In the regular transaction between a seller and a buyer, if a seller fails to deliver a clean title, the contract becomes void. No buyer wants to buy a property with someone’s else debt secured against it. It’s the sellers’ responsibility to satisfy all liens secured against the title they are about to transfer. However, this is not how a foreclosure auction works. The simple truth is that failure to research liens before buying a foreclosure can create numerous problems. Here’s how to do your homework in advance, so you don’t regret making that winning bid.
Before we begin, let me ask you not to construe this blog as legal advice – for that contact your own title lawyer. My goal is simply to convince you to investigate the title of the property you’re buying at a foreclosure auction and to equip you with skills to do it right.
Find Out How Many Liens Are On the Property You’re About To Buy
To avoid title issues after a foreclosure auction, you need to know whether there’re any other liens aside of the lien held by a foreclosing lender. A property can have an unlimited number of liens secured against it. Some of those liens are voluntary which means they were created by the contract between the creditor and the borrower. They are your mortgages and home equity lines of credit. There are also involuntary liens. They are the unpaid debts recognized by the court. Such liens include tax liens, homeowner’s association dues, judgments, mechanic liens, and child support.
Research the Nature and the Subordination Order of Those Liens
If you’ve discovered additional liens, you need to understand their subordination order. The subordination order is the order in which those liens are paid. With a typical exception of the IRS liens, the liens recorded first are the first to be paid, regardless of the foreclosing party. If there is not enough equity to satisfy all liens, junior liens might not get paid in full. Some of them might get wiped out altogether. This is why it’s riskier to be in the second position and why the second mortgages are generally more expensive than the first.
Typically, if the foreclosure you’re interested in is initiated by the first lien holder, you don’t have to worry about the liens that come after. Again, one notable exception here is the IRS liens. However, what if the foreclosing party is the second mortgage holder? The answer is that regardless of who the foreclosing lender is, the creditor with a more senior lien gets paid first.
Satisfying the first lien might come in addition to paying a winning bid.
The truth of the matter is that the second mortgage holder rarely forecloses unless there is enough equity to pay their lien. However, if and when it does, satisfying the first lien might come in addition to paying a winning bid. This is why it’s crucial to research liens before buying a foreclosure and not after you.
Liens are actually public information, and you can do preliminary investigation via the government agencies’ portals. For example, in Maryland, you can research liens by going to https://mdlandrec.net. The liens are typically registered under the owner’s name and not under the property addresses. If you don’t have the owner’s name, you can find it out by visiting the MD Department of Assessment and Taxation site. Once you have the name of the owner, you will have to carefully sift through all liens registered under that person to find only those associated with a particular property you’re interested in. It’s tedious work, but again, you’ve got to research liens before buying a foreclosure, or it might cost you.
In addition to doing your own research, read the auction house’s documents carefully. They are not required to disclose any additional liens but often do. Don’t hesitate to call them and ask probing questions. The more active you’re in your investigations, the more likely you’re to uncover any potential issues that might hunt you later.
Another resource to help research liens before buying a foreclosure is your title company. Of course, you don’t want to place a full-blown title order on a property you haven’t yet purchased. However, let your title company know that you’re an investor buying foreclosures and ask what resources they have to quickly research the title before making the bid.
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