I’m currently living in a rented house in Dallas, Texas, but I’m considering buying my own home. Some people who live down the street fell behind in their mortgage payments and now the bank is foreclosing. I think I may make a bid on the property at the foreclosure sale. I'm a little bit reluctant though, because I heard that the former owners might be able to reclaim the house after the sale by “redeeming” it. As I understand it, this means they can reimburse me for what I paid at the sale and kick me out even though I’ve already bought it and moved in. Is this correct?
No, that's not correct in the state of Texas. You don’t have to worry about Texas homeowners getting the house back after the bank forecloses its deed of trust (basically a mortgage). Unlike some states' laws, Texas doesn't provide the former owners with a redemption period after the foreclosure sale.
However, it is possible that the IRS could potentially take the home away from you by redeeming it (that is, reimbursing you for the full price you paid for the home, plus various other amounts) after the foreclosure sale. This can happen only if it had a lien on the house at the time of the foreclosure. (This is explained in more detail below.)
The IRS can redeem a house after a foreclosure sale, but only in cases where there was a federal tax lien on the home. (If homeowners don't pay their federal income tax, the IRS can place a lien on their property.) The IRS gets a 120-day redemption period. If the IRS does not redeem within this time frame, this right automatically expires.
To redeem the home, the IRS would have to reimburse you for the full amount you paid at the foreclosure sale plus certain expenses you paid after the sale, plus 6% interest from the sale date.
The IRS must send you a notice if it is considering redeeming the house.
Besides being aware that the IRS could redeem the home under the right circumstances, you should also be aware of certain other issues that you'll face when buying a house at a foreclosure sale. One important thing to consider is that you won’t get any seller disclosures before the sale telling you about the condition of the home before you buy it. (See "Texas Home Buyers: How to Read the Seller's Disclosure Form" for more on this topic.)
Additionally, you typically must purchase a foreclosure property “as is,” without being able to ask for repairs. The homeowners were clearly having financial difficulties, since they weren't able to keep up with the mortgage payments and this may well mean that they also couldn't keep up with maintenance and repairs -- or may have (as has happened in numerous cases) torn the place apart out before leaving, of frustration with the bank.
What this suggests for you is that the house may need a lot of fixing up. (Learn more in Nolo’s Buying Foreclosed Properties area.)
To find the statute that discusses the right to redeem the home after a judicial foreclosure in Texas, go to the Civil Practice and Remedies Code, Chapter 34, § 34.045 of the Texas Statutes. (If you want to learn about the redemption period following a tax sale or property association foreclosure, read Nolo's articles Getting Your Home Back After a Property Tax Sale in Texas and Texas HOA and COA Foreclosures.)