As we approach Halloween, we at Roddy’s Foreclosure Listing Service think it’s a good time to dispel the notion that tax foreclosures are scary or tricky. Actually, these purchases are really quite simple. And they’re a great way for investors who don’t have a lot of cash to enter the foreclosure market.

What is a tax foreclosure?

Tax foreclosure sales occur when homeowners fail to pay property taxes. The property is sold at auction through the governmental entity that’s owed the taxes, such as a county or township. These properties sell for less than conventional foreclosures and the homeowner or lien holder have redemptive rights for a limited period.

A low-cash sale

Tax foreclosure purchases offer investors a great opportunity, especially those who don’t have a lot of cash to spend at auction. In fact, you can end up buying a property that’s well below the mortgage, because you only pay the taxes that are owed (plus fees). My first investment was a tax foreclosure—I paid only $18,000 for a 2-bedroom house whose mortgage was 125,000!

There’s another advantage of tax foreclosures: All liens are wiped away, except for federal tax liens (which we’ll talk about that in a sec.) So you can immediately start recouping on your investment. Once you have the title, you can evict residents if necessary and rent out the property.

Properties can be redeemed

There is a catch with tax foreclosures. Under Texas tax laws, the homeowner or lien holder has a right to redeem the property up to two years. (There are ways to get around this, which we’ll talk about in a later blog post.)

But while you can’t sell the property for the next two years, you can start to recoup your investment by renting it out. You should work up a month-to-month rental agreement that explains that it would be void if the property is redeemed. Because you’ll be renting by the month, you can go with an above-market rate.

Making money even if the property is redeemed

Here’s more great news: Even if the property is redeemed, you can still make good on your investment, because homeowners who want to redeem their properties are required by law to reimburse you, the new buyer, for all you put in, and then some.

More specifically, if a property is redeemed, you will be paid what you paid for the property, including all penalties and fees, plus a redemption premium of 25 percent if it’s during the first year of the redemption period, and 50 percent if it’s during the second year.

So the upshot of tax foreclosures is this:

• Don’t be afraid of giving them a try; they’re a great way for first-time investors to break into the market.

• Even though you can’t sell the property for the first 2 years, you can still rent it out and begin to recoup your investment.

• If the property is redeemed, you still stand a good chance of making a tidy profit, because you can sell it for 25 percent (first year) and 50 percent (second year) of your investment.