Very peppered lien History. What winner has to paid for?

Question

I was at an auction recently, and a property I was interested in had a pretty peppered lien history.  Here goes the my best description of the situation:

First, I did a lien search by myself and found it to be very complicated.  The property ownership dated back to the 70s and there was a lot of borrowing against it.  I decided I would buy a title search.  However, my title search request was very late in the process, and I was concerned it would not be done in time.  I continued to search on my own.  What I found was there were 2 liens on the property.  The 1st was for 100k and the 2nd was for 32k.  The Foreclosure was on the 2nd.  At this point I put the property in the do not bid on category.  FYI, the paid title search didn't come in on time.

At the Auction:When the property came up to be auction a question was put to the judge.  "This lien appears to be in second position.  How does it fit in with control to the property"?  The judge responded, "This does have a senior encumbrance against the property, but the foreclosed lien (2nd) will have control.  From there everyone started bidding like there was nothing wrong with it. I did bid, but it went higher than my max bid, which was around 152k.

After the Auction:

When I got out of the auction I checked my phone, and notice my title search was done (lol).  In reviewing it I found there were also 3 judgements against the owners that I didn't find.  This is how they were listed.

1. owes to a bank 8k

2. owes to a bank 3k

3. foreclosure. the home at the auction

At this point I'm not sure if my bidding was a mistake, or if I should have bid higher, because the following questions came to my mind:

1.  Does the winner have to pay for the 2 judgments?

2.  Does the winner have to pay for the 1 lien.  the loan for 100k

3. Does the proceeds from the auction, the 152k, pay just on the foreclosed lien (2nd), or does it pay 2nd, then the 1st, then the judgement?

This is the end of my story.  I would really appreciate any explanations of this situation.

Peter Walther · Answer

Since the first mtg is still a lien on the property I wouldn't expect any of the excess proceeds go to pay it down.  Theproceeds would go first to the Plaintiff then to any named subordinate lien holders (because if they weren't named and properly served their lien wasn't extinguished) then to the former owner.

Peter Walther · Answer

Since the OP's first awareness of the three judgments was on receipt of the title search I suspected they were either not named or he didn't know to look at the docket for the Defendants or the pleadings to ensure they were properly served.

Peter Walther · Answer

First, unless you really know what you're doing, searching and as or more importantly examining title, yourself is a little like rolling dice.  Maybe you come up 7/11 (winner), maybe snake eyes (loser), or maybe have to make your point (the future will tell the tale).  Having the experience to understand what effect a deed, mortgage, easement, lien, option, covenant, condition, restriction, or other possible documents may have on the title is a rare thing.

Second, most people don't understand the limitation of liability for an error in most "title searches" is between what you paid for the search ($100 or so) and $1,000 so if you bid $152k backstopped by a last-minute title search you've got more guts than I do.  What you need is a title commitment wherein a title underwriter, by and through its agent, agrees to issue a policy, subject to certain exception and exclusions, if you to meets its requirements.  You probably won't get one for a foreclosure, but it's one I believe a person would need.

Third, it appears you don't understand lien priority.  Briefly, and not with any detail, and subject to lots of caveats, if A owns a parcel of property and gives a purchase money mortgage to B and then A has a $50k judgement properly recorded against him in favor of B and then A gives a 2nd mtg to C and a 3rd mtg to D and then C brings a foreclosure action which names AB&D, whose lien gets eliminated? Probably only D's, unless D's money went to pay off B's mortgage, in which D may be equitably subrogated to A's position and has priority of C's.  What if the property is a condo?  What lien priority does past due association assessments have?

What if A has a judgment against him when he takes title and gives the PMM to B and B files foreclosure? What is B's lien priority?  Well, being B's mtg is a PMM, it may have priority but the same probably won't hold true for C's mtg, unless C's money went to pay off A's mtg in which case see equitable subrogation above.

These examples don't take into account mis-indexed documents, actual knowledge vs constructive knowledge, competency of the parties, jurisdiction where the land is located, problems with the legal description, misspelled names (look up "idem sonome" for more information) and a whole host of other potential problems.

Wayne Brooks · Answer

@William K. When the judge said the winner of the 2nd foreclosure will “control” the property, he is right....but that just means you’ll Own it...the “senior encumbrance” he mentioned, will still be there against the property.  As for the judgments, it’s same as mtgs, if they were recorded After the foreclosing 2nd mtg was, and named and served, they would be wiped out.

Martin M. · Answer

@William K.

Answers to your 1, 2 and 3 questions:

1. It's all about removing liens that are attached to the property. The key is attached to the property, not the person.

2. Similar to question 1, generally speaking yes, winner would also have to pay senior liens if they want to obtain title (ownership) to the property

3. I'm fairly certain that second position lien holder (the one foreclosing) would be paid in full. I don't know how the excess funds would be distributed.

Peter's making some really good points. Buying foreclosures isn't for the faint at heart and it's easy to lose a lot of money if you don't fully understand lien positions and such. Sadly, a lot of people make very costly mistakes at auction that are legally binding and can't be undone.

The book Bidding to Buy may be a good place for you to start. It breaks down a complex topic (foreclosures) into understandable terms. If you haven't read that I'd highly recommend it.

Also if it were me, I'd maybe start with only first position liens until you're really comfortable with the process. It's still risky, but not nearly as risky as bidding when a junior lien holder is the foreclosing party. Hope this helps. Good luck!

Jake Wiley · Answer

Really interesting question

What I would do is seek out the possibility of title insurance in a situation like this, as the attorney would have to due the due diligence to provide the insurance.    It would probably take a bit of searching.

It's my understanding that foreclosure provides marketable title and clears the liens on the property, excepting taxes that are permanently attached to the property and could result in a tax sale if not paid.   The proceeds are used to settle debts in order of priority until the proceeds are exhausted and then the title is theoretically marketable.    Any deficiency could/would be pursued against the defaulting borrower.

There is still a potential right of redemption, or issues in the process that could create headaches, but the system was designed to get properties back into commerce and that simply wouldn't be possible if title issues persisted in perpetuity.

With all that said, I have your title rep on standby to make sure that this is all well thought through.

William K. · Answer

Thanks again everyone.  The morale of the story is to not bid on 2nd position liens.  Be very careful on 1st position too.

William K. · Answer

@Wayne Brooks would you know if any of the auction proceeds would go towards the 1st after the 2nd was payed off?

Very peppered lien History. What winner has to paid for?

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