If you’re looking to get rich off foreclosures, let me tell you about the guy in California who bought a billion dollar property for $100k….
I’m talking about this New York Times story, subtitled: “Did someone really walk into an auction and buy the priciest piece of real estate in California for $100,000? Well, yes and no.”
If you’ve dealt with foreclosures, then you’ve heard the story about the guy who happened to walk past the courthouse foreclosure with no bidders, knew the property being sold, bid $100 for the house, and won a house. Great story, right?
The reason the New York Times is talking about this famous 157-acre plot of land in California is that it was initially listed for sale for one billion dollars and then was cut to a more reasonable $650 million asking price. Jeff Bezos, Tom Cruise, and Brad Pitt have all kicked the tires on buying this property.
So, on August 20, when the the property sold at a foreclosure sale for the high bid of a mere $100,000, people noticed.
What a steal, right? Not so fast, the story continues:
That seemingly bargain-basement price came with a condition: that the estate forgive the $200 million loan. Any other buyer would have had to pay at least $200 million at auction to cover the debt.
This reminds me of my “buyer-beware” foreclosure post from 2010.
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).
With this in mind, always remember that a foreclosure sale will be subject to senior liens.
For that California property discussed above, the $100,000 bidder was buying the property, but subject to that $200 million lien.
To be clear, the buyer didn’t become obligated or assume that debt; it just means that the first mortgage still has a valid claim and lien on the property, and the foreclosure bidder had better make arrangements to pay off that debt…or the property gets foreclosed a second time.
But, on paper, it’s still a pretty good deal. I mean, the buyer can frantically try to sell it and, if they can sell it for half of the last list price (i.e. $325,000,000), that’s still a great day at the office.