Loans on Foreclosed Property


#1

When buying a foreclosure that has a 2nd on the property is the buyer responsible to cover the 2nd to aquire the property? Also, if the 2nd is in default how is the 1st handled/settled.

Thanks,

Don


#2

Hi Don,

There is a thread on this forum > “which liens are not wiped out at trustee sale” that will most likely address your questions http://www.foreclosureradar.com/forum/buyers-and-investors/buying-auction/which-liens-are-not-wiped-out-trustee-sale

When you buy at a trustee sale, you are buying the lender’s interest in the deed of trust (DOT) being auctioned. If you are the winning bidder, you will receive a trustees deed upon sale (TDUS). Once you receive/record that TDUS, you ARE the new owner of the property … with the very important qualifier that in order to gain clear title, you must be responsible for (generally meaning “payoff”) any “senior” obligations (liens/loans, judgments, etc) that have been recorded versus the property. “Senior” in this case means recorded before (by date or via subordination agreement) the DOT you acquired at the trustee sale. If there are any “junior” obligations … meaning they were recorded after the DOT you acquired … then they are “wiped out” to you, as the trustee sale buyer. In some cases the previous owner may still be on the hook for these outstanding obligations, but this “junior” (by recording date) debt is not your responsibility. There are some exceptions, such as IRS redemption possibilities (discussed at length in other forum threads).

The above is verbose way of saying … “if you bought the senior loan, then the 2nd is NOT your responsibility.”

If the 2nd is also in a default scenario, it makes no difference to you as a trustee sale buyer of a senior loan. Just make sure you’re bidding on (buying) the 1st (senior) loan. If you were to buy the 2nd loan at a trustee sale, then you would also need to be able to pay off the 1st DOT, or risk losing the property in a subsequent foreclosure action.

If there is a large 2nd or 3rd position loan on a property, it is not uncommon to see a representative from that lender at the trustee sale. That lender is at risk of being “wiped out” when a senior (e.g. 1st position) DOT forecloses. Hence the 2nd may “show” and to bid and ensure that they become the new owner or make sure the loan is bid up high $$$ enough to adequately cover their potential loss position.


#3

Great info, thanks