Purchasing properties at foreclosure sales can be an opportunity for investors. Some of these properties are offered at a fraction of the market value which is one of the reasons investors are incentivized to buy. Before purchasing a property, there are several steps to consider. Here is a basic overview of the foreclosure process.  

TOP 5 DUE DILIGENCE STEPS FOR PRE-FORECLOSURE 

There are three types of foreclosures: (1) tax sale, (2) trustee sale, and (3) HOA sale. Tax sales are government lines that usually have superior priority over other liens. Trustee sales are mortgage liens. Usually, these mortgage liens have priority over HOA liens. If the HOA lien is junior to the mortgage lien, it will extinguish at the sale. Mortgage liens are generally junior to government liens, therefore, additional diligence is necessary to ensure that those liens are not on title or that you are accounting for additional costs when purchasing the property. HOA liens are junior to government liens and most mortgage liens. Before purchasing from an HOA sale, you should conduct a title search.

1.      TITLE SEARCH = When conducting a title search look for liens, release of liens, any break in chain of title, Lis Pendens and abstract judgments. If you are not familiar with the title search procedure, you should seek a professional with experience. There are many title search companies available that can help you.

2.      CONTACT TRUSTEE = Reach out to the trustee of the property. Some trustees may provide an inspection report and let you view the interior of the property. Note that trustees are not obligated to provide such reports or allow you on the property.

3.      PHYSICAL CHECK = If you have permission you should physically check the property prior to the sale or have a professional inspector. Account for costs associated with capital expenditures such as the condition of the roof, foundation, and HVAC. Also check to see if the property is in a flood zone and whether there are any environmental contaminants. Be sure to check the neighborhood and surrounding areas. *Be aware that you are not allowed onto the property without permission by an authorized representative or agent.*

4.      TENANTS OR OCCUPANTS = Tenants or occupants may be residing on the property even after you purchase the property at a foreclosure sale. The proper procedure to remove tenants or occupants from the property is an eviction proceeding.  Otherwise, you can make an arrangement to rent the property to them.

5.      FINANCIAL ANALYSIS = Make your own financial analysis for equity. This can be done in several ways. One method is to research the fair market value of the property and surrounding properties to compare that value to the estimated cost of repairs, cost of any liens, and cost of any judicial action needed for eviction.  

6.      BONUS – OTHER DUE DILIGENCE TO CONSIDER = If there is a wrongful foreclosure action related to this property, it may put you in a legal battle. Wrongful foreclosure claims may prevail when the debtor or owner is an active military member, bankruptcy action is pending, or probate is pending. Check bankruptcy twice, during your due diligence and the day of sale because last minute bankruptcies may be filed. 

Other resources: Check for environmental issues: www.tceq.state.tx.us

Every property and transaction is unique, but these tips are the top five that we recommend to you as a guideline for some of the decisions and tasks to be completed before the foreclosure sale. For questions about this or more information about foreclosure sales, please contact us.

In Texas, foreclosure sales are at live auctions. Check the real property records for the list of foreclosure properties in the county you want to purchase your property. You may also find the list on your local newspaper, or the trustee’s website. In Harris County, the Daily Court Review provides a monthly list of properties.

Foreclosure sales are on the first Tuesday of each month between 10 a.m. and 4 p.m at the county court house unless specified otherwise. The constable or trustee will instruct and inform the bidders about the properties.

Depending on which county you are in, you may have to register in advance. In Harris County, bidders can register the morning prior to the auction sale, be sure to check the registration procedure for Harris County. Upon registration a number is assigned to you. The number is on a piece of paper which you will raise when you bid.

Bids usually start with the amount owed including accrued fees and other related costs. Winning bidders must provide identification name, address, taxpayer number, and photo ID and/or LLC.

Payment must be paid within a reasonable time. Generally, you pay once you win. Have the cashier’s check or certified check payable to the trustee or constable or to yourself. You can always endorse it to change the name of the beneficiary. If you are the winning bidder and cannot pay timely, you may be penalized, and the property will be rebidded.

At auctions properties are sold “as is” which means there are no warranties or guarantees. There’s no seller’s disclosures provided.  Keep in mind that after winning the bid and purchasing the property, it may take some time to receive the recorded deed from the trustee.

