When buying Foreclosures and Auction property, do you need to clear all liens on the property?
- June 25, 2018
- Posted by: admin
- Categories: Auctions, Buying Property At Auctions, Foreclosure, Judgement Liens, Judgment Liens, Judgments, Lien And Title Search, Liens, Posts, Preliminary Title Search, Property Title Search, Purchasing Foreclosure Property, Real Estate, Real Estate Post, Title Reports, Title Search
One question posed by many clients when purchasing foreclosure property at auctions is what liens require satisfying prior to closing. Do all liens on auction property need to be paid and cleared before closing on foreclosure and auction properties?
A summarized answer is: whether outstanding liens and encumbrances, i.e., mortgages, homeowners association assessments, delinquent taxes, or other liens must be paid before a clear title can be transferred typically. Depending on whether it is a short-sale, foreclosure/trustee sale, bank-owned or conventional transaction.
In some cases, short sales and foreclosures/trustee sales may require that the liens are paid before a clear title is transferred. How they are paid is usually negotiated by the buyer, seller, or a combination of parties. Please contact the seller or its agent to inquire about any liens on a given property in which you are interested. Ask how the property will be deeded or transferred to the buyer.
For example, will the buyer receive a warranty deed guaranteeing clear title to the property? Or will the title be transferred with the liens, making the buyer responsible for the existing liens? You would also need to double-check for any addendums by the bank or documents supplied by the auction company regarding details of anything that would need to be paid by the buyer at closing. Not typical, but on occasion, this can be the case.
The majority of our clients purchasing a property including foreclosures and auction property use the Property Lien Report, or Full Property/Owner Lien Report located on the property records page of the site for due diligence for liens on auction property.
When purchasing a property at a foreclosure auction, you do not automatically receive clear title free of all liens. The buyer takes the property subject to certain liens that survive the foreclosure, and determining which liens remain is critical to avoid unexpected financial obligations.
The Fundamental Rule: Lien Priority. The basic legal principle of “first in time, first in right” governs lien priority, with the priority typically determined by recording date. All liens have priority established not by the name of the company or county office, but by date and time – first in place is first to be paid.
The critical distinction is between senior liens and junior liens:
In a foreclosure sale, junior liens (those recorded after the foreclosing lien) are typically wiped out if the lienholders were properly notified and had the right to bid at the auction
Senior liens (those recorded before the foreclosing lien) survive the foreclosure and become the responsibility of the new owner
Liens that typically survive foreclosure include but are not limited to:
1. Property Tax Liens. In California and many other states, 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. Tax liens, especially property tax liens, are senior to all other liens and are paid off first when a home sells.
2. Federal Tax Liens (with special conditions). If the foreclosing encumbrance is junior to the IRS’ position, the federal tax lien remains on the property undisturbed by the foreclosure. Additionally, the IRS has a 120-day redemption period from the date the certificate of title is issued, during which it may elect to redeem the property by paying your purchase price plus the mortgages to preserve its claim.
3. Government and Municipal Liens. Government-issued liens superior to foreclosure, including IRS liens in certain circumstances, municipal liens, and code enforcement liens, survive the foreclosure sale.
4. HOA/COA Liens (in certain states). HOA or COA liens survive if the property is located in one of the 22 “super lien” states where the lien is in first priority.
5. PACE Liens. PACE (Property Assessed Clean Energy) liens constitute super-priority liens that take priority over mortgages even if recorded after the loan and remain with the property through foreclosure.
Risks of Subordinate Lien Foreclosures
When a subordinate lender forecloses on a property, the successful bidder can still be liable for senior liens on the property. For example, if you purchase a property at an auction that foreclosed on a second mortgage, the first mortgage remains intact and must be paid, potentially leaving you with a an obligation on top of your purchase price.
Summary
Not all liens are eliminated – Foreclosures eliminate liens, not debts, and only junior liens are typically wiped out.
Senior liens remain your responsibility. Any liens with priority over the foreclosing lien will survive and become your obligation.
Government liens often survive. Property tax liens, certain federal tax liens, and municipal liens frequently survive foreclosure.
Title research is essential. It is not prudent to bid on a foreclosure property without conducting title research to identify all existing liens.
The foreclosing position matters. Understanding whether the foreclosure is on a first mortgage, second mortgage, or other lien is crucial to determining your potential obligations.
The complexity of lien priority and the significant financial risks involved make professional guidance essential when considering foreclosure auction purchases. If you purchase a property at a foreclosure auction and later find there is a government lien or lien that survives the foreclosure auction, you will be responsible.
Please note that this is a summary of general information and does not constitute legal advice or recommendations.