Buying a Second at a 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?

[Don Konipol]

When a property is foreclosed on it goes through a PROCESS that ends with a public auction of title of that property. The lien that has been foreclosed on is wiped out. Any superior liens (which are liens that have been filed with the county clerk at a date before the lien being foreclosed on was filed are not extinguished, in other words they are still in effect. Additionally, in all states, any property taxes owed, including any tax liens, are considered superior to an other liens and remain in effect. US Treasury liens, usually, IRS, if file after another lien was filed, can be removed from property attachment via a foreclosure IF the government agency holding the lien was given sufficient notice as determined by Federal law. Whether HOA liens are extinguished or not depends on state law, and the exact nature of the HOA lien.

To make matters still more interesting, many states, especially regarding residential property, have statutes allowing property owners a period of time to redeem the property after the foreclosure auction takes place.  So, the former owner may have anywhere from 6 months to 2 years to reimburse the winning bidder his cost plus interest and regain ownership.  During this period of time a sale of the property is almost impossible as no title company would issue a title policy and no buyer would pay anything over what the winning bidder paid if even that.

Title policies can be difficult, if not impossible to get even without a redemption period in effect.  Many title companies won’t insure title until the statute of limitations has run out on some, or all legal actions that may occur.  These things are for example a owner/borrower claiming “wrongful” foreclosure; the borrower having file a bankruptcy that the parties missed; a potential claim for work performed on the property but unpaid (mechanics) lien; work paid for but for which the contractor did not pay his laborers ( workman’s lien) and any other basis a fee hungry attorney can think of to file a lawsuit.  Remedies may be available, such as petitioning the court of jurisdiction to confirm ownership; however any legal action is usually a pretty large added expense.

As others have mentioned, it’s almost a “classic case” when a person with little or no experience, knowledge or expertise in the real estate foreclosure/bankruptcy/mortgage world buys a property at auction.  Yes, you can get lucky at get a good deal with no problems, something like winning the lottery.  Foreclosure auctions in major metropolitan areas are attended by a number of “professionals” who have been doing this for a long time; they are knowledgeable, experienced, and have enough capital to buy numerous properties so that they engage the power of diversification.  The would be owner/investor would have a much better chance of success in a rural county IF  they were to educate themselves and do a thorough search to determine what liens are going to remain with the property after the foreclosure auction.  For those without experience who still want to try to bid at a foreclosure auction should engage the services of a real estate attorney to obtain, view and evaluate a title report and lien search, as well as get a handle on the potential for future litigation.