If the 1st mortage lender is doing the foreclosure, exactly which liens are not wiped out? Is the winning bidder now responsible for paying them ? How soon do they have to be paid ? Is it possible that a lien gets recorded in between the time of a preliminary title report and the auction ? Would title insurance?protect? against?such a case ? Sorry for asking many questions if you don’t mind
Let me start by saying that there are some nuances that chief title officers still debate, but let me try to give you a framework to work from.
The basic concept underlying all of this is that when a lender makes a loan, secured by the property, they shouldn’t become responsible for loans that occur later on. That simple rule frees the homeowner up to take additional loans without having to ask the earlier (or “senior”) lenders for approval. In exchange later (or “junior”) lenders understand that if the senior loan forecloses the senior lender is not responsible for insuring they are repaid.
The next thing to understand is that this pecking order is simply based on the order in which things are filed at the county, by date and document number. It really doesn’t matter what the documents say - I have seen deeds of trust (the document recorded for a loan in CA) labeled as 2nd mortgages that were actually in 3rd position. The only thing that can change this order, is a subordination agreement - which essentially sets forth that a loan recorded earlier agrees to be junior to a loan recorded later.
Now a couple of additional things to note: property taxes are always senior. IRS liens that are junior are essentially wiped out but they have a right or redemption for 120 days (they can buy the home back from you for what you paid, without interest, or repayment of unnecessary repairs). Mechanics liens may have a claim if the repairs were necessary (the theory being that they were in the lenders best interest as they avoided further damage to the secured interest).
Now with those things in mind let’s get to your questions. Senior loans (either though date or subordination) are NOT wiped out, and occaisionally mechanics liens (I’ve never had it happen personally) and the IRS has a right of redemption.? The winning bidder isn’t directly responsible for paying senior liens, but if they don’t they will lose the home when those senior liens foreclose. Yes a lien may get recorded between the time you do your research and the sale - but it will almost always be junior so it doesn’t really matter (I did see a lender record a subordination the day before the sale to try and sucker folks in at the auction - but it was clearly fraudulent and the sale was overturned). I’m not aware of any title insurance products for buyers at auction at this time.
Hope that helps.
I have a lien on someone’s property because they owe me money.? How do I know if I am a “junior” or “senior” lien?? and if I am junior and wiped out what is the point of my getting a lien in the first place if it doesn’t hold true?
Hi Judy, It is based on the concept of “first in time equals first in line”. Each document recorded at the county has a date, and a document number. With just a few exceptions documents recorded earlier (lower date and document number) are senior, and one’s recorded later are junior. Let’s assume there is one mortgage senior to yours, with a outstanding balance of $400,000, and that your lien is for $25,000. If the loan senior to yours begins foreclosure you have some options. If your lien is in the form of a deed of trust you can likely begin foreclosure as well as typically any failure to pay senior debt is an automatic default. To protect your position you have the right to make the payments on the first until you can foreclose and take control of the property (at which time you may have to pay the first off as it likely has a “due-on-sale” clause). Alternatively you can let the first foreclose, attend the auction, and bid the first up at trustee sale until the winning bid is enough to cover your lien (the trustee on the first will pay out any excess proceeds to lien holders in order until funds are exhausted or all liens are paid at which point the remainder goes to the homeowner). If the senior loan sells at foreclosure sale, for less than enough to cover your lien, and you FAIL TO PROTECT YOURSELF, then you are wiped out. Getting to have this option is the reason to file the lien.
Hello Sean…? I just read your very informative response to the question, Which liens are not wiped out at the Trustee Sale ?.? I am looking at a Trustee’s sale Oct 1 on a property owned by people that?went bust in a failing restaurant business.? I have checked the recorder’s office and found 3 mortgages - the first being the one foreclosed on (senior)?and two others.? I am now concerned that maybe there are property liens out there somewhere resulting from restaurant debt lawsuits or?equipment agreements, etc.? Would they be wiped out at the sale if?not recorded?? Thanks for your insights… Larry???
Hi Larry - unrecorded liens are something I haven’t had to face yet. My understanding is that as a bonafide purchaser for value, that had no knowledge of the liens before purchasing, you should be protected from claims as you relied on the recorded data, and it was the lienholders responsibility to protect their position by recording their lien. That said, one thing I do know is that anyone can sue you for anything, and in doing so they can tie up the property for a long time by filing a lis pendens. So if you expect trouble on a deal make sure to leave enough room in it to be worth the time and trouble? - I’ve found that if you plan for the worse, everything usually goes perfect, and if you expect everything to go perfect, you get nothing but trouble.
