Understanding Rights to Redemption

Many “real estate gurus” try and sell the idea that tax foreclosures are some secret and if you purchase their program, you can become uber wealthy in no time. In reality, there is no secret, they are sold at a public auction, and most of them are more trouble than they are worth. I’m not saying you can’t find a great deal through a property tax foreclosure but there are inherent risks involved with tax foreclosures in San Antonio and other Texas cities. This article will discuss the truths of tax foreclosures, particularly the rights to redemption.

What is a Property Tax Foreclosure?

If you have heard of Property Tax Foreclosures you probably know they are foreclosures on real property for delinquent property tax or ad valorem taxes. Just like a mortgage foreclosures, they are sold every first Tuesday of the month at the county courthouse steps. Unlike mortgage foreclosures that get REOed if they don’t sell, tax foreclosures get put on the Struck Off List. Once it is on the Struck Off List, they are auctioned off again at a later date.

Pitfalls of San Antonio Tax Foreclosures

Just like all foreclosures, it is important to research the title, check for potential bankruptcies, probate issues, condition of property, probate issues, and any other concerns that would prevent you from having a clear title. Even after all those considerations, you may not be completely clear from any risk. What makes tax foreclosures unique is the past owner’s right to redemption. This is the pitfall that causes the most headaches with tax foreclosures.

Right of Redemption

Under Texas law, the prior owner has the right to get their property back by fulfilling certain criteria. As a real estate investor, you must understand this process before you think about investing in a property tax foreclosure.

Tax Code section 34.21(a) provides a two-year right of redemption if a property which is foreclosed upon for non-payment of ad valorem taxes is homestead or agricultural in nature:

(a) The owner of real property sold at a tax sale to a purchaser other than a taxing unit that was used as the residence homestead of the owner or that was land designated for agricultural use . . . may redeem the property on or before the second anniversary of the date on which the purchaser’s deed is filed for record by paying the purchaser the amount of the purchaser bid for the property, the amount of the deed recording fee, and the amount paid by the purchaser as taxes, penalties, interest, and costs on the property, plus a redemption premium of 25 percent of the aggregate total if the property is redeemed during the first year of the redemption period or 50 percent of the aggregate total if the property is redeemed during the second year of the redemption period.

In layman’s terms, the prior owner has up to two years to get their property back as long as they pay the amounts listed above.

Unfortunately, this does not include repayment for any improvements or renovations that have been made to the property. As an investor in San Antonio, you must consider these elements before you go and sink any money into the property. Many seasoned investors will actually rent the property during this period to minimize the risk of not getting the return on their investment.

Fortunately, Texas law is different for commercial and non-agriculture property. The general commercial right of redemption after a tax sale is 180 days and the redemption premium is more limited. Tex. Tax Code § 34.21(e). The statute provides that:

(1) the owner’s right of redemption may be exercised not later than the 180th day following the date on which the purchaser’s or taxing unit’s deed if filed for record; and

(2) the redemption premium payable by the owner to a purchaser other than a taxing unit may not exceed 25 percent.

With this provision it reduces the risk of the prior owner exercising their right of redemption and gives real estate investors investing on tax foreclosures a quicker return on their investments.

Property Tax Foreclosure – Conclusion

If you are a San Antonio real estate investor who is investing in a property tax foreclosure, you should be prepared to hold the property, limit any major improvements, and not resale the property until all right of redemption periods have expired. In the end if you invest properly, these transactions can be a profitable investment and worthwhile. If you have any questions or concerns about tax foreclosures, don’t just run and buy one and regret it later. Talk to a competent San Antonio real estate attorney that understands the nuances of tax foreclosures and can properly advise you.