Texas Home Sales through Bankruptcy, Short Sale, and Foreclosure

​One proven real estate investment strategy involves finding distressed properties that one can renovate, refurbish, and add value to, ultimately flipping or renting them out in rising markets. The major pathways for disposing of properties in default are bankruptcy, short sale, and foreclosure.

A legal process, foreclosure occurs when the homeowner misses several mortgage payments. By Texas law, the loan servicer can only initiate the process after the mortgage payment is 120 days past due. Many homeowners use this preforeclosure period to work with the servicer on loss mitigation strategies, such as a short sale.

Once default occurs, resolution is through either judicial or nonjudicial foreclosure. Most Texas residential foreclosures are nonjudicial, as this is the faster and less expensive option. The process from Notice of Default through Intent to Accelerate takes between 41 and 90 days. With judicial foreclosures, the lender files notice with the court and automatically wins the case if the homeowner doesn’t make a written response. In cases where the homeowner defends, the judge enters a decision and determines whether the residence is retained by the homeowner or sold at auction.

Texas foreclosure sales take place at the county courthouse on the first Tuesday of each month. Typically, the lender starts by making a credit bid, which can be any amount, up to the total amount the homeowner owes (including costs and fees). If the lender bids under the total debt amount and is the highest bidder, they may seek a deficiency judgment. This allows them to make up the difference in sale price and debt amount through a personal judgment against the homeowner.

When the lender is the highest bidder, the property is called "real estate owned" (REO). In cases where multiple bids occur and the property sells for more than what is required to pay off liens on the property, the homeowner receives whatever money is considered surplus.

With short sales, the homeowner negotiates with the lender to sell their home for under the amount owed. In cases where there are two or more mortgages on the home, both lenders must agree to such a proposition, which makes the chances of an agreement slim. The benefit for the homeowner with a short sale is that it’s significantly less damaging to their credit score than foreclosure.

The third option, filing for bankruptcy, delays foreclosure but doesn’t erase the lien or provide the homeowner license to stay in the residence without making mortgage payments. With Chapter 13, homeowners go through debt reorganization. They have the opportunity to save their home by making payments on the debt over time. Chapter 7 involves liquidation, and while this may delay the foreclosure process, it does not often allow the home to be retained through a court-approved repayment plan.

Buying homes that go through the bankruptcy process is different from buying at a foreclosure auction. Sales typically take place through a bankruptcy trustee at the Bankruptcy Court, with district courts posting notices of sale weeks ahead of time. This means that buyers must scour District Court sites for upcoming sales. Another option involves monitoring local realtors with a consistently high volume of listings on behalf of Chapter 7 trustees. Either way, the search must be proactive, with the upside being that one sometimes finds good-value distressed properties that other parties didn’t notice.

KC Kronbach

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