RESCISSION OF FORECLOSURE SALE

Rarely does a property get rescinded, however, rescission of the sale can happen within 15 days post foreclosure. Rescission occurs for several reasons, including technicalities with the foreclosure process, debtor paid prior to foreclosure, probate is pending on at least one of the property owners or borrower of the note, or property owner has a bankruptcy pending with an automatic stay prior to sale. The bidder will get their money back but the bidder can dispute the rescission within 30 days. 

REDEMPTION PERIOD

The redemption period is the time an owner can take back the property after foreclosure. Redemption period depends on the type of property and type of lien. For instance, tax liens redemption period is two years for agricultural property and homestead property. The bidder is entitled to the bid amount plus 25% on the first year and 50% on the second year of the redemption period, costs of property insurance, and required repairs and improvements. Please note that repairs and improvements must be for habitable reasons. See Texas codes, ordinances, or the lease. Other properties have 180 days and investors are only entitled to principal and premium of 25%.

Redemption period for HOA assessment liens are 180 days after the HOA sends written notice of the foreclosure sale to the owner and the lienholder. Lienholders have 90 days to redeem after the HOA sends written notice, but the prior owner has first rights. Note that HOA liens are usually subordinate to mortgages and mechanics lien, meaning these liens may still be on title, thus new owner may be liable for those liens.

POST-FORECLOSURE EVICTION

After a successful bid, the bidder receives a deed as new owner of the property. You have title and right of possession of the property and automatically become the landlord if there are tenants or occupants. To request tenants or occupants to leave, a 3-day notice to vacate sent by certified mail is required pursuant to the Texas Property Code. If the tenants or occupants have not vacated the premises, then the next step is to file an action for forcible detainer action in Justice of the Peace Court in the county and precinct where the property is located. After a successful trial and judgment, a writ of possession is requested and the constable posts a notice on the door. Then, the constable removes any occupants or tenants. This can also be done with personal property that belongs to the tenants or occupants that remain on the premises. NOTE: the tenant or occupant can appeal eviction and set a bond, delaying the eviction process.

STOPPING FORECLOSURE SALE

Property owners may attempt to stop foreclosure for several reasons. This includes disputing the amount owed, lienholder did not provide correct and/or timely notice, the foreclosure process was not properly executed. 

One judicial action is filing a temporary restraining order also known as a TRO, with a reasonable claim such as the foreclosure is wrongful, debtor has cured or can cure with sells contract or proof of payment, pending probate, pending bankruptcy, owner is an active military, or property is in a current dispute, however, title issues cannot be claimed since it does not affect foreclosure. TRO is temporary  and usually lasts only 14 days. However, it may be renewed upon a temporary or permanent injunction presented to the court. Sometimes that is enough time to stop a foreclosure and cure the defect.

Foreclosure sales can be a great opportunity to find deals. However, there are several things to consider, and this outline is meant to provide you with some food for thought. For questions about this or more information about foreclosure sales, please contact us. 

Texas Property Code Section 51 covers foreclosure law.  The lienholder is required to provide 21-day notices of foreclosure sales of a residential homestead. This notice must also be filed with the county clerk and posted at the courthouse. The Statute of limitation is four years for lienholders to start the foreclosure process after default. After the statute of limitation expires, the lienholders cannot collect, with a few exceptions.

All lienholders must send a demand letter to debtors with the intent to foreclose on the property, the demand letter must be sent by certified mail. Debtors have 20 days to cure a homestead property, unless the deed of trust states otherwise.  If the debtor is able to cure the default then a reinstatement agreement should be executed unless the terms of the debt have been changed, such as a modification agreement or a replacement note.

If the debtor or tenant has paid more than 40% of the amount due or made 48 or more monthly payments, then pursuant to the equity protection provisions of Tex. Prop. Code Sec. 5.066, the seller or landlord must give a 60-day notice of default and opportunity to cure the default. If debt has not been cured, then the trustee may start the foreclosure process.

All superior liens will extinguish subordinate liens. After the sale, any excess proceeds from the foreclosure sale may be distributed to the subordinate lien holders.

Notice must be given to the IRS and U.S. Attorney (if any) 25 days or more prior to the sale. The IRS has 120 days to redeem the property after the sale. The U.S. Attorney has 60 days.

If you are a property owner or lienholder and need assistance with the foreclosure process, be sure to review the deed of trust, note and all other relevant documents. Feel free to contact us with your real estate questions.