Reinstatement of Second TD on Resale to Previous Owner?

Here is an interesting scenario. I purchased a property last month and was subsequently approached by the prior owner seeking to buy the property back (with proceeds from an inheritance (verified funds) that came too late to stop the foreclosure. I have reached agreement with the prior owner on the sales price but now have a problem with title. The prior owner had a loan secured by a second TD on the property, that lien was obviously wiped out on foreclosure. But, the two biggest title companies are saying that either the lien has to be reinstated on the resale back to the prior owner or one of the companies has stated that the loan must be paid off on close of escrow. Does this make sense to anyone? Short of getting a real estate attorney involved with the title companies I’m not sure how to solve this. Thanks.

Yes, that’s correct. My understanding was that the law was changed some years back to make sure someone could not strategically default and use the foreclosure process to eliminate their debts. Under the law if the owner comes back on title the debt is reinstated. Also, it is reinstated at its original recording date, thus any new loan the owner got would be junior to that loan. Unfortunately I can’t quote where this is in the law, it has been too long since I last looked into it, but it is certainly the case, at least in CA.

I’ve successfully done a couple of these by having a spouse who wasn’t previously on title or a close relative put the property in their name. Still though it is a tough deal to get done.

Also, one suggestion if you do this in the future - go ahead and file the unlawful detainer, and have them agree to a stipulated judgement if they fail to close by a certain date, and offer to dismiss the UD case upon close of escrow. This way if they can’t get financing, or title issues like this come up, you don’t have to worry about having lost months trying to help them, only to end up fighting them on eviction.