- Buying Property at Foreclosure Sales: A Deal or a Dud?
- July 16, 2013 | Author: R. Scott Alagood
- Law Firm: Alagood & Cartwright, P.C. - Denton Office
If you ever watch late night television, then you have seen those infomercials touting the ability to make you an overnight millionaire by purchasing financially distressed real estate. There are many individuals and companies who have built successful lives and businesses through the acquisition of financially distressed real estate. However, unless the process if fully understood and the risks are knowingly accepted, the purchase of financially distressed property at a foreclosure sale is not necessarily for the cash rich novice. The following legal and practical issues should be considered prior to acquiring property at a non-judicial foreclosure sale held under Texas deed of trust.1
A deed of trust is the document that a borrower gives to a lender to secure the repayment of a loan with real estate. In a typical Texas mortgage, the parties involved are the borrower, the lender, the trustee, and the owner of the real estate pledged as collateral ("mortgagor"). The borrower is the party responsible for the repayment of the loan. The lender is the party who funded the loan and is the beneficiary of the pledged real estate. In Texas, a trustee performs the duties and responsibilities contained in the deed of trust when the borrower defaults on the loan. The mortgagor is the party pledging the property as collateral for the loan.2
It should be noted that non-judicial foreclosures in Texas are generally governed by (i) Chapter 51 of the Texas Property Code, and (ii) the documented agreements between the lender and the borrower3 contained within the loan documents. Certain publicly filed documents which should be reviewed are the deed of trust, renewals/extensions of the deed of trust, Notice of Trustee's/Substitute Trustee's Sale, and any other document affecting title to a mortgaged property (such as easements, leases, liens, restrictions, covenants, estates, and mineral interests, just to mention a few). Unless a purchaser is adept at researching property titles, it is advisable to purchase an abstractor's certificate from a title company.
There may be other issues which will affect title to the property being foreclosed which do not appear in the public real property records. Some of these issues include encroachments, protrusions, overlapping improvements, set-backs, zoning, platting, building ordinances, flood zones, drainage, utilities, bankruptcy filings, lawsuits, and probate records. Issues which are located on the ground can be addressed by ordering a current survey of the property. However, permission from the current owner must be obtained before legally entering the property to conduct a survey. This can be very difficult, if not impossible. Other issues may be addressed though inquiries of public officials and employees. While information obtained through governmental offices can be valuable, such information may not be completely reliable, and the persons supplying it are typically not liable for inaccuracies.
Except for warranties of title contained in the foreclosure Deed (from the mortgagor not the Trustee/Substitute Trustee), property purchased at a foreclosure sale is sold "AS IS" without any other warranties and at the purchaser's own risk. The purchaser will acquire the property subject to all physical and title conditions which exist on the date of the foreclosure. Any tenants or occupants of the property on the date of the foreclosure sale may also have rights as parties in possession of the property. Even if the purchaser acquires a meaningful warranty in the foreclosure Deed, enforcing such warranty may be impractical since the mortgagor is usually in dire financial straits.
A foreclosure sale may be set aside for various reasons within four years of the date of the sale under state law and within two years under federal bankruptcy law. Any title insurance policy acquired by the purchaser will usually exclude any defects associated with the foreclosure process and any liens or encumbrances which were not removed by the foreclosure sale. A purchaser at a foreclosure sale is also not a "consumer" relating to the protections afforded by the Texas Deceptive Trade Practices - Consumer Protection Act.
A purchaser should identify these issues, determine acceptability or cost to resolve, and calculate a purchase price accordingly. Resolving an unidentified issue post-purchase may cost tens of thousands of dollars.4
1 As opposed to foreclosure sales by Court order or for unpaid ad valorem taxes which may have different considerations.
2 While the borrower and the mortgagor are typically the same party, it is not necessary that they are the same.
3 The third-party mortgagor's agreements should also be considered, where the borrower and mortgagor are not the same.
4 Legal fees necessary to clear up a contested title matter can sometimes exceed $100,000.00.