In my post from last week about ways to avoid disaster when buying real property at a foreclosure sale, one of the “nightmare” scenarios I noted is when “the house is still subject to prior liens or taxes.”
Well, that exact nightmare came true for these California foreclosure auction bidders, who bought their dream house for half of what it was worth…only to learn that they bought it subject to an existing $500,000 mortgage.
They paid nearly $100,000 for a house they thought was worth $200,000 (great deal so far)…but, under the foreclosure laws, they purchased the house still subject to a pre-existing $500,000 lien (not a great deal anymore).
This is the perfect example of my earlier advice: don’t bid at a foreclosure sale unless you do your homework in advance or consult with someone who will do your homework for you.
As a general rule, foreclosure sales wipe out liens behind the foreclosing instrument, but they are subject to any senior liens (liens recorded before the lien being foreclosed). The foreclosing lender didn’t do anything wrong here, and this isn’t that out-of-the-ordinary. Sometimes, the buyer mistakenly bids so much money above a junior mortgage that the lender is forced to pay that money to the defaulted borrowers–not upstream to those senior liens.
Over the next few years, we’re going to hear a lot about people who made a lot of money in foreclosure sales…just like we’re going to see stories like this one.
Hat-Tip: Calculated Risk Blog.