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In Texas, when you borrow money to buy real estate, the lender and you (with your downpayment and his loan) buy the property.  The lender agrees to give his part all to you when you finish making all of your payments to him.  You agree to keep the property in good repair and to make all of your payments.

You and the lender join in a document called a deed of trust.  The actual ownership of the property is transferred to the trust.  A third person is appointed by you and the lender to be the trustee, and it is his job to hold that property in the trust's name until you have completed making all of your payments.  When you do, the lender signs a document telling the trustee to release the deed to you.

(This particular process, i.e., the deed of trust or deed held in trust, started after the Big Depression.  Lenders had terrible reputations because they had thrown so many of their customers out of their property.  And it was public knowledge since the lender's name was on everything.  So some bright guy came up with the deed of trust idea.  The lender's name is nowhere on the document if it is posted for foreclosure.  Instead, it's the trustee who's taking the property away.  No more mountains of bad press for the lender.)

But, if you stop paying before the lender has been paid back, he tells the trustee that he wants the property so that he can sell it and apply the proceeds of the sale to your loan.  The trustee notifies you that the lender wants the property and that he will hold an auction sale on the courthouse steps on a certain day.  You can go there and bid to purchase the property, but you must be able to pay for it in cash or certified check as soon as the auction is over, should you have the highest bid.

Or, others who are interested in the property might also come and they can bid as well.  And the company that made you the loan also has someone there to bid if necessary.  The lender's person will bid if 1) no one shows up to bid or 2) one or more people bid but they don't bid enough to pay off the loan.  Then the lender's person bids that approximate loan payoff amount plus some expenses, wins the auction, and the trustee signs a deed, deeding the property to the lender, and that deed is recorded with the county clerk.

At that time, the lender can sell the property on the open market.  If the property does not bring in enough from the foreclosure sale to pay off the borrower's obligation to the lender, then the lender files a Deficiency Judgment for that amount that the sale proceeds are short.  The Deficiency Judgment gives the lender the right to take other property -- bank accounts, real estate and the like that are not legally considered exempt property -- away from you to make up the difference.

There are a number of states that use the deed of trust system.  Their foreclosure procedures are similar because there has to be a mechanism to get the property from the trust's ownership to the lender.

BILL CHERRY, BROKER-REALTOR.  MY 43RD YEAR SELLING TEXAS.  972 380-7347

MEET ME ON THE WEB AT WWW.BILLCHERRYBROKER.COM