Courthouse Steps Question

17 Replies

I found a house that is coming up for auction. The house is worth in the $450k range. When I look at the records, the only mortgage is for $87,000. The info on the filed mortgage matches the legal so its the first mortgage being auctioned. About a year later, there is a Judgment filed in favor of that mortgage company for $92,000. The only other liens on the property is property tax lien for $8200. I know that will have to be paid. On the surface this looks like a good opportunity. What other due diligence do I need to do so I am covering my rear. I hear these stories about unrecorded liens and what not but I don't know. I assume I would need to pay the money for a title search but anything else I might be missing? This deal has me spooked because it seems so odd to let a home get foreclosed on with 400k in equity. Don't know why they wouldn't just dump it if they were having financial trouble. Thanks in advance for the help as always.

@Jason Green

Yes that does almost sound too good to be true.  When you did your preliminary search did you come across any divorces or deaths.  I mean certainly a 40 year title search will flush out the issues but I would be wondering the same thing.

I haven't seen anything that jumps out on the documents filed. It shows where the guy paid the original mortgage off in 09 then the new mortgage was filed in 2010. Then the judgement and the tax lien. Nothing weird that I can tell. House is in excellent shape and empty. It's just really bizarre to let a house go back that you paid almost 500k for 90k. Only a moron would let something like that happen. I thought maybe the owner died and has no heirs? 

@Jason Green   could be an intestate situation.. best to just pay for  a title commitment.

you will know when you go to the auction as I am sure other investors will be chasing this and it will bid up.  pretty rare that something like this would just sneak through with no competition.. If you know about it so do 100 others.

@Jason Green

I bought a house a couple of years back where the lady only owed only 8k on the mortgage.  She let it go into foreclosure and I got it on the court steps.  Doubled my money on that deal without doing anything but changing the lockset.  Why?  The lady was crazy.  Just never know I guess.

I feel certain it will get bid up im just baffled by letting a house go with that equity. I stopped even going to courthouse auctions about 7 years ago because everything had zero equity so it was a waste of time. 

@Jason Green   I find that to be the case in the Deep south.. since so much of the foreclosure action was sub prime loans that were 100% at the time and with values falling .. of course not all but many..

Also in those areas ( B Ham which I do quite a bit of business these days) when you have subprime you have MI and so the lenders will full credit bid as to get their insurance payoff they don't really care what the asset is worth.. so you just don't get a lot of opening bids that are far less than what is owed.

but you will get these deals were some one dies with no heirs it does happen..

@Jason Green strange things happen in the auction world. I've purchased a few houses with very small firsts relative to their value. But it is rare. And to me it's a BIG red flag and reason to use extra caution.

Look at the sequence of the money trail and see if it makes sense. If they purchased the house 40 years ago and the loan was originated 20 years ago it might make sense. But, if they bought it for $400K three years ago and all you find is a small mortgage and its in foreclosure it makes far less sense.  Was this mortgage recorded one document after the acquisition deed?  If so, that's a good sign, but I'd also search the previous owner or two and make sure their mortgages were paid. It's possible that a former owner's loan was assumed or the purchase was subject to an existing mortgage and the mortgage recorded after the deed is subordinate to the former owner's loan.  I've even seen this happen after full-value transfer deeds so don't be fooled, mistakes happen on deeds and the wrong box can get checked.

If the foreclosing loan was not the very next document after the deed, I'd look at the very next document recorded after the deed just to see if it was a purchase money loan, and if so, how much it was for. If it was a large loan you'd have to wonder how it was paid off, or even if it was paid off.  I'd also check mis-spellings of the owner's name because there might be a senior loan where the lender or the county recorder's office didn't spell the name right and it got mis-indexed.

Proceed with caution, it could be a huge sucker-trap...l've seen it a hundred times and it doesn't end well.  Or, it could be legit which will almost certainly result in a very crowded bidding war.

@Jason Green Are you looking at the records in the actual county office or are you looking at the recorded documents on the county website? Online records are very finicky and not all records make it to county's online sites.

Agree with @Brian Burke  A misspelled name when recording a document can have a very ugly out come.  You may or may not be able to search by legal description there, but that's not always bullet proof either.  Get a real title sea h done before you invest any real money.

So a good title search company should uncover everything but in the event that it doesn't, I can't get an type of title insurance can I? Thanks for a the advice. It's really helping me out.

@Account Closed  

I almost had a similar situation last week. 

A local investor bought a condo 5 years ago for cash. Fell behind on HOA payments and went to foreclosure over $12k first position HOA lien. FMV around $110k.

I called the HOA manager and the foreclosing attorney and they both told me he was unresponsive to all communication. The attorney told me the plaintiff's bid was so much lower than the FMV that the sale might be thrown out at the judge's confirmation hearing!

I did my due diligence and everything seemed good so I was ready to bid. At 4pm the day before the auction, the HOA manager called me and told me the investor had turned up out of the blue at the foreclosing attorney's office with a cashier's check for the amount of the deficiency.

No explanation as to why he had disappeared or let the situation deteriorate so far... just one of those things I guess.

Originally posted by @Jason Green :

So a good title search company should uncover everything but in the event that it doesn't, I can't get an type of title insurance can I? Thanks for a the advice. It's really helping me out.

A good title search company should uncover everything.  But sometimes they don't.  They can make mistakes.  And if they do, it will be your money lost not theirs (unless the search comes with title insurance, which in the case of a purchase at the steps it will not).  The worst part is that the highest probability for errors is on titles where there are problems such as the ones described in this thread.  Nevertheless, it might be a supplement to the research you've already done.  Maybe they find something you didn't.  But just because they don't doesn't mean that there's nothing there.

I did some more digging and have unraveled the chain of mortgages and releases and what not. The mortgage being auctioned actually had an initial balance of $409k in 09. The 87,500 looks like a second mortgage taken the same day most likely to avoid jumbo rates maybe? So with the estimated balance at probably $370 and the tax lien of 8k. Opening bid should be $380k range. The HELOC will get wiped out. FMV is around $500k but after repairs that isn't a lot of meat on the bone for that much risk. House looks to be in great shape but have to assume its neglected. I appreciate all who replied. Really helped me to dig in and unravel this deal.

I did find a quit claim deed from his now ex wife to him for $255k with his name spelled with two "l" instead of one. So looks like to me he is rocking along, pays the house off. He and wife decide to part ways so he leverages the house. He pays her what I assume is half the value of the house. After coming out of pocket $255k to settle the wife in 2013, he probably said hell with it. Amazing what you can piece together about a total strangers life with a few hours at the courthouse 

@Jason Green if it is the second that is in foreclosure the opening bid will very likely be in the $90s, but the winning bidder will be acquiring the property subject to the outstanding balance on that $409K loan. 

Don't fall into the trap of thinking that the $409K loan is amortized down to $370K.  If the guy isn't paying on the second, he's probably not paying on the first, and there would be accrued interest, penalties, and foreclosure costs due to them as well.

I recently purchased a house at auction that had a $600K first, and the outstanding principal balance was over $1MM!  The accrued interest was over $400K, so obviously the owner hadn't paid in years.  I bought the first so it wasn't a problem for me, but imagine if there was a second that was in foreclosure and there was a bidder counting on the loan being less than $600K?  It would have been a total loss to that bidder.