Buying foreclosures?

Question

I've been reading up on investing in foreclosures and have a question to ask.

A home owner's house is worth $110k, about to foreclose has a first and second mortgage, for simplicity lets say $80k and $20k respectively. If first bank has to foreclose on the house and sells it at auction(owning only 80%), and someone buys it for $80k, what happens to the second loan?

Will the second bank holding the 20% equity loan lose the $20k?

So if the second bank does NOT show up, investor would own the house at the paid price of $80k?

Also - "read the fine print" the stated mortgage is the face value not paid down amount. For example original 1st was $80k, and auction starts at $80k. If a smart investor knows the CURRENT balance is $60k, can he BID at $60k even if the start bid is $80k?

Answer 1

There have been some good answer.

The bidding at the auction could go above what the lender in 1st is owed. Note that the lender in 1st can recover back interest, legal fees and other costs so the amount might be greater than just the loan balance.

The lender in 2nd might start foreclosure before the lender in 1st. More likely when the 2nd was in default earlier.

The lender in 2nd could bring the 1st current and then start a foreclosure action. The lender in 2nd has an automatic right to do so I believe but even if the right is not automatic it will be spelled out in most loan agreements for a 2nd.

In the simple case as you asked the lender in 2nd is effectively wiped out. More correctly they lose their lien on the property so the note is not likely to be collected on.

There are other legal rights in specific cases. You seem to have the general idea.

Answer 2

I've never participated in buying a house at the courthouse steps. Here is what an investor who does do it told me:

The first lien holder (the one foreclosing) must notify all other lien holders of the foreclosure, giving them an opportunity to bring the first current and take it over. If they elect not to do anything, those secondary liens get wiped out. If the trustee of the first lien holder does this correctly, then at the courthouse steps you can buy the house for the highest bid over $80k. And owe no more.

HOWEVER - It's important to confirm that this was all done legally, timely, return receipted, yada yada, etc. OR ELSE the secondary liens still exist and the new buyer owes them. Confirming this stuff with the trustee that's doing the foreclosure (prior to the day of auction) is part of the due diligence everybody talks about.

The scenario where the house is worth 110 and all that's owed on it is 60 or 70 doesn't happen alot - and when it does, an investor buys it from the owner prior to the courthouse steps.

Answer 3

In reality yes, That is why the holder of the 20K note will bid and bid until the bid is high enough to pay both mortgages.

That is why I as a second position holder always ask the first position holder to sell me the first position note before they take it to foreclosure. Please note that the mortgages listed is the face value and not the paid down value. A mortgage with a $100K start may have been paid down to $75k, you will not know until you read the fine print.

Answer 4

They still have a note with the original owner for 20K; the real estate no longer supports the debt. Which is why a title search and first lien position is key; all foreclosure monies start by paying off the first lien position, then the second......