Courthouse Steps Question

[Jason Green]

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.

[Brian Burke]

@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.