Buying a Second Deed at Foreclosure Auction

[Patrick Mahoney]

Hello,

I recently found a home in California that has two Deeds of Trust on it, the first being a mortgage and the second being a line of credit. The Trustee for the second (the line of credit) is foreclosing on the home and has announced the trustees sale at a public auction. My question is, if I purchase this at the auction with cash, the second is paid off (by me via purchase at the auction) but do I have the rights to the property but am liable to the first deed or does the homeowner still have the right to the property?

[Darius Ogloza]

The lender on the first deed of trust does not lose his priority to your second lien regardless of how you acquired it.  Your deed would remain subject to the first lien.

[Wayne Brooks]

@Patrick Mahoney Yes, you will own the property, but be liable for the amount of the 1st mtg….along with any late fees, interest, advances made by the first for taxes, insurance, etc…if the first is also in default.

[Chris Seveney]

@Patrick Mahoney

As mentioned you own it and have to pay off the first

The key thing to understand is what is the balance / payoff on the first, as it could be signficant and not worth it to buy the second.

[Marty Boardman]

This would be a very risky investment Patrick. As others have pointed out, you'll still be responsible for the 1st lien and it may be very difficult to contact this lender for payoff information after you win the house at auction.

Not to mention dealing with current homeowner. If they don't want to move out you could be in for a long fight (especially living in California).

About the only way I'd consider doing this is if I had a relationship with the current owner, including a signed loan authorization statement for the first mortgage. With this you can make contact and get the payoff info after the sale.

[Ronald Ty]

Quote from @Marty Boardman:

This would be a very risky investment Patrick. As others have pointed out, you'll still be responsible for the 1st lien and it may be very difficult to contact this lender for payoff information after you win the house at auction.

Not to mention dealing with current homeowner. If they don't want to move out you could be in for a long fight (especially living in California).

About the only way I'd consider doing this is if I had a relationship with the current owner, including a signed loan authorization statement for the first mortgage. With this you can make contact and get the payoff info after the sale.

This is not true. It is easy to contact the 1st lender. All you have to do is file a case or, better yet, hire an attorney to so it for you.

You need to make sure of the 1st mortgage balance which includes property taxes, lawyer fees, interest, penalties etc.

Keep in mind, if there is equity in the 1st, the bank will send an attorney to the auction to get the property back. This happened recently. 2nd was 50k, opening bid of 20k. 4 bidders plus the lawyer. 1st was around 150k. Home was worth around 280k.

Bank sent in a fedex messenger with a certified check of $207,852.08 (pay off both loans). Yes, they wanted that property back. No one else went higher than that.

so you can see the 1st mortgage holder would be VERY motivated to talk to you if you won that 2nd. 

[Wayne Brooks]

Quote from @Ronald Ty:

Quote from @Marty Boardman:

This would be a very risky investment Patrick. As others have pointed out, you'll still be responsible for the 1st lien and it may be very difficult to contact this lender for payoff information after you win the house at auction.

Not to mention dealing with current homeowner. If they don't want to move out you could be in for a long fight (especially living in California).

About the only way I'd consider doing this is if I had a relationship with the current owner, including a signed loan authorization statement for the first mortgage. With this you can make contact and get the payoff info after the sale.

This is not true. It is easy to contact the 1st lender. All you have to do is file a case or, better yet, hire an attorney to so it for you.

You need to make sure of the 1st mortgage balance which includes property taxes, lawyer fees, interest, penalties etc.

Keep in mind, if there is equity in the 1st, the bank will send an attorney to the auction to get the property back. This happened recently. 2nd was 50k, opening bid of 20k. 4 bidders plus the lawyer. 1st was around 150k. Home was worth around 280k.

Bank sent in a fedex messenger with a certified check of $207,852.08 (pay off both loans). Yes, they wanted that property back. No one else went higher than that.

so you can see the 1st mortgage holder would be VERY motivated to talk to you if you won that 2nd. 

Well, that would depend on state laws regarding who gets the surplus.  Here, any surplus on a junior lien (2nd mtg or hoa) foreclosure goes to the owner (assuming no liens junior to the one foreclosing)….so that would be a really stupid move by the first. 

[Ronald Ty]

Quote from @Wayne Brooks:

Quote from @Ronald Ty:

Quote from @Marty Boardman:

This would be a very risky investment Patrick. As others have pointed out, you'll still be responsible for the 1st lien and it may be very difficult to contact this lender for payoff information after you win the house at auction.

