Purchasing a second trust from foreclosure auction-Process?
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Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
6y@Jesse Morrell Yes, you have few things backwards....
-When buying at a foreclosure auction, you Are buying the property, not the lien...the lien is extinguished at the sale.
-When you buy a foreclosure by a second mtg holder, the first mtg Stsys on the property, since it is superior. You must then pay it or be foreclosed by the 1st position lien holder.
-When buying a first mtg foreclosure, the second mtg, and any other junior liens, get wiped out and are not the responsibility of the buyer.
-A first mtg holder gets no proceeds from a second mtg foreclisure.
16 Replies
- Flipper/Rehabber · Tyler, TX · Member since 2019 · 58 posts · 41 votes6y
@Jacob Beg I also buy at trustee foreclosure auctions. My understanding is that buying the 2 lien, without buying the 1 lien, is how you can seriously lose your money.
2 liens get auctioned off because that’s just the legal process. But it’s getting auctioned off because its not getting paid. The property owner isn’t going to suddenly start paying that lien.
You get your money for a 2 lien if he sells the house, which he may not do. If he forecloses because he also doesn’t pay the mortgage, my understanding is that your 2 lien remains on the property and you’d be paid when the house eventually sells retail, as the person who buys the 1 lien at auction inherits the 2 lien also.
The risk, at least here in Texas, is that if he doesn’t pay property taxes and the property goes to Sheriff Tax Sale, all liens and mortgages on the property fall off and you lose all your money.
That’s the nightmare situation some investors have fallen into, when they bought the 2 lien by mistake thinking they were buying the property, and then it goes to Sherif Sale for taxes.
But to be clear, buying the 2 lien is not buying the property. It’s buying the 2 lien only.
That’s my understanding from what I’ve read about it. Curious, how did you know it was the second lien being sold? I’ve heard of them being auctioned off but I haven’t seen the paper work of them yet. Sometimes I see Notice of Trustee Sale papers saying “the mortgage or lien is being auctioned.”
- Flipper/Rehabber · Tyler, TX · Member since 2019 · 58 posts · 41 votes6y
@Jacob Beg you said the owner of the 2 lien is responsible for the 1 lien. I think that is backwards. The owner of the 1 lien is responsible for any 2 liens. Sometimes you might buy the 1 lien knowing there is a 2nd lien, in which you budget to pay it off. But buying the 2 lien does not make you responsible for the 1 lien or the owner of the property.
2 liens could be second mortgages but they could also be contractor liens from contractors not getting paid for work they did.
- Flipper/Rehabber · Tyler, TX · Member since 2019 · 58 posts · 41 votes6y
@Jacob Beg maybe I was mistaken in my first posts. Maybe the second mortgage is bringing the property to foreclosure and the proceeds from the winning bid are supposed to pay off the first and then the second lien, since the property is collateral for both?
I’d like to know the answer to this question myself.
Originally posted by @Jacob Beg:
Hi All:
I usually purchase 1 lien positions from foreclosure trustee sales. I have never purchases a 2nd trust before, but came across a property where the 2nd trust is being sold via trustee foreclosure sale. Understandably, the winning bidder for the 2nd trust is responsible for the 1st lien.
My question is to do with the process. How does the successful bidder of the 2nd trust go by paying off/purchasing the 1st trust to complete ownership of the property. Do you need the previous owner's consent to payoff that mortgage? Is this an automatic right of the successful bidder of the 2nd trust or are there any other caveats involved? The property is located in MD.
Thanks in advance.
You are not responsible for paying the 1st mortgage but it is a lien on the property that is superior to your purchase so you want to make sure you don't get foreclosed on by the 1st. Probably they won't talk to you because you are not the borrower. If you could find out how much the loan is in arrears and send them a check to bring it current, it will buy you some time. Other options is try to obtain payoff through the title company (they might need borrowers SSN).
@Jacob Beg The foreclosure purchaser should be considered a successor in interest to the prior owner and as such should be able to obtain a current payoff statement without the authorization of the prior owner.
Gimer Law518 ReviewsOriginally posted by @Jacob Beg:
Hi All:
I usually purchase 1 lien positions from foreclosure trustee sales. I have never purchases a 2nd trust before, but came across a property where the 2nd trust is being sold via trustee foreclosure sale. Understandably, the winning bidder for the 2nd trust is responsible for the 1st lien.
My question is to do with the process. How does the successful bidder of the 2nd trust go by paying off/purchasing the 1st trust to complete ownership of the property. Do you need the previous owner's consent to payoff that mortgage? Is this an automatic right of the successful bidder of the 2nd trust or are there any other caveats involved? The property is located in MD.
Thanks in advance.
it is an automatic right. That said, you have to assert that right and show the state statute to show you have that right. Even then, be prepared for frustrations with the lenders that fail to recognize your rights.
Originally posted by @Jesse Morrell:
@Jacob Beg I also buy at trustee foreclosure auctions. My understanding is that buying the 2 lien, without buying the 1 lien, is how you can seriously lose your money.
2 liens get auctioned off because that’s just the legal process. But it’s getting auctioned off because its not getting paid. The property owner isn’t going to suddenly start paying that lien.
You get your money for a 2 lien if he sells the house, which he may not do. If he forecloses because he also doesn’t pay the mortgage, my understanding is that your 2 lien remains on the property and you’d be paid when the house eventually sells retail, as the person who buys the 1 lien at auction inherits the 2 lien also.
