DAVID J. WILLIS ATTORNEY
Copyright © 2013. All rights reserved worldwide.
Buying a Texas Foreclosure
by David J. Willis
Attorney at Law
Buying property at foreclosure sales is a popular form of real estate investment, but it contains traps for the unwary.
Texas law provides for two types of foreclosure: judicial (ie., through the courts, according to a judge’s order) and non-judicial (on the courthouse steps, without any involvement by the courts). Non-judicial foreclosure sales are held on the first Tuesday of every month between the hours of 10:00 a.m. and 4:00 p.m. at the location determined by the commissioners court of the county in which the property is located (Texas Property Code Sec. 51.002). Notices of foreclosure sales must be filed with the county clerk and posted (usually on a bulletin board in the lobby of the courthouse) at least 21 calendar days prior to the intended foreclosure date. These notices are entitled “Notice of Trustee’s Sale” or “Notice of Substitute Trustee’s Sale.” They provide information about the debt, the legal description of the property, and designate a 4 hour period during which the sale will be held. In larger metropolitan areas there may be a foreclosure listing service, such as the one in the Houston area, which publishes a monthly list of properties posted for foreclosure.
Due Diligence Prior to Foreclosure
The investor’s goal is to acquire instant equity in the property by paying a relatively modest sum at the foreclosure sale. However, apparent equity can evaporate if the property is loaded down with liens. It is prudent, therefore, to check the title of the property that will be sold. Is the lien being foreclosed a second or third lien? If so, then the first lien (usually a purchase-money lien held by a mortgage company) will continue in force. First liens are king. They are not extinguished by foreclosure on an inferior lien. What about IRS liens? Improvement liens? Liens imposed by homeowners associations? Any or all of these could consume whatever equity might otherwise have existed in the property. If you are unsure as to whether or not such liens will be wiped out in the foreclosure sale, then you should check with a real estate attorney.
As far as researching the title is concerned, every professional investor should ultimately acquire the skills to go to the real property records in the county clerk’s office and do this himself. One should obtain copies of the deed and any deeds of trust or other lien instruments. If the investor is not sufficiently knowledgeable to do this, it is advisable to obtain a title report or abstractor’s certificate which is available for a fee from a title company. It is a good idea to then consult with an attorney about which items on the report will be extinguished by the foreclosure sale and which will not.
If you need more information about the property itself, you can contact the trustee named in the Notice of Trustee’s Sale. Trustees are often willing to provide additional information if they have it. They may have a copy of an inspection report on the property which they may be willing to share with you. You might even be able to arrange to view the property if it is unoccupied. Information, information, information. You can never have too much of it if you are going to be successful in buying foreclosed properties.
It goes without saying that the investor should physically inspect the property if at all possible, although one should never trespass on occupied property. It is legal, however, to stand in the street (public property) and take photos.
Property Condition: The Big Three Negatives
When you buy at a foreclosure sale, it is “as is,” in the property’s present condition, and without warranties, express or implied. Property condition is therefore important. When buying residential properties in particular, you should be especially careful about condition of the foundation (learn to know the signs of settlement), whether the property is flood-prone, and whether or not there may be environmental contamination (generally not a problem if the house is in a restricted subdivision). It is usually best to avoid any property that suffers from any one or more of these deficiencies.
The past or continuing presence of hazardous substances can impose huge liability, since both Texas and federal law provide that any owner of property (including the investor) is jointly and severally liable with any prior owner for cleanup costs. The Texas Commission on Environmental Quality (TCEQ) maintains a web site at www.tceq.state.tx.us
where the environmental history of a property can be researched.
It is, of course, important not to bid more than the equity in the property (fair market value less the total dollar amount of the lien(s), if any, that will survive the foreclosure). So how do you discover fair market value? Again, it is a question of getting the right information. One of the best ways to do this is to obtain a comparative market analysis (cma) from a realtor.
Foreclosure sales in larger counties can appear chaotic. Generally, there are no rules as to any particular spot at which a trustee must stand or that only one trustee can carry on a sale at one time. Several trustees may be talking at once. There are no magic words, although trustees usually recite the details of the note and lien, the fact that it went into default, proper notice was given, the note was subsequently accelerated, and the property is now for sale to the highest cash bidder. Trustees must, however, conduct their sales within the four-hour period specified in their notices. The investor should remain in motion, talking to the trustees, until he finds the right trustee with the right property. Caution: do not let the excitement of the sale cause you to exceed your pre-established maximum bid.
It is awkward and risky to carry large sums of cash. Most trustees will allow a buyer an hour or two to return with a cashiers check in the amount of the sales price. If the buyer does not return within that time, the sale is resumed. Many investors will carry an assortment of cashiers checks in different amounts, allowing them flexibility in how much to bid.
Your Substitute Trustee’s Deed will trump any lease that the former owner signed with an existing tenant. This is unfortunate, even unjust, for the tenant - but that’s how it is. You will therefore have a choice in the case of occupied properties – whether to allow the tenant to remain on terms acceptable to you or, alternatively, to evict the tenant. Eviction under such circumstances is seldom accomplished without resort to filing a forcible detainer action in Justice of the Peace court in the precinct in which the property is located (See the companion article on LoneStarLandLaw.com entitled “Evictions and Foreclosures in Texas”). Evictions can often take 3 to 4 weeks (much longer in the event of appeal by the tenant to county court) and involve substantial attorney’s fees. You should build these costs into your budget from the beginning. Hire an attorney for your first couple of evictions, then you will be prepared to handle them yourself.
Rights of Redemption
An investor should be prepared to hold the property and avoid either making substantial improvements to it or re-selling it until after any applicable rights of redemption have expired.
Chapter 209 of the Property Code, known as the “Residential Property Owners Protection Act,” requires provides for certain procedures and protections in the event of foreclosure by a homeowners association. The redemption period is 180 days (Property Code Sec. 209.011).
After foreclosure for unpaid taxes, the former owner of homestead or agricultural property has a two-year right of redemption (Texas Tax Code Sec. 34.21a). The investor is entitled to a redemption premium of 25% in the first year and 50% in the second year of the redemption period, plus recovery of certain costs that include property insurance and repairs or improvements required by code, ordinance, or a lease in effect on the date of sale. For other types of property, the redemption period is 180 days and the redemption premium is limited to 25%.
Full due diligence is not accomplished until a check is made of the bankruptcy records to make sure the owner in default has not filed bankruptcy immediately before the sale. If so, the sale is null and void. The problem for the investor is that it is sometimes a difficult and lengthy process to recover the money the investor paid for the property at auction. Sheriffs, constables, and tax authorities are notorious for this.
Information in this article is proved for general educational purposes only and is not offered as legal advice upon which anyone may rely. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is expressly retained in writing and receives payment to do so.
David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information can be obtained on his website, http://www.LoneStarLandLaw.com
. Copyright © 2013 by David J. Willis. All rights reserved.