Buying Second Lien Position at Auction

Foreclosure Investing
1

Hi all,

I have two questions (full explanation below):

  1. Is it sometimes a good strategy to buy a second lien position at a lower cost to prevent a property going to auction for the first lien where it would likely be bid up?
  2. If I buy a second lien, is the lender on the first lien obligated to accept a full (cash) payment of the value of the loan, interest, fees, etc.? Or can they choose to continue to foreclose anyway? Obviously if the property is worth far more than the lien value it would be in the bank’s interest to get it to auction.

Detailed Explanation:

There is an attractive property going to sheriff’s auction in my city, but it’s a second loan position. I believe the value is attractive even when considering having to pay the senior loan off in full. Can buying the second loan position sometimes be a good strategy?

For instance, if no one bids on the second position and it then goes on to be auctioned for the first lien position the price will likely go much higher as bidding on a second position tends to scare people away. In this case, the property I’m looking at has a fair market value of ~$550,000 in decent shape (some repairs are needed) but the second lien has a judgment of ~$34,000 and from my research I believe the first loan to have a value around $50,000. There’s also a third loan for ~$8,000. From what I understand, assuming I could get the second position at auction for relatively cheap, the third position is wiped out, and I could just pay off the full value of the first loan to stop the foreclosure. So if I could get the second position near opening bid, let’s say $40k, then I could pay ~$50k to stop the first position lien going to auction and I’d get the house for $90k. Obviously there’s then other costs such as repairs or outstanding utilities. But if the house went to auction on the first position there’s a good chance it would sell much higher, maybe $300-400k (too high for me).

I understand that the lender for the first loan is not obligated to accept payments on the first loan from me in this scenario. But are they obligated to accept a cash payment of the full value of the loan to stop the foreclosure/sale?

Obviously, if this is a good strategy, I’m sure other savvy investors would bid relatively aggressively on the second loan so maybe it doesn’t matter.

Some Property Information:

Location: Wisconsin

Loans

  1. Primary Mortgage ($70k taken out 11/2001)
  2. Second Loan - HELOC ($40k taken out 05/2004)
  3. Third Loan - HELOC ($20k taken out 01/2005)

Lis Pendens

  1. The primary mortgage lender foreclosed on 10/1/2025
  2. The second mortgage lender filed Lis Pendens to foreclose on 10/6/2025

For what it’s worth, I don’t plan to bid on this property as I think is a bit too risky for my liking, but I’d like to try to understand if this could potentially be a good play.

Thanks!

2

Hi Kevin,

  1. Yes, bidding on seconds can be a great strategy! Just be sure to get a handle on the loan balance of any senior liens. With option ARMs, and foreclosure programs, there is the potential for the balance to be far higher than the original loan amount. If the first has filed a notice of trustee sale with a clear statement of the total balance this helps. I’ve also given an owner $100 to show me their most recent statement or call for the current balance. You’ve got to approach that right. You have to convince them it does them no harm (true!) and it’s a free $100.
  2. After buying the second, you should have the right to pay off the first, though there can be obstacles, as it is often hard to reach someone at the lender to arrange this with. If you have the funds, it is always best to monitor the senior lien foreclosure and to bid on it if it goes to auction. To the degree it gets bid up, you are entitled to the excess proceeds (assuming the loan you bought was the second). You can even bid it up beyond what you paid for the second, stop bidding, let the other bidder win, and keep the overage as a profit (when the trustee disburses the excess proceeds - the amount bid above what the first was due).
  3. I have had pretty good luck bringing the first current and making payments after buying seconds, but you are right, they can demand payment in full.

There should be lots of posts in the community about this. I recall it being a hot topic back during the crisis.

2 Likes
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Thanks Sean! I appreciate the thorough response!