Bidding at auction for junior priority lien (2nd), is that a no-no or go-go?


#1

Hi guys. We’re a few RE investors here just starting out. Among us are a broker and a few RE agents. But anyhow, here’s our question. We’re interested in bidding on a property that is going to auction. Furthermore, both the 1st and 2nd priority lien holders are foreclosing this property (both recorded NTS against trustor and an auction date exists for each). The 2nd is foreclosing BEFORE the 1st (which makes sense because otherwise they’d be wiped out by the 1st foreclosing).

  1. if we bid on the 2nd and actually win (if the opening is low enough and makes sense), how would we take care of the 1st? Would we be able to clear the lien, or would the 1st still foreclose anyway?
  2. if no one bids on the 2nd and the property goes back to Bene, what would happen next? Would the 1st still foreclose at the later date so that we can step in and bid?

We’re just trying to be completely sure before we bid on this property. The reason is that the property’s estimated value is very high because it’s a luxury home, and if it makes sense, we would pool our funds together to bid on this property. It would most likely wipe us out if we mess this up.

Thanks!


#2

If you purchase the 2nd at trustee sale the property would still be encumbered by the 1st. You would need to pay that loan off (including any past due interest and foreclosure fees) as well as any past due property taxes. The first could still foreclose on the property if the loan is not paid off on time to stop the sale. If the first foreclosed then anyone who purchased the 2nd (or if it went back to the bank) would then be wiped out.
If there truly is a substantial amount of equity it COULD make sense to purchase the 2nd and then payoff the first to stop the sale.
Since the first has filed a Notice of Trustee Sale you can see the Published Bid which is the amount owed on the 1st at the time the Notice of Trustee Sale was prepared. There will be additional interest accruing from that date. If the sale has been postponing the additional interest could be substantial. You need to take this into account before you determine your max bid on the 2nd.


#3

Thanks for the quick response Michelle!

With respect to paying off the 1st, the auction dates are pretty close to one another, differing by days. If we bid and win the 2nd, my guess is that we just call up the lender. Or, is there a standard process to payoff the 1st after buying the 2nd?

Lastly, I would imagine that since there is enough equity in the home, that the 1st would consider foreclosing anyway since it’s almost guaranteed that they’ll make a significant profit. Therefore, if we have and can give them the funds (payoff + interest + fees) after winning the 2nd, are they REQUIRED to take these funds and subsequently stop the sale? The last thing we want to have happened is that we win the 2nd, but the 1st doesn’t budge and wipes us out by foreclosing anyway.


#4

You would want to contact the Trustee right away to get a payoff amount. If you are willing to pay the loan balance and all back interest and fees there would be no reason why they SHOULD not accept that payoff and cancel the sale. If you purchase a 2nd and the 1st is scheduled to go to sale you would always want to be prepared to attend the trustee sale on the 1st in order to protect your position. That would mean bidding on the 1st. If there were other investors that were bidding you would need to be prepared to bid enough to protect your position. Keep in mind that any overage would go back to you since you are the owner.
Lets look at a hypothetical situation. There is a 1st of 400k and a second of 100k. The property is worth 800k. You buy the second for 100k at trustee sale and now own the property. The trustee doesn’t get back to you on the payoff of the 400k loan and it has a published bid of $500k which includes all past due interest and fees. The trustee does not discount the opening bid so the opening bid is $500k. You would want to go to the sale on the 1st and be prepared to bid the $500k plus the additional 100k to protect your interest since that is what you have spent. (keep in mind that the additional 100k would come back to you as an overage if you purchased the 1st at $600k since there is a 100k overage). If another investor bids up the 1st and buys it at trustee sale for $700k then the overage that he paid would go back to the owner (you) and you would have made a quick profit of 100k (500k to the 1st, 100k back on what you paid for the 2nd and a 100k profit).
The bottom line is Plan A-contact the trustee to payoff the 1st and cancel the sale. Plan B be prepared to show up a the trustee sale on the 1st with enough cash to protect your position.


#5

Thank you very much for the elaborate answer Michelle. We really appreciate this.