Investors Should Know About Lien Priority
When the economy starts to go sour, it often does not go sour for everyone. There is opportunity even in a bad economy, and as we learned during the downturn of the late 2000s, often, that opportunity comes in real estate.
If you are a real estate investor, you may be considering buying foreclosed property. But if you are thinking of investment property, be wary of first and second liens.
A first lien, as the name indicates, has priority, and in Florida, as a general rule and with certain exceptions, the first lien taken out on property in time, also gets the first priority. Usually, primary mortgages are the first liens on most properties. Other liens, like second loans, or home equity lines, may be second and third liens.
Why should you as an investor care? Because if you purchase property that is a foreclosure of a second lien, the first lien likely has not been extinguished by the foreclosure (the same often goes with liens as a result of code violations).
That’s because inferior liens cannot extinguish “higher ranking” liens. Foreclosures generally only extinguish subsequent, lower ranking liens, and in second loan foreclosures, there is usually a high ranking first mortgage that survives the foreclosure.
What Happens if You Ignore Liens
If you purchase property at a second lien foreclosure, you potentially are purchasing it subject to the first mortgage, which could be well more than what you can pay, what you want to pay, or what the property is worth. If you bought that property, the first lienor could (and likely will) demand that you pay off the first loan.
If you do not pay it off, you wouldn’t owe the money personally, but the property could be foreclosed upon, and you could lose whatever money you initially paid to purchase the property.
Homeowners and condominium association dues face a particular problem. By law, they survive foreclosure, regardless of their priority. That means that even if a superior lien, like an initial mortgage, forecloses, and wipes out all inferior (subsequent) liens, the HOA does survive, and remain due and owing.
Associations know this, and by law, you along with the prior owner, owe the dues that have accrued. In other words, you as the new owner would owe unpaid, back owed association dues, even though they were assessed, accrued, or charged, long before you were the owner of the property. Although the law is a bit unsettled, there is even some authority that says that you could also owe interest, or attorneys fees assessed as a result of those back owed association dues.
Do Your Homework
Usually, a lien or title search or a public records search can reveal the existence of all liens. Any investor should make sure to review the public records, to make sure they don’t lose their money to a foreclosure after buying the very same property at foreclosure.