25 Sep Best Alternatives To Foreclosure in Texas
Here in Texas, we’ve recently seen an uptick of more and more of our sellers going through the entirety of the foreclosure process; from pre-foreclosure to auction.
More importantly, the entire process, which is often prolonged for months, leaves our sellers feeling overwhelmed and with very limited options once the auction date has been set.
In response to the increasing numbers of foreclosures in San Antonio, Austin, and especially Houston, we’ve decided to put together a guide to the best alternatives to foreclosure in Texas.
Editor’s Note: In this post, I’ll be working under the assumption that the property(ies) in question is(are) located in Texas. Additionally, we are not attorneys and all information posted in this post is strictly educational and does not provide legal, accounting, or financial advice.
Form a Strategy that Works for You
Whatever the situation, you must pick the best strategy as quickly as possible:
- The best option to keep the house and avoid foreclosure is to pay what you owe (reinstatement amount.) All other strategies only serve to delay the auction.
- If you have the time and available equity, sell the property through a real estate agent.
- If you don’t have equity nor time, sell the property to a real estate investor.
Foreclosure in Texas
During the beginning stages of foreclosure, commonly referred to as pre-foreclosure, your lender will notify you of the missed payment(s) plus any late charges related to said payment(s.)
During this stage in the process, it’s relatively easy to catch-up since the late fees, arrears, and other charges are relatively low. Additionally, the lender will be very receptive to negotiations during this stage of the process.
After all, it’s in the lender’s best interest to keep you in the house and avoid a costly foreclosure.
However, if the homeowner makes no attempt to make his/her loan current, an uninhibited foreclosure can be completed in under 60 days.
Notice of Default
According to Texas law, the lender is required to send two certified mail notices to the borrower in question. This period, typically known as the “cure period,” precedes the Notice of Acceleration and Posting for Foreclosure.
As it was previously mentioned, you have the best odds of catching up on your payments and making the mortgage current during the cure period.
Once the cure period has passed, however, the Notice of Acceleration and Posting for Foreclosure will be posted on the county courthouse and its online records. The publicly posted notice allows investors, lenders, and attorneys to market their services directly to you.
What Factors are at Play?
The factors at play that caused the mortgagor (a technical term for the borrower) to fall behind on his/her payments have to be analyzed before making a decision.
Since the reasons why someone would fall behind on their payments are innumerable, we’ll instead split them up into two categories: Keeping the house or selling the house.
With this table, you can get an idea of your best options by applying its logic to your own circumstances.
Keeping The House
- Whatever caused you to fall behind is temporary.
- You have/will have the funds to pay what you owe.
- You want to keep the house.
- The lender is open to negotiations.
- If necessary, you have the funds for an attorney.
Selling The House
- Whatever caused you to fall behind is long-term/permanent.
- You do not/will not have the funds to pay what you owe.
- You don’t want/are indifferent about keeping the house.
- The lender is not open/has exhausted all options.
- If necessary, you do not have the funds for an attorney.
Most people, at least most of our sellers, fall somewhere in between; they want to keep the house, but don’t have the funds, they have the funds but don’t care about the house, etc.
We’ve personally worked with homeowners that have stayed-off foreclosure for over 18 months, only to end up selling it a week before the auction. A story for another time.
Once you’ve determined your best course of action; keeping or selling the house, it’s time to plan a solid strategy to get you there.
Have a Plan A & B
To be perfectly honest, we are never the first option for 95% of our sellers. How do we know? Firstly, they tell us and secondly, they always choose to contact us ~ 2-3 weeks before the house gets sold to the highest bidder.
With this in mind, a homeowner’s decision to call us that late in the process tells me two things:
- The owner wanted to keep the house when their circumstances only allowed them to sell it.
- They exhausted all other options before deciding to sell.
Even so, for every property that we buy from a seller, there are 10 more that get auctioned off because the homeowner didn’t have a backup plan in place.
Plan A: Reach Out to Your Lender
According to the Joint Economic Committee of Congress, a lender will spend as much as $50,000 to complete the entire foreclosure process. To put it differently, foreclosure is almost never in the lender’s best interest.
In order to avoid losses, the lender will likely attempt to negotiate a deal before going through with the foreclosure.
When this happens, the lender and the homeowner should work to establish an open line of communication to prevent each party from assuming the worst:
- The lender believes the borrower has given up.
- The owner believes the foreclosure to be inevitable.
Whatever the situation, you should always attempt to work out a deal with your lender.
If it’s early in the process, the lender is almost guaranteed to offer the borrower a figure to reinstate the mortgage. The reinstatement amount will include the arrears (missing payments,) fees, and attorney expenses.
If you have the funds and are able to catch up on the payments, reinstating the loan is the simplest way to get out of the foreclosure.
When calling your lender, have the following information ready:
- Last four SSN
- Loan number
- Full name
- Property street address and zip
If you have an open line of communication established, requesting the reinstatement amount will only take a few minutes. Once requested, the reinstatement will be emailed, faxed, or mailed to you within a couple of days.
Finally, when you have the reinstatement in-hand, call the lender and they’ll walk you through depositing the necessary funds to get your loan reinstated.
Ultimately, paying thousands out-of-pocket to reinstate the loan only makes sense if one, you have the funds, and two, if you want to remain in the house.
If you cannot afford the reinstatement, you may be able to permanently modify the terms of your mortgage. Although you will likely owe arrears, the loan modification’s goal is to lower your overall monthly payments.
Again, if you have an open line of communication with your lender, requesting a loan modification packet is simple.
When filling out the packet, one of the most integral parts of the request is the hardship letter. When writing the letter, please keep it simple, honest, and let the lender know your desired outcome.
