They form a special entity (usually LLC) called the Exchange Accommodating Title Holder (EAT). 

As the 2nd lien holder, again, I'm wiped out entirely.

Normally my bank would be the lien holder on my insurance for a covered property.

‘The only instance I can think of where the passive investors don’t retain further interest in the property would be if they are note holders and not equity owners. 

Liens against the owner, assuming the lien holders were noticed, get wiped out.  

On one of my tax sale purchased, I was contacted by the primary mortgage holder a week after the sale, and they were looking for a discount on the redemption.  

How can I find out if lien holders were served at the time of forclosure?

The 1st lien holder is not going to feel very secure knowing that you are borrowing all of the down payment and closing costs. 

@Neal Weinstein if you transfer title, the title company should notify all lien holders.

In addition to the other advice you received, be especially cautious with Section 8 - if you have a lease in place and take a Sec 8 voucher holder, often you are locked in to charging them only their tenant portion as stated on the HCV contract, not any additional RENT on your lease agreement.