Buying subordinate liens at foreclosure auctions

[Evan Gater]

Hello,

I reside in Orlando and I'm currently exploring properties in Florida. I am contemplating the possibility of purchasing a second mortgage or an HOA lien to subsequently pay off the superior lien. How does the process involved in paying off the superior lien work? Is it typically straightforward to make such payments, or is there a chance that the bank might refuse payment and proceed with an auction?

Furthermore, I'm curious about the level of risk associated with this process. Would you recommend investing in subordinate liens?

Thank you very much in advance,

[Chris Seveney]

@Evan Gater

Are you buying the asset at foreclosure from a junior lien or you buying junior liens prior to foreclosure?

We invest in notes but prefer first over seconds because seconds typically carry much higher risk - for example a jr lien could be 100% wiped out in a bankruptcy whereas not happening with a first

Pros and cons to all - if you at buying at auction with liens still attached most lenders will want the full payoff or foreclose

[Shafi Noss]

I think each type of lien is different in each state (HOA vs. Investor vs. tax), but if it is a 2nd lien from an investor, there may be an intercreditor agreement that spells out the rights of the 2nd lien holder. Getting a hold of that document would be important for understanding your rights, and 1sts generally prefer to be bought out rather than going to foreclosure.

[Evan Gater]

@Chris Seveney and @Shafi Noss

Thank you for answering my question.

I'm considering purchasing a property undergoing a second mortgage foreclosure. The first mortgage's auction is scheduled for September 2024. Assuming less competition, I believe I could secure the property at a lower price by participating in the second mortgage auction. My plan involves paying off the first mortgage's judgment amount afterward. However, I'm uncertain if this strategy is feasible. I'm concerned about the possibility of the first mortgage holder refusing my payment and proceeding with the foreclosure. Are there any other risks I should be aware of? Appreciate your insights.

[Chris Seveney]

@Evan Gater

If you are paying it off they cannot say no we won’t accept your payment

What would be more worried about is what is the payoff on the first. The first payoff could be higher than you thought as if they are I. Foreclosure the advances, charges and possibly deferred principal balance can all crush your goals

Remember the 2nd may also bid their full amount owed as well.

Yes money can absolutely be made but it’s also very risky

[John Clark]

Quote from @Evan Gater:

@Chris Seveney and @Shafi Noss

Thank you for answering my question.

I'm considering purchasing a property undergoing a second mortgage foreclosure. The first mortgage's auction is scheduled for September 2024. Assuming less competition, I believe I could secure the property at a lower price by participating in the second mortgage auction. My plan involves paying off the first mortgage's judgment amount afterward. However, I'm uncertain if this strategy is feasible. I'm concerned about the possibility of the first mortgage holder refusing my payment and proceeding with the foreclosure. Are there any other risks I should be aware of? Appreciate your insights.

If you are asking such questions at a place like this, then you really don’t know enough about the risks to do it. I know I don’t, and I know the law (of my state). You need to pick a much simpler situation to start with.

[Ron S.]

its not that complicated. Junior goes to sale, you are successful bidder at sale. You own the property subject to the senior. You exercise your rights as a junior lienholder to pay off the senior. You might have to show you are the junior now with your foreclosure paperwork but by statute you have the right to pay the senior off. If you don't, they'll foreclosure and wipe you out.

What's gonna suck is, say the property is worth $500,000 and say the senior is $200,000 and say the junior is $100,000. The junior is going to go to say at full debt at $100,000. No doubt someone else is going to bid. Let's say someone bids $199,999 and you bid $200,000 and no one else bids...you are like, "Yay, I won and get the property". You do but guess what, you don't' get that extra $100,000 back. You paid $200,000 even though the total debt on the junior was only $100,000. The surplus proceeds do not go to pay the senior down and do not get reimbursed back to you as an overpayment. Any surplus would be subject to claim by junior encumbrances and then to the owner of record 

[Jay Hinrichs]

Quote from @Ron S.:

its not that complicated. Junior goes to sale, you are successful bidder at sale. You own the property subject to the senior. You exercise your rights as a junior lienholder to pay off the senior. You might have to show you are the junior now with your foreclosure paperwork but by statute you have the right to pay the senior off. If you don't, they'll foreclosure and wipe you out.

What's gonna suck is, say the property is worth $500,000 and say the senior is $200,000 and say the junior is $100,000. The junior is going to go to say at full debt at $100,000. No doubt someone else is going to bid. Let's say someone bids $199,999 and you bid $200,000 and no one else bids...you are like, "Yay, I won and get the property". You do but guess what, you don't' get that extra $100,000 back. You paid $200,000 even though the total debt on the junior was only $100,000. The surplus proceeds do not go to pay the senior down and do not get reimbursed back to you as an overpayment. Any surplus would be subject to claim by junior encumbrances and then to the owner of record 

in the day we used to call this Junior in possession.. Title company writes for payoff demand and you pay it off in an escrow.  Never seen one not work that way.

[Evan Gater]

Thank you all for your answers.

