Be Careful Of Liens When Buying Foreclosed Property
One of the prime opportunities in real estate investing is the chance to buy foreclosed properties. But there are a lot of potential dangers in buying these properties—especially if you don’t understand lien priority and how liens are foreclosed on.
What is Lien Priority?
Absent a law that makes a lien priority, liens get priority in the order they are recorded. So, if property has a first mortgage and a second, the first gets priority.
Some liens get immediate priority, even if they were recorded later, such as tax liens. Tax liens, and some government liens, jump to the “front of the line,” even if they are recorded after other liens.
The rule with liens is that lenders foreclosing a lower-tier or priority lien cannot foreclose on a higher-tier lien—it can only foreclose on liens that are inferior to it. This is where many investors get into trouble.
Why Foreclosures Can Cause Problems
When you buy property that is or was the subject of foreclosure, you may assume that the foreclosure wiped out all the liens on the property and that it is free of any liens. But remember the rule—whichever lender foreclosed can only wipe out (foreclose on) liens that are lower in priority.
Let’s look at a simple example. A property has three liens: Lien one is the initial lender. Lien two is the second mortgage. Lien three is a creditor’s lien of some kind.
The borrower defaults on the second mortgage and it forecloses. You buy the property at the foreclosure sale. But remember, the second lender only foreclosed on the third lien, the creditor’s lien. It did not, and could not, foreclose on the lien of the initial lender, the first lien.
That means that the first lien has survived the foreclosure. It still exists and is still valid.
And now that you’ve purchased it, you own property that is the subject of a first lien. That’s a first lien that you may not have anticipated paying. Even if you try to sell the property, that lien will have to be paid before you are, so it’s eating into your equity in the property.
That lien can also foreclose on you even after you’ve purchased the property, and although you don’t personally ever have to pay that mortgage, you still can lose your property at the foreclosure sale of the first lender.
There Aren’t Many Options
If you do purchase property that has a lien on it even after a foreclosure, you may have the option of paying off the first mortgage (or any priority liens that still exist) in full after you buy the property; if you got a fantastic deal on the property and it’s still worth it financially to do that.
But absent that, you now have a host of problems with your newly purchased foreclosure property, all because you didn’t check to see which, if any, liens survived the foreclosure.
Liens should be checked before you buy or sell property. We can help. Contact the Tampa real estate lawyers at Gilbert Garcia Group, P.A. today.