Foreclosure buyers: beware of liens

Home Sale Hindsight

Tara-Nicholle Nelson
Inman News

Q: I bought a property at the auction court house and got the trustee’s deed upon sale. There is an equity lien for $18,000. Who is responsible for that? –Kim, California

A: Let’s handle the hindsight lesson right up front: Before buying a property at the foreclosure auction on the county courthouse steps, it is critical that you conduct a title search to know exactly what other liens and obligations you will take the property subject to, if you’re the successful bidder. Period.

The best way to do this is by paying a title company or real estate attorney to search the chain of title for the property, but hard-core do-it-yourselfers can also search the county recorder’s office file on the home themselves.

Now, let’s work backwards to get to you closer to having an answer to your question about whose responsibility this $18,000 lien is.

When you buy a home at the trustee’s foreclosure sale, what is happening is the trustee is exercising his power under the deed of trust to sell the home in the event the homeowner defaults on the mortgage.

When the homeowner took the mortgage funds and secured an IOU to the lender with the deed of trust, that trust deed was recorded at the county recorder’s office as a lien.

In many cases, though, yours included, that trust deed was not the only lien, or debt that was secured by the property. Second and third mortgages, home equity loans and lines of credit also constitute liens that are recorded against homes.

Liens operate on a system of priority that is generally based on the order in which they were recorded. So, when a first mortgage holder forecloses on a home in California, for example, and the home is sold at the trustee’s foreclosure sale, your purchase of the home extinguishes the trust deed, but also all junior liens — meaning liens that were recorded after the trust deed, with some exceptions.

Notably, if the junior lien holders were not notified of the sale, their rights may not be extinguished by it, in some cases.

So it’s critical for those buying homes at foreclosure auctions to research the chain of title to see if there are any liens senior to the one being foreclosed on.

If there was, for example, a mortgage lien recorded previous to the one that was defaulted and foreclosed on, your purchase would not extinguish that lien — and you, the new buyer, would be responsible for it.

However, even if you were buying the trust deed from the first mortgage, there are a number of other lien types that can be senior to yours. In California (and many other states), any past-due property taxes become liens that are automatically in first position to all other liens, and become your obligation when you buy the property at a foreclosure sale.

Additionally, in some cases, delinquent homeowners association dues, liens placed against the property by the city or county (for example, for unpaid garbage collection fees), and even mechanic’s liens by unpaid contractors who started the work prior to the mortgage lien’s recording — all of these types of liens could survive the foreclosure sale and become the new buyer’s responsibility.

Internal Revenue Service tax liens are always senior to all other liens for 120 days following the foreclosure auction; during that time, the IRS has the right to buy the property from you, the new owner, at the price you paid, if they choose to do so (this is fairly rare in today’s market climate, as the IRS does this only when it is highly certain it can resell the home for enough to pay you and to pay off the foreclosed owners’ past-due federal tax bill).

Additionally, leases, subordination agreements and easements can all survive the foreclosure sale, depending on the specific facts of the matter.

So, if the $18,000 lien at issue in your situation, which you describe as an "equity" lien, is in fact a lien from a home equity loan or line of credit that was recorded after the foreclosed mortgage, chances are good that the lien is no longer your obligation, and that the only recourse that lender has, if any, is against the personal assets of the foreclosed owner — not you.

Nevertheless, it would be a great idea for you to have a quick consultation with a local real estate attorney to ensure that you’re not on the hook under any exception or loophole, and to make sure that your title is otherwise clear.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.

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