I have a couple more questions before buying a subordinate liens. That would be greatly appreciated if you could help me find answers to these questions:

1- So, when I buy a second mortgage, the first mortgage and taxes stay and they are not paid through the surplus. I have no access to the surplus in any way. The surplus does not pay the first mortgage or taxes. How about the HOA liens? Does it not even pay the HOA liens?

2- Let's say, I buy a second mortgage and lis pendens has already been issued for the first mortgage and an auction date has already been set for it. Can I still pay off the first mortgage? Or is it too late? How long does it usually take to complete all procedures with the first mortgage holder after buying the second mortgage to pay off the first mortgage? 

3- Do I need any kind of signed letters or anything else from the previous homeowner to be able to pay off the first mortgage? Are the balance and all other details about the mortgage not considered confidential between the previous homeowner and the bank?

4- Is there any way to learn the exact balance of the first mortgage before buying the second mortgage if a final judgment has not been issued for the first mortgage?

5- Is there anything else I need to be careful about or take into account when buying a subordinate lien?

[Wayne Brooks]

@Evan Gater
1-no,surplus does not go to the hoa debt…it only goes to 1) any debts junior to the debt foreclosing or 2) the owner

2-yes, the first can be paid off up until the 1st foreclosure auction. It could take a month to get them paid off.

3-no, you are a “debtor in possession” and by law they must give a pay off, and accept it.

4- no. You can guess at it. The foreclosure file may show when the last payment was made, but it was at least 120 days before the filing. You then estimate accrued interest, add some more for fees, a few thousand for foreclosure fees, a few thousand for force placed insurance,check to see if the lender paid taxes, etc.

5- the hoa fees can be hard to estimate also. There doesn’t have to be a lien filed, but if it is, it should detail when the non payment started. Then, the same as for the first….total amount of hoa fees owed, a few thousand for attorney fees.

Understand that very few of these will have any equity and if there is, the pros that analyze and bid at these auctions Every Day, know how to do the math too. There is no strategy they don’t already know.

[Chris Seveney]

Quote from @Evan Gater:

Thank you all for your answers.

I have a couple more questions before buying a subordinate liens. That would be greatly appreciated if you could help me find answers to these questions:

1- So, when I buy a second mortgage, the first mortgage and taxes stay and they are not paid through the surplus. I have no access to the surplus in any way. The surplus does not pay the first mortgage or taxes. How about the HOA liens? Does it not even pay the HOA liens?

2- Let's say, I buy a second mortgage and lis pendens has already been issued for the first mortgage and an auction date has already been set for it. Can I still pay off the first mortgage? Or is it too late? How long does it usually take to complete all procedures with the first mortgage holder after buying the second mortgage to pay off the first mortgage? 

3- Do I need any kind of signed letters or anything else from the previous homeowner to be able to pay off the first mortgage? Are the balance and all other details about the mortgage not considered confidential between the previous homeowner and the bank?

4- Is there any way to learn the exact balance of the first mortgage before buying the second mortgage if a final judgment has not been issued for the first mortgage?

5- Is there anything else I need to be careful about or take into account when buying a subordinate lien?

First, I recommend to get a lot more education on this as the terminology you are using is confusing as you talk about buying a second mortgage which is literally buying a second mortgage, but it sounds like what you are talking about is buying a property at foreclosure auction whereas it is being foreclosed on by a 2nd or HOA. I will explain why this is important below:

1. Whether buying at foreclosure sale or buying the mortgage, any senior liens do not go away. You are bidding based on still owing that amount. depending on the state you need to know what is superior and inferior. think about it this way, you are marrying a person with kids from a prior relationship - those kids do not go away, you are taking them as well.

2. If you are buying a second mortgage, you can pay the first but that would not be a wise decision at all. Say you pay it, stop the foreclosure, you just paid someone elses bill - you saved them for foreclosure - that is a nice donation you made. They keep living in the house. They default again, file bankruptcy and you cannot foreclose. 

3. If you are buying the second lien the seller should provide you with a credit report which then you have the lender and account info from credit report so you could call to get the balance. If you are buying it at foreclosure sale, this is not an option.The first will not talk to you.

4. See #3

5. ALOT. bankruptcy and if little to no equity then you get 100% wiped. lawsuits, QWR requests, probate... 

[Jill Patton]

What you're proposing is really high risk.  

Last year, I won a bid for a second trust that was foreclosing (I've purchased over 450 properties at auction for a REIT and some for myself too).  The first trust had not filed lis pendis.  I estimated the balance of the first trust.  However, when I got the payoff it was $50,000 higher than I had estimated.  The problem is, you don't know what the first trust balance is.  And, the first trust lien holder is not obligated to move quickly.  They could tie you up for months.

I flipped that property.

I came out okay, but I would never buy a second trust again.  Too much uncertainty.

Buying a second trust is super risky.  Also, remember that some communities have multiple HOAs - I've seen as many as three.  And, some HOAs are in country clubs that have mandatory acquisition fees that could be $85,000.  Be careful.