Not to mention dealing with current homeowner. If they don't want to move out you could be in for a long fight (especially living in California).

About the only way I'd consider doing this is if I had a relationship with the current owner, including a signed loan authorization statement for the first mortgage. With this you can make contact and get the payoff info after the sale.

This is not true. It is easy to contact the 1st lender. All you have to do is file a case or, better yet, hire an attorney to so it for you.

You need to make sure of the 1st mortgage balance which includes property taxes, lawyer fees, interest, penalties etc.

Keep in mind, if there is equity in the 1st, the bank will send an attorney to the auction to get the property back. This happened recently. 2nd was 50k, opening bid of 20k. 4 bidders plus the lawyer. 1st was around 150k. Home was worth around 280k.

Bank sent in a fedex messenger with a certified check of $207,852.08 (pay off both loans). Yes, they wanted that property back. No one else went higher than that.

so you can see the 1st mortgage holder would be VERY motivated to talk to you if you won that 2nd. 

Well, that would depend on state laws regarding who gets the surplus.  Here, any surplus on a junior lien (2nd mtg or hoa) foreclosure goes to the owner (assuming no liens junior to the one foreclosing)….so that would be a really stupid move by the first. 

 Not really. 2nd was 50k. I believe the 1st was 150k. So all are paid off in full. Bank (or investor) evicts the homeowners and it sells for 80k. 

[Wayne Brooks]

Quote from @Ronald Ty:

Quote from @Wayne Brooks:

Quote from @Ronald Ty:

Quote from @Marty Boardman:

This would be a very risky investment Patrick. As others have pointed out, you'll still be responsible for the 1st lien and it may be very difficult to contact this lender for payoff information after you win the house at auction.

Not to mention dealing with current homeowner. If they don't want to move out you could be in for a long fight (especially living in California).

About the only way I'd consider doing this is if I had a relationship with the current owner, including a signed loan authorization statement for the first mortgage. With this you can make contact and get the payoff info after the sale.

This is not true. It is easy to contact the 1st lender. All you have to do is file a case or, better yet, hire an attorney to so it for you.

You need to make sure of the 1st mortgage balance which includes property taxes, lawyer fees, interest, penalties etc.

Keep in mind, if there is equity in the 1st, the bank will send an attorney to the auction to get the property back. This happened recently. 2nd was 50k, opening bid of 20k. 4 bidders plus the lawyer. 1st was around 150k. Home was worth around 280k.

Bank sent in a fedex messenger with a certified check of $207,852.08 (pay off both loans). Yes, they wanted that property back. No one else went higher than that.

so you can see the 1st mortgage holder would be VERY motivated to talk to you if you won that 2nd. 

Well, that would depend on state laws regarding who gets the surplus.  Here, any surplus on a junior lien (2nd mtg or hoa) foreclosure goes to the owner (assuming no liens junior to the one foreclosing)….so that would be a really stupid move by the first. 

 Not really. 2nd was 50k. I believe the 1st was 150k. So all are paid off in full. Bank (or investor) evicts the homeowners and it sells for 80k. 

As I said, not here….
Bank bids, and pays out, $150k at the second mtg foreclosure….
-$50k goes to 2nd
-the $100k surplus goes to the Owner, Nothing goes to the first mtg holder
-the bank just spent $150k, on top of their Initial loan….now they can sell the property for whatever they can get.

I’m assuming in the case you mentioned, the surplus would go to the first mtg holder, as per state law. I don’t think that is the majority of the statues.

[Ronald Ty]

Quote from @Wayne Brooks:

Quote from @Ronald Ty:

Quote from @Wayne Brooks:

Quote from @Ronald Ty:

Quote from @Marty Boardman:

This would be a very risky investment Patrick. As others have pointed out, you'll still be responsible for the 1st lien and it may be very difficult to contact this lender for payoff information after you win the house at auction.

Not to mention dealing with current homeowner. If they don't want to move out you could be in for a long fight (especially living in California).

About the only way I'd consider doing this is if I had a relationship with the current owner, including a signed loan authorization statement for the first mortgage. With this you can make contact and get the payoff info after the sale.

This is not true. It is easy to contact the 1st lender. All you have to do is file a case or, better yet, hire an attorney to so it for you.

