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Purchasing 2nds at Auction

I am looking at buying a property at auction where the 2nd is foreclosing (there is enough equity apparent in the property to make this a plausible investment).

I believe Sean may have purchased 2nds. I was hoping he could go through the PRECISE STEPS that he went through after the auction was completed.

For example:

  1. Win at auction and deliver funds to trustee;
  2. ??? (receive title?)
  3. ??? (hire title co to pay off first?)

Mostly I was interested in determining that once he “purchases” home at auction whether he becomes the new owner or whether he only owns a 2nd in the property?

I am also interested in trying to identify pitfalls besides confirming:

  1. this is indeed the 2nd (and not a 3rd, 4th or 5th)?
  2. what mechanic’s or tax liens are on the property?
  3. if the 1st is also in the process of foreclosing, how does this affect this auction and my ownership?
  4. as a follow-on, how do I pay off the first if I buy the 2nd at auction?
  5. if I pay off the first (and whatever other liens are on the property), do I own the property or does the current owner still hold title?

After the sale is pretty simple.

  1. Hand check to auctioneer get receipt
  2. Wait for trustees deed, record it with county.
  3. Contact owner, offer cash-for-keys, evict if necessary

You now own the property, though any senior debt (the 1st mortgage, property taxes, etc) remain owing as well.

Confirming the loan position requires a careful title search, and even then there are no guarantees.

Determining what mechanic’s or tax liens are on the property is part of the title search.

If the first is also in foreclosure, you just need to be careful on timing, and you need to be prepared to defend your position. If you buy the 2nd and the 1st then goes to sale, you will be entitled to any amount the 1st receives that is more than they are due. As such, you can defend your position by showing up for the sale of the 1st, and bidding it up until you?ve covered your investment in the 2nd. The big downside to this approach is that you?ll need sufficient funds not only to buy the 2nd originally, but to also bid more then the first and second put together.

To payoff the 1st: The 1st usually won?t talk to you as you aren?t the borrower, so it is usually easiest to have a title company request the payoff. Note that if you have a friendly borrower you may find it worthwhile to work with them to make the payments for a while, especially on a flip, so you don?t have to come up with the full payoff right away.

The current owner loses their interest in the property as soon as the trustee?s deed is filed.

Finally, there is one question you didn?t ask that is BY FAR the most important? How do you know the current balance of the 1st?

There are a lot of 1st mortgages right now that haven?t made payments in years, aren?t in foreclosure, and have HUGE outstanding past due amounts that are added to the loan balance. I?ve heard of $300k loans having a current balance of $450k. This is the biggest risk when buying 2nds, and you REALLY need to be careful because of it. The current balance on a loan is not public record data, it is credit data, and you can?t get it unless you are the borrower, or pretend to be the borrower (usually requires finding their social and or date of birth). The later likely isn?t legal. The one exception is when there is a very recent foreclosure notice on the 1st - the notice of default will show the default amount, and the notice of trustee sale with show the total loan balance.

There is more to this, but this covers the most important bits. Bottom line, buying 2nds can be lucrative, but it is definitely higher risk than buying 1sts.