Buying Foreclosure Property Can be Perilous

Posted on by Trey Wilson -- San Antonio Real Estate Attorney
                    

Foreclosure Sale Lawyer San AntonioBuying property at a foreclosure sale can undoubtedly present a savvy buyer with tremendous opportunity for profit.  Death, disability, divorce, job loss, and financial woes are the frequent companions of (or precursors to) foreclosure of real estate. Sometimes, the misfortune of a prior owner can quickly be converted to equity which is available for purchase for pennies on the dollar.

In fact, television would have us believe that foreclosure sales provide a fail-proof formula for getting rich quickly and easily through “flipping.”  However, this isn’t always the case, and positive returns are far-from-guaranteed where foreclosure buyers are concerned.

As with anything that seems too good to be true, purchasing real estate at a foreclosure sale in Texas is filled with potential pitfalls. These pitfalls can be costly and time-consuming. Sometimes, they completely undermine investment objectives, result in tremendous loss for even the most sophisticated of buyers.

The following are some of the most common issues encountered with foreclosed properties in my San Antonio real estate law practice:

  • FORECLOSED PROPERTY IS ALWAYS SOLD “AS IS.”    By law (Texas Property Code Sec. 51.009), a purchaser at a foreclosure sale of real property  (1) acquires the foreclosed property “as is” without any expressed or implied warranties, except as to warranties of title, and at the purchaser’s own risk; and (2) is not a consumer.  This means that the the buyer assumes the property with all of its defects – known and unknown.  Since properties being foreclosed are typically occupied prior to the sale, foreclosure buyers rarely have the ability to conduct a thorough examination of the property before buying it. This is risky and can definitely backfire if an expensive component of the property (foundation, roof, etc.) has problems.
  • SOME SALES ARE SUBJECT TO REDEMPTION BY THE FORECLOSED OWNER.  Depending on the type of foreclosure sale, the new buyer’s purchase may not be final. The law governing tax sales, HOA lien sales and other types of foreclosure sales often gives the foreclosed party the right to redeem the property (i.e. make full payment and recover possession/ownership) within a defined period of time. Sometimes this period is quite lengthy. Thus, the foreclosure buyer could lose the property — even several months after paying the purchase price — in the event that the property is redeemed. In addition, there are strict limitations on the new owner’s ability to transfer the property during the redemption period. In some cases, foreclosure sales can even be rescinded by the Seller after the foreclosure purchaser has paid the purchase price.
  • SOME FORECLOSURES ARE FATALLY BOTCHED BY THE FORECLOSING PARTY. Strict compliance with state and federal laws relating to foreclosure is essential to conducting a successful sale. Sometimes banks and other parties pursuing foreclosure take shortcuts or make mistakes that fatally undermine the legality of a sale. Deficiencies in notice, timing and accounting are commonplace. These defects — which have nothing to do with an investor/buyer who purchases the property — sometimes result in a foreclosure sale being invalidated by the Court. Often, these procedural errors in conducting the foreclosure sale result in the filing of a “shotgun blast” lawsuit by the former owner. The foreclosure purchaser (the new buyer) is almost always implicated in these lawsuits, even though they had nothing to do with the deficient procedure by which the foreclosure sale was conducted. The “innocent buyer” defense does not always carry the day in defending these suits.
  • SOME FORMER OWNERS REFUSE TO VACATE AND MAXIMIZE LEGAL INTERVENTION & JUDICIAL APPEALS.  I’m almost embarrassed to discuss a case I handled in 2014 for a real estate investor who purchased a lender-owned property (REO) through an online auction. The selling bank had previously foreclosed the property (and purchased its own lien through the public Trustee’s Sale), but never taken any steps to obtain possession or otherwise remove the former owner (its defaulting borrower) from the property.  Our investor client purchased the property “AS IS” and quickly learned that the former owners still occupied the property once efforts were made to change the locks.  We were hired to evict the former owners.  Those owners — who had not made any housing payments in over a year — found a lawyer who used every trick in the book to maximize the process of removing them from the property. Even though the former owners lost at every step of the process, they appealed and appealed and appealed. Thus, a quick eviction that was filed in the Justice Court lasted for more than 10 months — during which time the former owners continued to occupy the property for free, even though they had no valid legal argument for doing so. Finally, after almost a year and expenditure of significant attorneys’ fees, the Fourth Court of Appeals upheld the prior rulings of the trial court, and granted the investor possession.  As a final kicker, the former owners trashed the property on their way out.  This case illustrated all that is wrong with the judicial eviction process in Texas.  It also stands as a testament to the perils inherent in purchasing foreclosed properties.