If I buy at auction in California a foreclosure on a second lien, will I have to pay off the first loan right away, or can I bring the loan current with any past-due amounts and/or penalties and then pay the monthly payments? If the latter, how can I find out before I buy at auction what the terms are on that first lean?
The first would be due and payable immediately. Most standard Deeds of Trust have an acceleration clause that if there is a transfer of the beneficial interest the entire amount becomes due and payable. The first would have to foreclose on the loan which could buy you some additional time. If the first goes to trustee sale your ownership interest could be wiped out.
Michelle, thank you. Can one find out in advance how much exactly is due on the first, including penalties? Is it ever difficult to locate the lender and get them to accept the full payment, as crazy as that might sound? I wouldn’t take chances and buy time, I’d plan to pay it right away. I’d only bid on the auction if the bid amount plus the first loan amount was still a good deal for the property.
Hi Mitch, This is always the challenge. Because this is a credit account and you are not party to the loan they are not obligated to give you any information. If the first is in foreclosure then you can contact the trustee and see the default amount posted on the Notice of Default and add the estimated additional interest. I know that some investors will use the help of their title company to see who the servicer is on the loan. If you have a wonderful way with people you may want to reach out to the homeowner. This could benefit you two fold. You can get information about when they stopped paying on the 1st, you can find out about the condition of the property, and you can see what their intentions are in terms of moving. I had one investor that approached the owner and they gave him a complete tour and told him about his IRS lien. Still another investor approached an owner that declared that he would burn the house down before he left. Just some clues that can be helpful.
Super helpful. Thank you very much.
If the second mortgage forecloses and you purchase at the foreclosure sale, do you know the legal nature of what you have purchased? Have you purchased the property subject to the first mortgage or have you purchased a second priority lien? I ask because I’m wondering if the original homeowner continues to have any claim to the property if he/she is current on the first priority lien.
Hi Kristin, The laws vary from state to state. In the case of CA there is no redemption period unless it is a foreclosure on a HOA lien. If you bought the second in CA then you are the owner of the property subject to any senior liens or loans. It would be up to you to evict the current owner.