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Foreclosure Sales: Buyers Can Be Required to Forfeit Property Even Years After Purchase

Law Office of Todd A. Wilson > Estate Planning  > Foreclosure Sales: Buyers Can Be Required to Forfeit Property Even Years After Purchase

Foreclosure Sales: Buyers Can Be Required to Forfeit Property Even Years After Purchase

reclosures, Property Sales & Estate Administration in Texas | Austin Estate Planning Lawyer

Buyers, Beware of Purchasing a Decedent’s Foreclosed Property. Here’s Why.

Foreclosures and property sales typically attract real estate investors hunting for bargain basement prices. That’s no secret. However, there may be hidden risks involved in these transactions when the property owner has recently passed away. 

In fact, when it comes to foreclosures on a decedent’s property in the Lone Star State, Texas Estates Code and case law set forth some distinct rules regarding when: 

  • The foreclosure could be rendered voidable.
  • The sale of the foreclosed property could be superseded and reversed via the administration of an estate.
  • The buyer of the foreclosed property could lose out, despite making a good-faith purchase. 

Consequently, whether you are shopping for foreclosed property in Texas — or you recently lost a loved one whose property could be subject to foreclosure — here is what you need to know about Texas laws, how this all works in practice, and how to protect your rights at every step.

A Look at the Complex Issues & Claims Raised by Foreclosures After Death

Foreclosing on the property of a decedent can set the stage for some unique complications, as multiple parties may now have conflicting claims related to that property. Specifically: 

  1. Lenders can have a claim related to the outstanding debt: This debt, arising from missed mortgage payments, can start accumulating before or after the property owner has passed away. The foreclosure process is simply a lender’s or mortgagee’s recourse for addressing defaulted payments to satisfy the outstanding mortgage debt.
  2. Heirs may have some claim to the property: Despite foreclosure, heirs may be entitled to any equity in the property. Additionally, the heirs may retain the right to choose whether and how to sell that property. If they do, that could mean having the opportunity to sell at a higher price than an auction or foreclosure could command. 

To prioritize these claims and resolve the issues at hand, Texas laws focus on a few key factors, including (but not limited to):

  • Whether the decedent left behind a valid will
  • When the death of the property owner occurred
  • The amount of time that passes between decedent’s death and the opening of administration of an estate 
  • Whether the administration is independent or dependent

Testate Deaths in Texas: How Foreclosures & Property Sales Work with a Will 

If the decedent has left a valid will and their property goes into foreclosure, here’s what generally happens, according to Texas laws:

  • The executor will have the opportunity to satisfy the outstanding mortgage debt, using the assets of the estate. If necessary and when possible, the executor may sell other assets of an estate to repay this debt.
  • The lender will be among the debts and debtors who have top priority for repayment. However, this priority will not overshadow the need to pay funeral costs and burial expenses.
  • The executor will distribute the property, according to the terms of the will, once the debt has been satisfied. When this happens, the beneficiary who inherits the property would then inherit the mortgage payments, if the loan has not been fully repaid.
  • The foreclosure could proceed and result in a sale at auction IF the executor or a beneficiary who inherits the property ends up defaulting on the mortgage payments. If this happens, the auction sale would be valid.
  • If the lender does sell the property at auction and the debt has not been fully satisfied, that lender cannot seek the remainder of the outstanding debt from the beneficiaries directly.

If the decedent has not left a will behind, all of this changes, with case law generally dictating the rights and rules that apply in these trickier circumstances.

Intestate Deaths in Texas: How Foreclosures & Property Sales Work without Wills 

If the decedent has NOT left a valid will, the timing of the foreclosure, the sale of the property, and the opening of estate administration is crucial. 

Specifically, if dependent estate administration is initiated within four years of the death:

  • The foreclosure on the decedent’s property may be voidable: With this action, the estate administrator would have the opportunity to repay the outstanding debt.
  • Administrators can opt to recover decedents’ properties sold at auction: If a lender sells the property before administration is opened, the administrator can take action to reclaim the foreclosed property that has already been sold off by the lender or mortgagee.
  • Administrators may seek damages from the parties who have sold the property at auction: Specifically, the seller could be liable for damages if they sell the property after estate administration has been opened (or if other circumstances apply). 
  • Secured creditors with a preferred debt and lien can still foreclose on properties by judicial or extrajudicial means, pursuant to Texas Estates Code Chapter 403, if the administration is independent and such foreclosure is not within six months of issuance of Letters of Administration. 

The case law that has largely established these rules was handed down by the Texas Supreme Court in Pearce v. Stokes, 291 S.W.2d 309 (1956).

The Watershed Decision in Pearce v. Stokes

Should the sale of a decedent’s property be set aside if it interferes with the administration of an estate?