You need to make sure of the 1st mortgage balance which includes property taxes, lawyer fees, interest, penalties etc.

Keep in mind, if there is equity in the 1st, the bank will send an attorney to the auction to get the property back. This happened recently. 2nd was 50k, opening bid of 20k. 4 bidders plus the lawyer. 1st was around 150k. Home was worth around 280k.

Bank sent in a fedex messenger with a certified check of $207,852.08 (pay off both loans). Yes, they wanted that property back. No one else went higher than that.

so you can see the 1st mortgage holder would be VERY motivated to talk to you if you won that 2nd. 

Well, that would depend on state laws regarding who gets the surplus.  Here, any surplus on a junior lien (2nd mtg or hoa) foreclosure goes to the owner (assuming no liens junior to the one foreclosing)….so that would be a really stupid move by the first. 

 Not really. 2nd was 50k. I believe the 1st was 150k. So all are paid off in full. Bank (or investor) evicts the homeowners and it sells for 80k. 

As I said, not here….
Bank bids, and pays out, $150k at the second mtg foreclosure….
-$50k goes to 2nd
-the $100k surplus goes to the Owner, Nothing goes to the first mtg holder
-the bank just spent $150k, on top of their Initial loan….now they can sell the property for whatever they can get.

I’m assuming in the case you mentioned, the surplus would go to the first mtg holder, as per state law. I don’t think that is the majority of the statues.

Sorry, I think I explained it incorrectly. The bank paid 50k for the 2nd. Then, thru will pay off the 1st. They did not pay 150k to get the 2nd. Perhaps the bank owns both mortgages and just wanted to simplify.
So  those other investors would have just bidded 50k for the 2nd then bid for the 1st.  We didn't get that far. 

[Wayne Brooks]

@Ronald Ty Gotcha.

[Alex Cee]

Where I am you can foreclose even from second place.  All you have to do is ensure that taxes and first doesn't fall behind as they would have priority.  If you own the second and it is in default, the first can be paid as part of the sale. 

Are both in arrears?  make sure you have the funds to keep everything up to date in case you can't get it sold right away.

[Ronald Ty]

Quote from @Alex Cee:

Where I am you can foreclose even from second place.  All you have to do is ensure that taxes and first doesn't fall behind as they would have priority.  If you own the second and it is in default, the first can be paid as part of the sale. 

Are both in arrears?  make sure you have the funds to keep everything up to date in case you can't get it sold right away.

 Ah, so that must be it! Maybe the homeowner defaulted on the 2nd and kept paying the 1st mortgage. Not sure how an investor would know what the 1st was owed on ? I would think the 1st was in the process of foreclosure otherwise how would an investor what was owed? 

[Alex Cee]

Quote from @Ronald Ty:

 Ah, so that must be it! Maybe the homeowner defaulted on the 2nd and kept paying the 1st mortgage. Not sure how an investor would know what the 1st was owed on ? I would think the 1st was in the process of foreclosure otherwise how would an investor what was owed? 

You would need to do a title search to know more.  It's very tricky to by foreclosures because if you don't invest a few $$ you won't have the full picture.  You might buy a $200K property for $50 and owe $250K on mortgages, overdue taxes, permits that didn't close ((particularly in Florida, but may apply in other locations).

[John Slater]

@Patrick Mahoney - if you shoot me the address in a DM I can check better for you, but this is likely the scenario.

many 2nd's from 2004-2006 era have been sleepy/dormant for a long time.  These were the old ELOC's that you don't see too often now.  They were dormant while the properties had no equity.  When the market increased, especially here in california, these seconds were bought by glorified debt collectors and actually amounted or the majority of foreclosures during covid as they weren't bound by the foreclosure moratorium.  Even 2 years after covid, 2nd's are still be sold off to lenders/debt collectors with their sole intention to foreclosure.

Now, the laws in california...  If you buy the second, yes you own the property, NO the seller has zero right of redemption, however, if bought it as an investment property, at auction, you WONT receive the deed to the property until around day 45!  We have a lovely Newsome bill giving any random person or tenant the right to over bid you within 30 days (except the old owner) if they are going to occupy as there personal residence... No investor can outbid you, only someone using for personal residency.  Any surplus from overage of paying off the 2nd will go to senior liens.  Imagine the homeowner pocking $50k overage and the first sat there saying "What about us?"  The old owner can't make money on the property being sold at auction while senior liens exist.