Things tend to go a lot smoother if both the lender and borrower are working towards the same goal.
If the modification gets approved, your monthly payments will be permanently lowered and your odds of catching are greatly increased.
On the other hand, if you do not qualify for the modification, there are other strategies that will give you the time you need to get back on your feet.
This type of agreement “delays” the foreclosure for a predetermined number of days and it allows you time to catch up on the mortgage payments.
Although it sounds useful, a forbearance agreement is only a short term solution to the bigger problem. At the end of the day, the only way to keep the house is to pay the arrears and reinstate the loan.
As I mentioned at the beginning of the post, one of our sellers used every trick in the book in an attempt to stop the foreclosure. Even so, and after 18 months and a bankruptcy later, she realized that her financial situation only allowed for one outcome: selling the house.
Although she had a plan, she failed to realize that all strategies, other than paying the reinstatement (arrears plus fees) only serve to delay the inevitable.
Plan B: Selling the House
If keeping the house is no longer, or was never a viable option for you, selling it before the auction date is the next best thing. Before deciding what sales strategy works for the situation, you need to determine the amount of available equity.
Contrary to what many think, calculating equity is a simple process: you subtract the mortgage balance from the appraised value of the home.
For example, if your home is worth $200,000 and you owe $125,000, your equity is $75,000.
If you need help finding an estimate of your home’s value, Zillow has a great tool that’s fairly accurate at assessing your property’s market value. If you need a more accurate figure, there are many Realtors that provide home values for free.
What does your equity tell you?
Well, the amount of available equity helps you determine the best sales strategy for the situation. For instance, if you have a high amount of equity, selling the traditional way — working to sell the house through a real estate agent — is the way to go.
In contrast, if you have very little or negative equity, your options are limited to a short sale or working with a real estate investor to sell the house.
Note: if you’re down to the wire, as in < 2 weeks away from the auction, investors are just about the only people who can quickly enough to stop the foreclosure.
Selling your house through an agent makes sense if you:
- Have enough equity to cover the closing expenses
- Have enough time to close before the auction date
If neither of those applies to you, selling through an agent will not work and the house will likely be sold at auction.
Not Having Enough Equity
If a homeowner with low equity attempts to sell through an agent, the closing expenses, typically 6-8% of the sales price, are likely to put them in the red.
Once the seller and his/her agent realize that selling will put them at a loss, the homeowner may attempt to sell the house with a mark-up. However, unless the property sits in a really hot market (e.g. Austin or Seattle,) odds are that it will not sell.
People will not overpay for a house and even if they do, their lender will certainly not pay above market for the property.
Not Having Time to Close
If the auction is a few weeks away, throwing out an overpriced, rushed property and hoping someone bites is not a very good strategy.
Selling a house through an agent takes time — according to Fannie Mae, the average is 46 days — and many homeowners don’t have the time to wait around for a perfect offer.
Additionally, if your buyers realize that you are between a rock and a hard place, they will be tempted to bring down the price as much as possible. Even so, and when given the option, many sellers will accept unfavorable concessions out of sheer necessity.
Getting the Price Wrong
Pricing real estate is not an exact science and, if fact, can be quite subjective. More importantly, however, the agent’s profit model — getting paid a certain percentage of the sales price — will make selling the house quickly more difficult.
In short, to sell a property as quickly as possible, it needs to be priced below market value. However, doing so will lower the agent’s commission and to avoid this, many of them will attempt to sell the property at, or even above, market.
For example, we worked with a homeowner whose property was worth $160,000 in perfect condition. Yet, in reality, the house was not in perfect condition: it needed a new roof, paint, and new flooring throughout.
Knowing this, the agent carelessly decided to list the property at $180,000… that’s a full $20,000 above market for a property that needed $10-12,000 in repairs. Gotta get that commission, I guess.
Needless to say that the property sat on the market for 3 months before the seller decided to work with us instead.
The sellers, who owed ~ $140,000, should have listed the property at $155,000 and by doing so, they would have generated much more interest. Better yet, they should have contacted local investors who not only specialize in low-equity properties but foreclosures as well.
Selling to Investors
9 times out of 10, selling through a Realtor is more profitable for the seller. However, as we’ve previously mentioned, real estate investors serve to help those who are left behind by unwilling, or inexperienced real estate agents.
With that said, the two major issues that come with foreclosure; deadlines set in stone and equity issues, can be handled by savvy and seasoned investors. We’ve personally, although we wouldn’t recommend it, have bought properties mere days before the auction.
Investors such as ourselves have the funds, personnel, and contacts that allow us to buy properties at no cost to the seller. More importantly, our home buying apparatus allows us to close on the sale before the auction.
I cannot tell you how much time we’ve spent chasing down required documents, signees, and the all elusive mobile notaries.
In short, if you own little to no equity and don’t have the time to wait around, selling to a real estate investor is your best of closing before the property gets sold from under your feet.
Contrary to popular belief, a short sale can damage your credit score as much as a foreclosure. Even worse, the sale can take up to six months to complete and the lender may come after you with a deficiency of judgment.
If you’re dead set on selling the property through a short sale, however, we’ve written a comprehensive post about when and how to use a short sale effectively (Hint: they suck.)
Understand the Situation
To reiterate, the first thing you should ask yourself is, “do I want to keep the house?” If the answer is no, the amount of equity and auction date will dictate whether you should sell through an agent or to an investor.
If you want to keep the house and your hardship is temporary, a forbearance agreement can give you the time you need to reinstate the loan.
On the other hand, if you want to keep the house but don’t/will not have funds to reinstate the loan, I don’t know what to tell you. We’ve been in this business for a long time, and not once have we seen a lender allow someone to permanently live in a house for free.