Second Liens and Foreclosures: Investors Beware

Although the days of mass foreclosures are thankfully over, that doesn’t mean that buying foreclosed property isn’t a good idea. It certainly can be a good investment and a good way to make good money. But one thing that many investors of foreclosed property aren’t aware of, is how second liens in foreclosure can affect them when they buy foreclosed property.

The Priority of Multiple Liens

As you may know, property can have many types of liens on it. The most common is just a first mortgage, but other government fines, code violations, court judgments, and second liens or home equity loans, can also put liens on property.

When there are multiple liens on property, they are prioritized by when the liens were put on the property. As a general rule, first in time is first in line—the first lien to put on the property has priority.

Because most people take out mortgages when they purchase property, this makes a first mortgage, in most cases, the lien that has priority.

Second Liens in Default and Foreclosure

But oftentimes, other liens go into default—liens that aren’t a first lien. For example, a second mortgage or a home equity loan may not be paid.

That second (or third, or fourth) lien then forecloses. But because that second lien is second, it cannot legally foreclose on the interests of the liens that are “ahead” of it. That means that even if the second lien gets a foreclosure, the first lien isn’t extinguished. It survives the foreclosure, and goes with the property.

You then buy that property at foreclosure. You figure that you are buying that property free and clear of all liens, because after all, the foreclosure wipes out all liens, right? But it did not—the second lienor did not and could not wipe out the primary mortgage.

After You Buy

So you, as the foreclosure investor/buyer, now own property that is encumbered still by a primary mortgage.

That first mortgage can’t ever get a money judgment against you—you didn’t take out the mortgage, the prior owner did. But that primary mortgage can foreclose on the property for nonpayment. And if that foreclosure is granted, you would have lost the property, and with it, all or most of the money you used to purchase the property.

Avoiding the Problem

This is thankfully an easy problem to avoid. A simple title or public records search will reveal whether a foreclosure extinguished some, but not all liens, and will reveal if there are any mortgages that remain unextinguished.

And yes, there may be times where it is still a good deal to purchase property in foreclosure that has a first lien. It may be that you could pay off that first lien when you buy the property, and still get a good deal out of the property.  But either way—it’s best to understand how second and later liens can affect you if you are a foreclosure buyer or investor.

Call the West Palm Beach real estate lawyers at The Law Offices of Larry E. Bray today for help with your real estate needs, whether you are a homeowner or investor.

Sources:

leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0700-0799/0713/Sections/0713.07.html

floridabar.org/the-florida-bar-journal/code-liens-are-not-superpriority-liens-is-it-the-end-of-the-debate/