That was the central question that came before a Texas trial court in the 1950s with Pearce v. Stokes. In this case, Stokes took out a loan to buy lots in Abilene in 1951. The following year, Stokes died without a will, with the loan going into default in 1954. At that point: 

  • The lender sells the property to Pearce.
  • Six months later, administration for the estate of Mr. Stokes is opened, and the administrator sues, along with the heirs, trying to nullify the sale.
  • Pearce countersues.

First overseeing this case, the trial court decided in favor of Pearce, holding that the sale should NOT be set aside. The Court of Civil Appeals disagreed, however, ruling that the sale should be set aside if it “interfere[s] with the due administration of the estate.”

In 1956, the Texas Supreme Court agreed with the Appellate Court, affirming that:

A sale, made under a power before an administration is begun on an estate, is not void, but merely voidable in case an administration should be begun within the four years prescribed by the statute. Such sale would not interfere with the due administration of the estate. 

The Court went on to explain that:

The moment that the probate court took control of the estate, the sale would be superseded, and the mortgagee relegated to the collection of his debt by the method required by law in cases of administration.

Simply put, with administration opened for an estate:

  1. The foreclosure becomes a debt of the estate.
  2. Administering the estate takes priority over the sale of the property — so long as estate administration begins within four years of the date of death. 

The ruling in this precedent-setting case was issued, in part, to encourage mortgagees “to pursue their remedy in an administration proceeding in the first instance,” rather than seeking recourse by immediately moving to sell off the property. 

How It Works in Practice: Foreclosures, Property Sales, & Estate Administration in Texas

Off paper and in the real world, here is how all of this typically works and how Texas laws can impact each party involved:

  1. A property owner passes away, without a will.
  2. The mortgage payments and/or property tax payments go into default.
  3. The lender or county moves to foreclose on the property.
  4. A third-party buyer purchases the foreclosed property, usually at auction.
  5. After that purchase and within four years of the date of the death, a relative of the decedent opens a dependent administration, and the court appoints an administrator to oversee that case.
  6. The administrator files a motion to have the court reclaim the property as part of the estate.
  7. Recovering the sold property does NOT erase the underlying debt, regardless of whether that debt is associated with missed mortgage payments and/or property taxes.
  8. The administrator will have the opportunity to repay the outstanding debt OR sell the property.
  9. If the administrator chooses to sell the property, they will generally have the chance to sell it for a higher price than they would get at an auction.
  10. The third-party buyer, who has not done anything wrong, will lose out. This buyer may still be able to purchase the property from the estate, but it usually comes with a higher price tag than the auction. 

In light of these facts, mortgage holders, title companies, and counties tend to:

  • View the issue as a title problem, rather than a foreclosure matter: The key issue hinges on how transferring the title via the sale of the property could be blocked or reversed due to the law providing four years for estate administration to be opened after death. In other words, the default isn’t the issue complicating a potential sale; the title issues and the law are.
  • Wait to obtain or issue a foreclosure real estate-owned (REO) title: These titles generally indicate that properties have been repossessed by the mortgagee, with the intent of selling them. Knowing that estate administration can open at any point within four years of a property owner’s death, lenders and title companies do not typically take swift action to get REO titles for these foreclosures. Instead, they tend to create “deceased mortgagor” (or “dead debtor”) files to carefully monitor and manage these special cases.

The Bottom Line: Buyers, Sellers & Heirs, Beware!

When it comes to the foreclosure and sale of a decedent’s property in the Lone Star State, the bottom line is BE CAREFUL. Whether you’re buying, selling, or inheriting the property in question — or whether you’re administering an estate associated with that property: 

  • The stakes can be high, with a lot on the line.
  • Texas laws can open up certain options while being unforgiving with mistakes, oversights, and missed deadlines.
  • The more you know about Texas estate laws and your rights, the more empowered you’ll be to protect your interests moving forward. 

Find Out More About Estate Planning, Probate & Estate Administration 

Property foreclosures and real estate transactions are just a couple of issues that can arise in estate planning, probate, and estate administration. Beyond these matters, grantors, executors, beneficiaries, and others may face several other challenges, some of which could have long-term implications.

To get experienced help addressing these issues head-on — and to get trusted counsel, support, and representation for any estate administration matter — talk to a 5-star Austin estate lawyer at the Law Office of Todd A. Wilson, now also known as TAW Law TX. We offer confidential advice in convenient, no-obligation consultations. Simply reach out for more answers today. 

Foreclosures, Death & Property Transactions | Austin Estate Lawyer | TAW Law TX

Todd A. Wilson

Todd A. Wilson has been practicing law since 2007, with the aim of educating all strata of society and sharing crucial insights about the importance of estate planning, probate, and more.

The Law Office of Todd A. Wilson (also known as TAW Law TX) offers affordable estate planning and probate services.