Junior and Senior Lien holders

Tax Liens & Mortgage Notes
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Junior and Senior Lien holders

Jimmy H.
Lexington, KY · Member since 2010 · 315 posts · 133 votes

It is my understanding that junior lien holders essentially get wiped out if the owner of a tax liens forecloses on a property.

Example: House worth 100k with a 1st mortgage of 75k, I buy the property tax lien for 5k, hold it for a year (legal holding period before you can foreclose in my state), and when I foreclose the 75k mortgage is wiped clean and I own the property free and clear?

I guess the borrower still owes 75k but it is not longer collteralized by the property?

Is this how it owrks, that all JUNIOR lien holders get completely wiped out and you own a property free and clear for 5k?

Lastly, what lien are senior to property tax liens? IRS and what else? Is it just any federal lien?

-It seems a bit odd to me that a 5k lien wipes out a 75k mortgage. It seems more reasonable that you would foreclose and be the first to collect on your money, then the mortgage holder could seek repayment from whatever equity is left.

How does this work?

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Loc R.
Note Investor · Pasadena, CA · Member since 2009 · 849 posts · 544 votes
15y

A simple rule of thumb that I live by: the 2 most important people in your financial life are going to be your accountant and your attorney. They will always be worth their fees.

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  • Adam Tracy
    Real Estate Attorney · Naperville, IL · Member since 2008 · 26 posts · 4 votes
    15y

    Your assumptions are correct, I believe. In all the states I am familiar with - most of them, a tax lien takes priority. Hence why lenders will pay taxes during foreclosure. I have had this happen in my practice before - the mortgage debt becomes unsecured debt. Most lenders will then sue for the money owed but obviously cant foreclose.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    Laws and procedures vary state to state. Here in CO, junior lienholders have redemption rights. If you, as the senior lienholder, foreclose then then junior lienholder (the first mortgage) would be able to redeem the property. They would pay you the amount you are owed, plus a tiny bit of interest, and then take the property. In your example, they would very likely redeem. Even if they took a net loss, it would be less than the full $75K they're owed.

    Further, they would have to be informed during the foreclosure. They might choose to pay you off up front rather than let you proceed to foreclosure.

    Assuming you are talking about Kentucky, though,you need to understand the exact procedures used there.

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  • Jimmy H.
    OP
    Lexington, KY · Member since 2010 · 315 posts · 133 votes
    15y

    Thanks for the responses, but you essentially both gave me different answers - that is my confusion - do you get the property free and clear or does the junior lien holder have some remedies to seek the leftover equity?

    And yes I plan on buying in Kentucky. I have found state websites with many details, but can't seem to find the nitty gritty anywhere.

    No websites, books, BPers, state info, etc. will give me the specific answers I want and I am frankly quite frustrated by it. I do not want to pay a lawyer for his time, and if I do I have trouble finding a tax lien lawyer.

    For starters, what type of law practice involves tax liens? Maybe i can start looking for a lawyer that way

    recommendations?

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    We're not giving different answers. We're answering different parts of your question. Yes, tax liens are generally senior to mortgages. So, a tax lien takes priority over the mortgage.

    The way junior liens are handled varies widely from state to state. Here in CO, and AFAIK, in many states, a junior lien can start foreclosure proceedings. A successful foreclosure by a junior lien won't wipe out the senior lien, but will take the property. The new property owner is now responsible for the senior lien. That if doesn't make sense to do that if you're the holder of a $25K HELOC behind a $75K first on a property worth $100K. It makes a lot more sense if you're the holder of that $75K first behind a $5K tax lien.

    The reason you're having trouble getting good answers is that this is a complex question that's state specific. I'm not a lawyer. I think Adam is, though he lists his location as IL. You need someone who's thoroughly familiar with KY law and the local customs. You're about to plunk down money to buy that tax lien. Plunk down $500 (or less) for some time with a lawyer familiar with laws and procedures in your area.

    Or, if you can, find someone local. This sort of thing is a pretty frequent topic at our local REIAs. I've attended several presentations in the last few years where foreclosure processes were the main topic of discussion, and the presenters were people who had been though the process and had paid for legal advice. If you can't find someone like that, you're really stuck with paying for a lawyer.

    I would start calling and asking if they deal with real estate lax, real estate taxes, and foreclosure procedures. If they say no, ask if they have a recommendation for someone who does.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    15y

    What you seek is tough to do, due to what Jon has already stated - this stuff varies all over the place.

    I'm in PA, and PA is a tax deed state. In PA, there are two different ways to get a tax deed that I'm aware of, and each of those ways has what's called an "upset sale" and a "judicial sale". For the "upset sale", you take the property subject to all existing liens and encumbrances of record; if a mortgage pre-dates the date of the tax lien, that mortgage remains in place for the purchaser to pay off! In the "judicial sale", not only is there a court order to sell the parcel for back taxes owed - there is a court order that wipes out liens of lower priority.

    Figure out what state you're trying to do this in, learn the laws that address this for that state, get an experienced attorney in that state to confirm your understanding of those laws - and you'll at least be aware of what you could be up against.

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  • Loc R.
    Note Investor · Pasadena, CA · Member since 2009 · 849 posts · 544 votes
    15y

    A simple rule of thumb that I live by: the 2 most important people in your financial life are going to be your accountant and your attorney. They will always be worth their fees.

    1Reply
  • Robert A.
    Longmont, CO · Member since 2011 · 2 posts · 0 votes
    15y

    "Laws and procedures vary state to state. Here in CO, junior lienholders have redemption rights. If you, as the senior lienholder, foreclose then then junior lienholder (the first mortgage) would be able to redeem the property. They would pay you the amount you are owed, plus a tiny bit of interest, and then take the property."

    I'm confused on this. I filed for a Treasurer's Deed dound in El Paso County (CO). Does this mean that a junior deed could foreclose and just pay off my lien? Could they do that even after I get the Treasurer's Deed?

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  • Jon Fadil
    Note Investor · Elko, NV · Member since 2011 · 9 posts · 2 votes
    15y

    They could redeem your lien anytime before the treasurer's deed is issued. After it is issued, they are technically wiped out; however, they may fight you in court to get the deed overturned if they feel they were not noticed by the county appropriately.

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