Liens in Texas

If you’re still interested in buying tax liens in Texas, then we have a few tips that’ll be useful before getting started.

1. Buying a tax lien doesn’t automatically make you the owner.It would be best to remember that buying a tax lien certificate does not mean you’re the property’s rightful owner yet. The property owner has 180 days (up to two years) to satisfy all of the liens placed on the property. You make money when the property owner pays their debts, but if you walk away with a property, think of it as a welcome surprise.

2. Laws for buying tax liens will vary by county. The county imposes tax liens, so you will be dealing with the county when you buy the tax lien certificates. You need to familiarize yourself with the county laws to know exactly what to expect. There are 254 counties in the state, and each may have slightly different procedures that you’ll need to adhere to. But with that said, all counties must hold their auctions on the first Tuesday of the month unless it’s a national holiday, of course.

3. Diversify your portfolio.We mentioned above that buying tax liens shouldn’t be the only thing in your portfolio. It’s a good thing to have, but you don’t want to put all your eggs into one basket. The more investment options you have, the lower your financial risks. Also, if you have the capital to buy tax liens, perhaps you may want to look into becoming a private lender. Fortune Builders has a guide you can check out to learn more about becoming a private lender.

4. Determine if the ROI is worth your time.Maybe the return on investment isn’t worth the time or effort. While it’s true that you can make good money buying tax liens, it really depends on where you’re doing it. Some counties are going to be more lucrative than others, which you need to consider before going all in.

Is Buying Tax Liens in Texas Right for You?

Diving into the world of buying tax liens isn’t something you should do without careful consideration and lots of research — especially if you want to make this a significant component of your portfolio.

However, savvy investors can make a pretty penny when they know the ins and outs of the practice.

If you need advice and an expert’s opinion, don’t hesitate to reach out! We havea dedicated team that can answer any questions about buying tax liens in Texas and more!