Texas- the Hybrid Tax Lien/Deed State
By Stephen Preston of www.TaxLienTraining.com

Where else can you generate government mandated returns of 25% every six months in THIS economy?

Of all the deed and lien states in the USA Texas is my favorite and here’s why:

Texas is a Deed state but has an important feature that differentiates itself from other Tax Deed States (Texas is often called a “Hybrid” Lien/Deed state). In a typical Tax Deed state, when the investor purchases a property at a tax sale they are handed over the deed to the property then and there and are now the proud owners to do with the property as they please.

This is not the case in Texas, however.

When you purchase a property at a Texas Deed sale, you get ownership of the property right away just like any other Deed state and can begin to collect rent
BUT (and here is the important differentiating factor)

In Texas, the former property owner has a redemption period (just like in a Tax Lien state) of 180 days to pay you back what you paid for the property at the auction + a 25 % interest penalty to get the deed to their property back. This 180 day window is called “the redemption period”.

Confused? Stay with me.

Think of the redemption period as like a time clock. When you purchase the property at the auction and register the deed the 180 day redemption clock begins to tick immediately. The former property owner (I say former because for all intents and purposes the property is now yours) has 180 days to deliver a cheque, made payable to you, for the price you paid for the deed at the auction + a 25% interest penalty. If they fail to deliver payment to you before the 180 day redemption clock runs out of time then the property becomes 100% yours!

If the delinquent property owner delivers the payment to you, the investor, in full and with the penalty payment anytime before the redemption period has expired, they can reclaim the deed from you. In this case, the investor has made a 25% return on their money in a very short time frame of six months (180 days) or less. Not bad!

Texas Tax Deeds are therefore a two pronged investment strategy: either you get a high interest return on your investment within 180 days or you obtain 100% ownership of the property and are free to sell it or hold on to it as you see fit.

Let’s use an example to illustrate this point:

Michael does not pay the property taxes he owes of $3,000 in Harris County Texas. After numerous failed attempts by the county to collect the taxes, Michaels house: 123 Forest Grove, is placed on the counties official auction list.

Joe the Savvy Investor attends the Tax Deed auction and purchases the deed for Michael’s property in the amount of the taxes owed: $3,000.

In Texas there is a 180 day redemption period. This means that Michael has 180 days to pay Joe the Savvy Investor the $3,000 he purchased the Tax Deed for at the auction + the state mandated interest rate penalty of 25%!

Thus in order for Michael to retain ownership of his property he must pay Joe:

$3,000 (the winning price at auction)
+
25% interest ($3,000 x 25% = $750)

= $3,750 ($3,000 + $750)

Not bad eh? A 25% return on your investment in only six months. But wait it gets better. What if Michael does not pay Joe the money plus the interest? Let’s say the six month redemption period passes and Joe has not received his money. The property then becomes Joe’s and Joe may now do with the property as he likes.

So under this scenario:

Michael fails to pay Joe back the $3,000 plus the 25% interest penalty within the 180 day redemption period. The property is now Joe’s to do with as he sees fit. The property is worth $50,000. Joe decides to sell 123 Forest Grove quickly for $40,000. Joe pockets $37,000!

($40,000 for the property – $3,000 invested = $37,000 profit)

It does not matter when during the redemption period the previous owner pays you back your investment + the 25% penalty; four months, right after the auction, one month or one day. The interest penalty they must pay you, if they want to get the deed back to their home, is always 25%!

God Bless Texas!

Stephen Preston
CFO