@Marty Boardman I'm with you! It is not easy to contact the bank and get a payoff for the first!  its possible, once you have a deed in hand (45 days later) and then you're hoping to get to the right person that helps you out.  You do not have access to the borrowers lender.  They do not have a contract with you, it's with the borrower, and privacy rights yada yada dictate the lender is giving up information personal to the borrower to a stranger!... now, being the owner of the property gives you some rights, but no 100%.  The first could eventually foreclosures, and now there's more chance of getting a payoff from the foreclosure trustee versus the lender.  Understand the laws of your state, other states have different laws and it wastes time understanding what might happen in IL, when you are in CA.  

[Marty Boardman]

Quote from @Ronald Ty:

Quote from @Marty Boardman:

This would be a very risky investment Patrick. As others have pointed out, you'll still be responsible for the 1st lien and it may be very difficult to contact this lender for payoff information after you win the house at auction.

Not to mention dealing with current homeowner. If they don't want to move out you could be in for a long fight (especially living in California).

About the only way I'd consider doing this is if I had a relationship with the current owner, including a signed loan authorization statement for the first mortgage. With this you can make contact and get the payoff info after the sale.

This is not true. It is easy to contact the 1st lender. All you have to do is file a case or, better yet, hire an attorney to so it for you.

You need to make sure of the 1st mortgage balance which includes property taxes, lawyer fees, interest, penalties etc.

Keep in mind, if there is equity in the 1st, the bank will send an attorney to the auction to get the property back. This happened recently. 2nd was 50k, opening bid of 20k. 4 bidders plus the lawyer. 1st was around 150k. Home was worth around 280k.

Bank sent in a fedex messenger with a certified check of $207,852.08 (pay off both loans). Yes, they wanted that property back. No one else went higher than that.

so you can see the 1st mortgage holder would be VERY motivated to talk to you if you won that 2nd. 

I wouldn't say filing a case or hiring an attorney to get the payoff from the first mortgage lender is "easy" Wayne. That sounds expensive and time consuming.

I've had trouble getting this information from a lien holder even with the expressed written permission from the borrower. And if the lender sells the loan that's even worse. I just did a sub-to deal with a homeowner in foreclosure in January. The lender sold the loan and neither the borrower or I can track down where to send the new payment. It's been a nightmare.

[Marty Boardman]

Quote from @John Slater:

@Patrick Mahoney - if you shoot me the address in a DM I can check better for you, but this is likely the scenario.

many 2nd's from 2004-2006 era have been sleepy/dormant for a long time.  These were the old ELOC's that you don't see too often now.  They were dormant while the properties had no equity.  When the market increased, especially here in california, these seconds were bought by glorified debt collectors and actually amounted or the majority of foreclosures during covid as they weren't bound by the foreclosure moratorium.  Even 2 years after covid, 2nd's are still be sold off to lenders/debt collectors with their sole intention to foreclosure.

Now, the laws in california...  If you buy the second, yes you own the property, NO the seller has zero right of redemption, however, if bought it as an investment property, at auction, you WONT receive the deed to the property until around day 45!  We have a lovely Newsome bill giving any random person or tenant the right to over bid you within 30 days (except the old owner) if they are going to occupy as there personal residence... No investor can outbid you, only someone using for personal residency.  Any surplus from overage of paying off the 2nd will go to senior liens.  Imagine the homeowner pocking $50k overage and the first sat there saying "What about us?"  The old owner can't make money on the property being sold at auction while senior liens exist.

@Marty Boardman I'm with you! It is not easy to contact the bank and get a payoff for the first!  its possible, once you have a deed in hand (45 days later) and then you're hoping to get to the right person that helps you out.  You do not have access to the borrowers lender.  They do not have a contract with you, it's with the borrower, and privacy rights yada yada dictate the lender is giving up information personal to the borrower to a stranger!... now, being the owner of the property gives you some rights, but no 100%.  The first could eventually foreclosures, and now there's more chance of getting a payoff from the foreclosure trustee versus the lender.  Understand the laws of your state, other states have different laws and it wastes time understanding what might happen in IL, when you are in CA.  

100% right. These lenders have strict protocols in place for releasing this info, not easy to get even if you have the borrower's written consent.

[Bob Floss II]

I had a client do this and the first lien bank immediately sent him a demand letter for the total amount of the first mortgage or they would foreclose on their lien and take the property.