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I'm looking into purchasing a foreclosure that is being sold by a trustee at a courthouse auction. I did some research on the property (via RealtyTrac), and it seems like there were quite a few loans taken on the property. From the records there appear to be 3 mortgages (assuming 2 are refinances) the last for 314k. Also, there appear to be 3 HELOCs on it. The last one in 2008 for 64k. Can't tell for sure but It appears that the foreclosure was initiated by the 64k loan which seems kinda strange. I know this scenario is not for the faint of heart, but I want to do my due diligence to figure out if this is a possibility.

Let's say I do a title search, and the title comes up clear without liens. Now let's say that I go to the auction and bid on the property, and my bid is accepted. Am I in the clear once I pay the cash, or is there still the possibility of getting screwed? From what I understand, everything is subordinate to the primary mortgage or loan, any proceeds go to that, and if there are additional funds left, the money goes toward those loans. Also from what I've read the HELOC loans are actually still on the individual even after foreclosure. So other than the possible condition of the structure, and the potential difficulties with owner occupation, are there any hidden pitfalls? If there are no current liens on the property, is there any way that I would owe additional money after foreclosure?

FYI The property is located in NY State ( Colombia County )

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    I think there's more uncertainty here than is already addressed. Foreclosure and public auction is fundamentally mostly a state matter, and varies heavily state to state. I think there's a better chance of you getting a more reliable answer if you note the state of intended purchase. Regardless, if you are new to this you'd be well advised to talk with local experts (such as foreclosure attorney, experienced foreclosure investors, etc.) before throwing any chunks of money around (even a multiple hour legal consultation would be worthwhile given the stakes). – BrianH Jan 19 '17 at 16:53
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You're not responsible for the mortgages on the property - those are agreements between the lender and the borrower.

The risk you have is that the title search missed something. If the seller (i.e., the bank or banks who foreclosed) did not have full rights to sell the property, and there was another party who had a lien on the property or had an interest in it in some fashion, that party could make a claim that would interfere with your purchase. You wouldn't be responsible for the loan, but you might not end up with the title to the property if that happened.

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    Title insurance always seems like a good idea to me... – Joe Jan 19 '17 at 16:08
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    If it turned out that the seller didn't have the right to sell the property, would the buyer be entitled to sue the seller for reimbursement of funds required to clear liens, up to the purchase price of the property? – supercat Jan 19 '17 at 22:30
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    @supercat That sounds like a good question to ask as a question. – Joe Jan 19 '17 at 22:41
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    @supercat even if you are, do you really think you're going to get any money out of someone that has that many unpaid loans? – Kat Jan 20 '17 at 0:00
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    @Kat: In the case of a foreclosure, the seller would be the bank, would it not? – supercat Jan 20 '17 at 0:07
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Your best bet is to pay for title insurance. If you do the same search as the title company, you'll probably find (and miss) the same things they would. By letting a title company do the search and paying for their title insurance, you're covered in case something else surfaces. In a case like this you should be getting a good enough discount, don't take the risk of doing the search yourself.

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    Do I still have to pay the insurance if I don't win the bid? from what I read, the bank with the biggest loan might bid on the property anyway ... would not want to blow $1000 for nothing. – user379468 Jan 19 '17 at 15:41
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    You do not have to pay for the insurance if you don't buy the property but you will still have to pay them to do the search. – David Schwartz Jan 20 '17 at 13:42
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No, if you purchase it with all taxes and leins dismissed, in Pa, it usually goes up for sale 3 times before they drop all leins and taxes. Before you purchase the house, check eith sheriff and make sure they are selling with the above dismissed, otherwise, you can get youself in a real mess.

  • I'm a little confused about the lein terminology ... they can owe money on second mortgage and home equity loans without actually have a lein right? – user379468 Jan 20 '17 at 17:20
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I've done this in AZ. It's important to know which lender is foreclosing, because if it's not the most senior one, then your purchase can later be foreclosed. A foreclosure extinguishes all junior interests, but can itself be extinguished by a more senior interest. I may not have the correct terms here but you get the idea. You should also check to be sure property taxes are current. They are probably being paid by the original lender, but it wouldn't hurt to check.

Make sure you understand the requirements for participation in the auction. In my case they required that I bring a $10K cashier's check made out to myself. On winning the auction I endorsed the check over to the auction company and had 24hours to come up with the remaining funds in cash.

The property I bought had been previously sold at a Sheriff's sale to satisfy a judgment in favor of the Homeowner's Association for delinquent dues. The HOA bought the property at the auction and received a Sheriff's deed. At this point the original owner's possessory interest in the property was extinguished. Nevertheless, the original mortgage and deed of trust were still in place, being senior to the HOA's interest.

About a year later the lender foreclosed on the property and I bought it at auction at the courthouse. This had the effect of extinguishing the HOA's interest, a fact that took some explaining to the water utility to get the account in my name :-)

  • Is it possible for someone to be recognized as a senior lienholder without having officially filed a lien (possibly in response to a notice of sale)? I wouldn't think that any junior lienholder would be allowed to sell a property without fully satisfying all senior lienholders (either through full repayment or an agreement to accept a lesser amount). How could a property be sold without satisfying senior lienholders? – supercat Jan 20 '17 at 15:45
  • that was my understanding as well, but it seems there is some confusion over it, I thought regardless of the foreclosing party, the senior loan holder gets paid. If that amount is not near the amount they are owed then they can bid on the property, but I may have that wrong – user379468 Jan 20 '17 at 17:16
  • Liens generally follow the "first in time, first in right" rule. That said, I believe in some jurisdictions a property tax lien can be senior to other liens, even though they were recorded earlier. That's why I mentioned assuring the taxes are current. Of course, mortgage companies will know this and keep paying the taxes even if the owner stops making mortgage payments. That was the case with the property I bought in AZ. – Eric Nelson Jan 20 '17 at 22:44

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