I have a property that I’m interested in that is going up for trustee sale for HOA.? If I win the bid, will I be respondsible for any other loans on the property such as banks, 2nds and taxes?
Right. And also note that the homeowner has a 90 day right of redemption after the trustee sale. See civil code 1367.4 © 4.
Have you ever had liens recorded after the Trustee’s sale, but before you recieved the deed in the mail and have it recorded??
I recently checked out a property where someone was living there and doing work on the property - supposedly in exchange for rent.? But if they kept all their records and did improve the property, it seems they could record a mechanics lien and you would be forced to either pay or sue?
I have not had a lien filed in that manner though I have had equally frivolous lis pendens filed. I disagree that I would be “forced” to pay or sue. That would only be true if I needed to resell the property and the title company wasn’t willing to insure the transaction without a reconveyance (one could argue that is was wiped out by the foreclosure as despite the filing date it was for work incurred prior to the foreclosure). Also note that my experience is that the courts are not friendly to homeowners that play games and try to misuse the legal system to gain rights above and beyond those provided during the foreclosure process. That said it is importatnt to remember that anyone can sue your for anything and you should be prepared for this as a part of buying at the trustee sales.
excellent. always confused before but you really cleared it up. wasnt aware of the 120 irs rule but i do now.
I am looking at a house that has IRS liens filed after the 1st being foreclosed. However, the liens list delinquent tax years that pre-date the 1st. I think I know the IRS lien is junior unless recorded before the loan being foreclosed? The tax years are just information? How did this guy get loans with delinquent taxes?
As to your last question how would the lender know if the liens weren’t yet recorded? Especially back in the days of stated, and low or no doc loans. Without being able to generally rely on recordings sale and lending would be nearly impossible. And yes, it is the recording date of the lien that matters, not the tax years.
What happens if you purchase a home at the Trustee Sale, there happened to be IRS liens, and you sold the home within 90 days after becoming the owner, flipping it. What is the IRS came knocking on your door to purchase the property back from you within that 120 day period, but you have already sold it for profit?
Unlikely you’d be able to sell as most buyers would want title insurance and or need a loan that required title insurance. If it were to actually happen, I’d imagine the IRS could unwind both sales paying your buyer the amount you paid at auction, and then that buyer would have a claim against you. I haven’t looked into it, so note this is just a guess.
Sean, I just had a senior title officer tell me the following:? Concurrently recording trust deeds (ie.90/10, 80/20, 70/30 loans) are equal in seniority unless otherwise specifically stated on the face of the recorded TD. Therefore, even if the foreclosing TD appears to have priority based on the sequential recording number (xxxx-xxx111 is foreclosing and xxxx-xxx112 was recorded with same date/time stamp) xxxx-xxx112 will not be wiped out by the foreclosure sale initiated by the default of xxxx-xxx111. Xxxx-xxx111 will be extinguished, but the new buyer will be responsible for xxxx-xxx112 and title policy will list xxxx-xxx112 as an exclusion. ?I had a local, highly respected, so. Cal guru confirm the title officer?s opinion. What say you? ? ?
I say you are getting smoke blown way up somewhere. Absolutely ridiculous on its face and is contrary to everything I’ve ever learned about title and to dozens of transactions I’ve done where sequential juniors have been wiped out. ? Worse, it is completely non-sensical. Why would there even be such a thing as an 80/20 if the 80 was assuming the 20 upon foreclosure anyway? I think you’ve either misunderstood what they said, they are messing with you, or they are brain dead. ? Do note I’m not a title officer or an attorney, so proceed with my opinion at your own risk.
GREAT information, I’m glad I stumbled across this page.
I want to buy a property at a trustee auction in a couple of days but I just found out that the foreclosing lender is in 3rd postiion.? There is a first mortgage, followed by a line of credit, followed by a 3rd loan by private party (foreclosing).? If I buy the property, will I be responsible for paying the other two loans since they were filed first?? Thanks.
Yes, and the back property taxes too!!!
I opened escrow on a property I bought at auction last week to get a preliminary title report. I know there are junior IRS liens and Franchise Tax Board Liens. I wanted to see what the title company would say about when they would be willing to issue title insurance to a buyer. To my surprise, none of the liens showed up in the preliminary report. If you relied on the prelim to buy at auction, it would have missed very significant title issues.? I am thinking about send them an email asking them about these other liens. Should I do this or just let it go until I get a buyer into escrow?