The risk, at least here in Texas, is that if he doesn’t pay property taxes and the property goes to Sheriff Tax Sale, all liens and mortgages on the property fall off and you lose all your money.
That’s the nightmare situation some investors have fallen into, when they bought the 2 lien by mistake thinking they were buying the property, and then it goes to Sherif Sale for taxes.
But to be clear, buying the 2 lien is not buying the property. It’s buying the 2 lien only.
That’s my understanding from what I’ve read about it. Curious, how did you know it was the second lien being sold? I’ve heard of them being auctioned off but I haven’t seen the paper work of them yet. Sometimes I see Notice of Trustee Sale papers saying “the mortgage or lien is being auctioned.”
Not much of what you said is accurate.
- Flipper/Rehabber · Tyler, TX · Member since 2019 · 58 posts · 41 votes6y
@Ron S. Each state is different. I’ve heard from two separate sources that in Texas, investors have purchased the second lien by mistake thinking they were buying the property only to have the property then go to sheriff sale, where all liens fall off in Texas.
Originally posted by @Jesse Morrell:
@Ron S. Each state is different. I’ve heard from two separate sources that in Texas, investors have purchased the second lien by mistake thinking they were buying the property only to have the property then go to sheriff sale, where all liens fall off in Texas.
i was talking about your first post...which had a lot of incorrect statements. The post you just made (This one), no one is arguing with. That's what happens when you buy a junior lien and don't pay off the senior.
- Flipper/Rehabber · Tyler, TX · Member since 2019 · 58 posts · 41 votes6y
@Ron S. Ok. So when you buy a second lien at auction, are you buying the property or just the ownership of the second lien?
- Flipper/Rehabber · Tyler, TX · Member since 2019 · 58 posts · 41 votes6y
@Ron S. Yes I think another scenario I heard of it people buying second liens by mistake (thinking they got a really cheap deal), thinking they were buying the first, only to find out later and not having enough to pay off the first.
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes6y
@Jesse Morrell Yes, you have few things backwards....
-When buying at a foreclosure auction, you Are buying the property, not the lien...the lien is extinguished at the sale.
-When you buy a foreclosure by a second mtg holder, the first mtg Stsys on the property, since it is superior. You must then pay it or be foreclosed by the 1st position lien holder.-When buying a first mtg foreclosure, the second mtg, and any other junior liens, get wiped out and are not the responsibility of the buyer.
-A first mtg holder gets no proceeds from a second mtg foreclisure. Originally posted by @Jesse Morrell:
@Ron S. Ok. So when you buy a second lien at auction, are you buying the property or just the ownership of the second lien?
if you mean foreclosure auction, you are buying the property, subject to the 1st lien, meaning, yeah, you get the property but you also get the senior lien that needs to be paid off in full.
- Flipper/Rehabber · Tyler, TX · Member since 2019 · 58 posts · 41 votes6y
@Wayne Brooks so if you buy the property through the second lien at auction, you inherit the first lien with it. But if you buy the property through the first lien, the second liens get wiped out?
My understanding for Texas was that liens only get wiped out at the County Sherif Tax Sale, but properties auctioned at the Trustee Sale come with any and all liens attaches to the property - none get wiped out.
So when I buy a property in Texas, I search for any liens and am ready to pay any of them if I buy the property. So far I’ve just purchased first liens with no secondary, and never wanted to buy any second liens because I was unsure of them.
But it makes sense to me, if you buy the second you get the property and are now responsible for the first. That helps me out a lot. Thanks guys.
Along these liens, has anyone ever purchased a property through the second lien and then negotiated Subject To with the first lien holder, merely bringing it up to date rather then paying it off?
- Flipper/Rehabber · Tyler, TX · Member since 2019 · 58 posts · 41 votes6y
Maybe I heard wrong about Trustee Auction properties not wiping out liens in Texas:
"Properties may (and often do) have multiple liens against them. "A valid foreclosure on a senior lien (sometimes referred to as a ‘superior' lien) extinguishes a junior lien (sometimes referred to as ‘inferior' or ‘subordinate') if there are not sufficient excess proceeds from the foreclosure sale to satisfy the junior lien . . . In general, mechanic's liens whose inception is subsequent to the date of a deed-of-trust lien will be subordinate to the deed-of-trust lien." Trinity Drywall Systems, LLC v. TOKA General Contractors, Ltd., 416 S.W.3d 201 (Tex.App.-El Paso 2013, no pet.). As to competing M&M liens, a perfected M&M lien is deemed to relate back in time to the date of its inception. Leases, including ground leases, are generally terminated as well. Kimzey Wash, LLC v. LG Auto Laundry, LP, 418 S.W.3d 291 (Tex.App.-Dallas 2013, no pet.).
Notice to the IRS
The best practice is to do a title search prior to foreclosure to determine if there is an IRS tax lien or other federal lien. If so, notice must be given to the IRS and/or the U.S. Attorney at least 25 days prior to the sale, not including the sale date. 26 U.S.C. § 7425(c)(1). If this is not done, any IRS tax lien on the property will not be extinguished by the sale. Note that the IRS also has 120 days following the sale to redeem the property, although this seldom happens. The successful bidder on an IRS-liened property is therefore not entitled to breathe a sigh of relief until the 121st day.”
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes6y
@Jesse Morrell You have a better understanding now. But when buying through a second mtg foreclosure....no, the first will not let you bring it current then make the payments. The balance will be due in full.
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