Hello, investor recently purchased a property at the Trustee sale but it was later discovered that they purchased the 2ND Deed of Trust. Can someone please explain the correct way to proceed in this case. Do they contact the first lien holder and ask for a pay-off demand? Who currently owns the property?
The investor, who purchased the 2nd at the Trustee Sale, *is* the new owner. This will be formalized by recording of the Trustee’s Deed Upon Sale (CA terminology). Hopefully there is some equity remaining in the property for the investor after paying off the 1st and any other senior liens/judgments? But since this was a “surprise” that may not be the case?
The trustee typically issues the TDUS within 5 to 10 days of the auction. The investor can scramble and contact the trustee and attempt to get the sale cancelled, but that effort will most likely end in vain. Without a court’s backing, it is very hard to get a lender/trustee to rescind a validly conducted trustee sale (particularly since they have been paid [steps buyer’s cashiers checks cashed] and they otherwise might have been wiped-out if the 1st foreclosed before them). It gets even harder once the TDUS has been issued. An investor’s (who now realizes their position/mistake) failure to record the TDUS will NOT make any difference. You can’t mail the TDUS back to the trustee with a “my bad” or “do over.” You can get a lawyer to put it fancy legalese, but I have not heard about any success stories in getting a sale rescinded due to mistakenly buying a 2nd. But never say never. Perhaps someone can relate such a success story?
As far as what to do now? … The senior loan (1st) will most likely have a “due on sale” clause, and the trustee sale is of course a “sale.” Consequently, the senior loan becomes due in full.
If the investor is short on cash, and there is good reason to keep the property (e.g. enough equity to make it worthwhile waiting out the market), you might advise them to contact the 1st lien-holder to see if they will allow the investor to effectively “step into the shoes of the prior owner” and bring the loan current and continue making payments. First step is to contact the prior homeowner to get their payment info/book. Then contact the lender and see if they will work with you (the investor) on continuing the payments (vs enforcement of the due on sale provision). Worst case is they say “no,” and your investor cannot afford the full payoff. Then you’re looking at another potential foreclosure that would wipe out the investor’s ownership. If it simply makes no sense (no equity left) to continue the payments, perhaps the investor could negotiate with the 1st for a “small rebate” in exchange for the investor’s prompt cooperation in giving the lender a “deed in lieu” (vs the lender incurring expenses and delays in a foreclosure process)? Since the lender has likely NOT been paid for months or even years on this loan, it might be to their benefit to work with your investor vs. foreclose.