There are a number of benefits to buying a foreclosed property. In fact, many real estate investors use foreclosed property as their main source of real estate investing income. But there are also some dangers or risks when buying foreclosed property; risks that, if you are not careful, can end up getting you into trouble as a foreclosure buyer.
Liens and How They Work
One of the main potential problems when buying a foreclosed property is the existence of liens on the property.
Ideally, a foreclosure is supposed to wipe out any liens on the property so that when you buy the property, you are buying it free and clear from liens (outside of any that you put on in order to actually buy the property). But that isn not always the case.
That is because there are often multiple liens on property, and those liens have priority over one another. Generally, a lien that is recorded first has priority over other liens that are recorded later on. So, for example, if you buy your home and take out a mortgage with a lien on it, and then two years later, a judgment is entered against you, resulting in a lien on your property, the mortgage would have priority since it was recorded and existed first.
Some types of liens “jump the line” and get priority no matter when they were recorded. For example, a federal tax lien will almost always have priority, even if it was recorded well after other liens were recorded.
Liens and Foreclosures
This is all important because if you buy a foreclosed home, you have to see which liens were eliminated—foreclosed on—in the foreclosure.
By law, an inferior lien cannot foreclose on or eliminate a superior lien. That means that if you are buying a foreclosed property that was foreclosed on by an inferior lien, the superior lien(s) could (and probably do) still exist and be legally enforceable.
As an example, let’s say you buy a home that was foreclosed on by a second mortgage. The second mortgage’s foreclosure cannot wipe out or eliminate the first mortgage. When you buy that property at foreclosure, you are buying that property subject to and with an existing, enforceable lien by the first lender.
The End Result
Practically, that means that the first lender could always foreclose on you. While you would not owe any money, personally, as you did not take out that loan, you could lose any money you put into the home as a down payment or equity, on top of, of course, losing the home itself in foreclosure.
In most cases, a real estate attorney can do a title search to see if the foreclosed home did, in fact, wipe out all liens or if any of them still exist. If any still exist, you may have to choose between paying them off yourself or just letting the property go.
Contact our New Jersey real estate attorneys at The Law Office of Agnes Rybar LLC today if you have questions about the purchase of any type of real estate.