SO YOU WANT TO BID AT THE SHERIFF’S SALE? PRE-BIDDING CONSIDERATIONS ABOUT AN OWNERS’ RIGHT OF REDEMPTION
Your decision to bid on a property at the upcoming Sheriff’s Sale understandably has you excited. The prospect of purchasing a home for pennies-on-the-dollar compared to its Actual Retail Value would excite most people. You’ve scoured through the lists of properties for sale, run comps, and you’re ready to show up on the courthouse steps next Tuesday and land the winning bid on the perfect property. Before you bid, however, take a minute and ask yourself how much you really know about an owner’s right of redemption in Texas.
Most real estate investors have general knowledge about an owners’ right of redemption in Texas, but sometimes, only having this general knowledge can end up costing an investor both time and money. We have represented clients on both sides of the deal, i.e., investors and former homeowners. This article will not cover every nuance associated with the statutory provisions or case law outcomes surrounding redemption, but it will give you several important things to think about before bidding.
To begin, since as early as 1909, courts in Texas have “liberally construed” redemption statutes to favor one’s right to redeem. Should a dispute arise between an investor and former homeowner regarding the redemption, if the disagreement is all but black-and-white, a court is likely to favor a former owner’s right of redemption. I’ll further illustrate this point later, but let’s get that out in the open from the very start.
Redemption After a Tax Sale – Time Frame- If the property being auctioned made its way to the Sheriff’s auction list by virtue of the owner(s) not paying their property taxes, Section 34.21 of the Texas Property Tax Code controls, and grants the former owner (and really anyone with an interest in the property, e.g., mortgagee) the right of redemption. If the property was used as that person’s homestead, land designated for agricultural use when the tax deficiency suit was filed, or if one merely holds a mineral interest, the right of redemption extends two years from the time the Sheriff’s Deed was presented for recording. If the property was not used as a person’s homestead, was not designated for agricultural use, or was not one’s mineral estate, the right of redemption extends six months (180 days) from the time the Sheriff’s Deed was presented for recording.
Redemption After a Tax Sale – Let’s Talk “Cost” to Redeem- If a year has passed since the Sheriff’s Deed was recorded the former owner (who used the property as his homestead), must pay the purchaser’s bid, the deed recording fee, any taxes, penalties, interest, and “costs” PLUS 50% of the aggregate total of all things mentioned. If a year has not passed, OR if a non-homestead owner redeems within six months of the deed being recorded, they must pay the same costs previously listed, BUT the premium is reduced to only 25% of the aggregate total.
You’ll notice that I have continued to emphasize the term “cost.” Section 34.21(g)(2) of the Property Tax Code explains that “costs” include the amount “reasonably spent by the purchaser for maintaining, preserving, and safekeeping the property” including the purchase of property insurance, repairs required by local ordinance, the expense of discharging a municipal lien against the property, dues/assessments owed to an HOA, etc.
Now granted, it’s tempting once you’ve submitted a winning bid for pennies-on-the-dollar to prime-up the property for sale on the retail market. However, putting brand new granite counter-tops in the property is hardly an expense that went towards maintaining and safekeeping the property. In fact, if the redeeming party has an attorney, they will scoff at this expense. If you and the redeemer reach an impasse and cannot agree on the redemption price because of these $5,000.00 counter tops, and this winds its way to court, remember that note on Texas courts liberally construing the statutes in favor of the redeeming party? What’s the takeaway? If a window has been shattered or a recent hail storm has left a gaping hole in the property’s roof, by all means, fix the damage, and absolutely include that expense in the redemption price. If this is not maintaining or safekeeping the property, I don’t know what is.
Know What Are You Bidding On
I’ve saved this point for last, not because it lacks any importance, but rather, I am hoping it becomes etched in your mind the deepest. By now you know that during the Sheriff’s Sale (which happens on the first Tuesday of every month), the Sheriff is tasked with auctioning off properties whose owners failed to pay property taxes. But did you know the Sheriff also auctions off properties having nothing to do with the failure to pay taxes?
That’s right, it’s up to you to do your homework and find out how the property made its way to the Sheriff’s list. In Texas, an HOA can similarly use the judicial foreclosure process on homeowners who have failed to pay their dues/assessments. If so, the Sheriff’s auction list will include those properties as well.
Most investors justify the risk of purchasing tax sale properties sight unseen because no matter what, they are purchasing the properties at sometimes exponential discounts, and even if they are redeemed, it’s a win-win, i.e., they get their money back PLUS either a 25% or 50% premium. A lot of investors do not know, however, that an entirely different statute controls HOA foreclosures, and this statute does not allow for the luxurious 25% or 50% premium.
Section 209.011 of the Texas Property Code grants owners who have failed to pay their HOA dues/assessment with the right of redemption. Under this section, a former property owner has six months (180 days) to redeem the property after the HOA has mailed written notice of the sale to the former owner. And unlike Section 34.21, the purchaser is not entitled to receive 25% above-and-beyond the price the purchaser paid at auction. In fact, in most situations, the redeeming party only has to reimburse the purchaser the price they paid at auction. AND, unlike section 34.21, 209.001 explicitly states that a purchaser may not transfer ownership of the property to anyone other than the former owner during the redemption period.
As with all matters real estate, market demands ebb and flow. With the DFW market currently making Sheriff’s Sales an attractive avenue for securing that next investment property, never stop learning. And when it comes to bidding on properties subject to another’s right of redemption, sometimes digging deeper beyond that general knowledge surface can save you both time and money!
The information contained herein is provided for general educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. This firm does not represent you, i.e., no attorney-client relationship established unless and until it is retained and expressly agrees in writing to do so.