Foreclosure Basics

All states have a procedure for foreclosing on real property which is pledged as collateral for a loan. Most, Texas among them, have a non-judicial foreclosure procedure. As the name implies, a “non-judicial foreclosure” is conducted without the need for filing a lawsuit. That means it is a quick and relatively inexpensive process.

Texas has a particularly streamlined procedure. We call our mortgaging instruments “deeds of trust”. When a borrower signs a deed of trust, an interest in the property is conveyed to a trustee in trust to secure the lender’s note; however, the lender does not actually “own” title to the property. The property owner continues to own the property, subject to the mortgage interest conveyed to the trustee under the deed of trust. The lender has a lien against the property.

If there is a default in payment of the note secured by a deed of trust or a default under the terms of the deed of trust, the lender will instruct the deed of trust trustee to foreclose the liens securing the note. The foreclosure divests the property owner/borrower of title to the property and places it in the successful bidder at the foreclosure sale.

There are some safe-guards to protect the interest of a borrower. For instance, if the property is the homestead of the borrower, at least twenty days written notice of default must be given to the borrower with an opportunity to cure the default during the notice period.

If a borrower who receives notice of default is $1,500 in arrears in note payments, during the notice period she can tender $1,500 to the lender and the lender must accept payment and cease foreclosure proceedings.

If the borrower does not cure a default during any required notice period, the loan is typically “accelerated”. After acceleration, the entire unpaid balance of the note is due; not just the amount of past-due payments. After acceleration, the lender will instruct the trustee under the deed of trust to “post” the property for foreclosure. Posting simply means that notice of the foreclosure sale is “posted” at the proper place at the county courthouse in the county in which the property is located; notice is filed with the county clerk of that county; and the borrower is given notice by certified mail.

Foreclosure sales must be “posted” at least 21 days before the sale. All foreclosure sales occur on the first Tuesday of each month at a specific location in each county designated by the county for conducting foreclosures.

A foreclosure sale is a public auction. Anyone, including the lender, the borrower, and any third parties are permitted to bid for the property. Lenders have no inherent right to purchase the property at foreclosure. They may bid for the property and if their bid is the highest bid, they are the successful purchaser at foreclosure. The trustee conveys the foreclosed property to the highest bidder by a trustee’s deed.

The amount bid at a foreclosure sale is off-set against the amount due under the note. If the foreclosure sales price is less than the amount owed, the borrower will still owe the lender for the unpaid balance of the note, and, if the borrower is personally liable for payment of the note, may be sued for the unpaid balance of the note. If the bid price is more than is owed under the note, the excess amount is given to the property owner/borrower.

An example might help illustrate the procedure. Suppose a borrower owes an unpaid balance of $100,000.00. If the property is sold for $90,000, that amount is credited against the note leaving a balance due of $10,000.00. If the property is sold for $110,000, the $100,000 note is paid in full and the excess bid amount, $10,000, is paid to the borrower.

There are substantial risks in purchasing property at foreclosure. First, the deed given by the trustee is totally without warranty of title. If there are un-discovered liens superior to the lien foreclosed or any other title defects, such as tax liens, the buyer at a foreclosure sale takes the property subject to all of those defects and has no legal recourse against the trustee or the foreclosing lender.

Second, the buyer purchases the property in whatever condition it is in. There is almost never a way to actually get inside the improvements on a foreclosed property to inspect. If the property has been vandalized and virtually destroyed, that is the buyer’s problem. The trustee and lender are not responsible.

Several times a year, I will have a client request a conference to discuss purchasing property at foreclose. Invariably, the client has attended a “get rich quick with foreclosures” seminar and is anxious to make their first million.

I will certainly not tell you that there is no money to be made in purchasing foreclosed property. There certainly can be good profits. But buying foreclosed property is often not a path to easy profits. It takes experience and hard work to avoid losing more than you make.

Several years back, I had a client who was particularly pleased that he had been able to purchase a property worth about $100,000 for less than $40,000. It was my sad duty to tell him that the lien foreclosed was a second lien and that he owned the property subject to paying the first lien which had a balance of about $80,000.

Caveat emptor! Let the buyer beware.