CHAPTER 3: TAX FORECLOSURE SALES

Overview of Tax Foreclosure Process

Statutory Tax Lien

On January 1st of each year, a tax lien automatically attaches to real property. The lien secures all ad valorem taxes, penalties, and the interest imposed by each taxing entity covering the area where the property lies. Ad valorem taxes become delinquent (and subject to foreclosure) if not paid before February 1st of the following year.

Tax Foreclosure Suit

A suit for tax foreclosure may be brought by a taxing entity at any time after its tax has become delinquent. The taxing entity bringing a tax foreclosure suit must join as defendants all other taxing entities that also have delinquent tax claims against any part of the property. In addition to all taxing entities, the suit should name all other lien holders against the property as defendants. The taxing entity must notify every owner of the tax delinquent property of the lawsuit. If either the identity or whereabouts of an owner are unknown, the unknown owner may be notified by publication of the notification in a newspaper.

Penalties and interest are charged against properties with delinquent taxes. Once a lawsuit is filed, court costs are also added. Sometimes a person can work with the taxing entities to initiate lawsuits against tax-delinquent properties in an area the person would like to develop.

A judgment issued by the court will contain an order that directs sale of the property to satisfy the amount of judgment granted for delinquent taxes. If any defendant (such as a mortgage company) fails to assert a claim for payment after notice of the lawsuit, its lien will be extinguished by the judgment entered in the suit.

Tax Foreclosure Sales Public Auction

Any taxing entity that obtains a judgment for delinquent taxes in the foreclosure suit and wants to sell the property must apply to the district clerk for an order of sale. The order of sale should direct the appropriate officer (sheriff or constable) to sell the property at a public auction to satisfy the tax judgment. The officer must then send the appropriate notice of tax sale to each named defendant in the judgment and must advertise the sale in a newspaper published in the county where the sale will take place. If no newspaper is available, posting of notice at three public places—one of which must be the county courthouse—is a permissible substitute.

By law, these sales are held on the first Tuesday of every month, usually on the courthouse steps. By statute, the minimum opening bid at the public auction must be at least the lesser of either the total value of the property or the taxes, penalties, and foreclosure costs owed or the market value of the property. Some taxing entities, however, will not sell the property for less than the taxes, penalties, and costs owed, even if the costs exceed the value of the property. At the sale, if no bid is received from the public which equals or exceeds the minimum bid, the officer must automatically bid the property off to the taxing entity that initiated the foreclosure. This property is sometimes called “struck off” property. The officer will then transfer the property by deed to the appropriate taxing entity to hold the property for itself and in trust for the other taxing entities who were party to the suit.

One benefit of the tax foreclosure process is that it should wipe the slate clean for the property by clearing the claims of known and unknown owners of the property. There are many cons to the process as well, however. For example, a taxing jurisdiction may make a mistake by failing to provide notice of the foreclosure action to a co-owner, resulting in clouded title. A buyer that purchases tax foreclosed property also needs to know that the person takes the property “as is”— subject to any environmental hazards, flood plain issues, and other problems that might make the property ill-suited for development. As a result, prior to purchasing property at a tax sale, the buyer needs to research the property for their intended purposes.

Tax Sale Deed

The officer conducting a tax sale must prepare and deliver a tax sale deed to the tax sale purchaser or, in the event of struck off property (property which was not purchased at the tax sale), to the taxing entity that initiated the foreclosure. The tax sale deed transfers “good and perfect title,” including the right of use and possession. The transfer is subject to the foreclosed owner’s statutory right of redemption and to any restrictive covenants running with the land that were recorded prior to January 1st of the year in which the earliest foreclosed tax lien arose. However, some title companies will choose not to insure tax sale property, especially if the title company suspects that the former owners or lien holders were given inadequate notice of the tax suit. A buyer should work with a title company before attempting to purchase any tax foreclosed property.

Redemption Periods

Owners of foreclosed property have a certain time period in which they have an absolute right to buy back the tax foreclosed property. The process of buying back the property is called redemption. The length of time that a foreclosed owner has to redeem the property depends on the type of property involved:

• Residential Homestead: on or before the second anniversary of the date on which the tax sale deed was filed in the real estate records.

• Land Designated for Agricultural Use: on or before the second anniversary of the date on which the tax sale deed was filed in the real estate records.

• All Other Real Property: 180th day (basically, 6 months) following the date on which the tax sale deed was filed in the real estate records.

In order to redeem property, the foreclosed owner must pay the costs of the foreclosure plus a premium.

Statutes of Limitation

A buyer that purchases property at a tax sale auction needs to also be aware of the statutes of limitations for challenging property tax foreclosure lawsuits. A title insurance company will usually insure property subject to the expiration of the statute of limitations. The statutes of limitations are statutes that limit the time period when someone may file an action to recover property from a tax sale purchaser as a result of an improper foreclosure action. For example, if the former owner claims he did not get proper notice of the tax sale, the former owner has a limited period in which to file a lawsuit to try and get the property back. After the statute of limitations has passed, the purchaser and the purchaser’s successors-in-interest have full title to the property, precluding all other claims. [Section 33.54(c) of the Texas Tax Code.] Once the time period set out in the statute of limitations has elapsed, the person who acquires the property for value and in reliance on the tax sale is entitled to conclusively presume that the tax sale was valid. The purchaser holds the title free and clear of the right, title, and interest of any person or entity that arose before the sale —subject only to an unexpired right of redemption and any restrictive covenants recorded prior to inception of the earliest foreclosed tax lien.

Taxing Entity’s Resale

When, in the absence of a sufficient bid at the public auction, property is “struck off” to the taxing entity, the taxing entity can proceed to resell the property. Resold property remains subject to any unexpired right of redemption in favor of the prior owner as well as the statute of limitations. Resale can occur by means of another public auction conducted by the appropriate officer, and, at such a sale, the taxing entity may accept any price.