Lien Foreclosure Sales

Say you’re thinking about buying a house at a sheriff’s foreclosure sale. However, there is a judgment lien on the property, as well as the mortgage. How will these affect the sale?

A foreclosure sale takes all of the liens off a piece of property, whether the lien exists from the mortgage or from a judgment. After the sheriff’s sale, a sheriff’s deed is given to the buyer, who gets the house or land free and clear of any liens – at least those that were on because of the previous owner.

Sales of homes at auction that do not bring enough to cover all of the previous owner’s debts are increasingly common. The money paid by the buyer (after the sheriff takes out his fees) first goes to any tax liens, then to any claims for unpaid employee wages, and, finally, to all other liens in order of their priority. The purchase money mortgage, if there was one, will come first, which is why it is sometimes referred to as a “first mortgage.” After that, the priority usually goes in the order that the liens attached. For example, if there was also a home equity line of credit, or HELOC, as well as a judgment lien, it would matter which came first, because any sale proceeds left after the first mortgage would go to the earlier lien first. When the money runs out, any party still holding unpaid liens against the former owner still has a personal judgment for the unpaid balance.

For the new buyer, however, there are no worries. The sheriff’s deed wipes out all the existing liens, and the buyer is absolutely not liable for a penny on any of those debts. If the buyer had to take out a mortgage to get the money, the mortgage itself would be dated so that it came no earlier than the sheriff’s deed. For this reason, a judicial sale or auction is the one situation in which you can confidently buy a house without a title search. Whatever is in that title search is irrelevant! In any other situation, however, buying property without a title search is a very bad idea, because what you don’t know can absolutely hurt you.

Case Studies: Lien Foreclosure Sales

Case Study 1: The Smith Property and Lien Foreclosure Sales

Smith Property, owned by John and Sarah Smith, is being sold at a sheriff’s foreclosure sale. During the sale, all liens attached to the property, including those from mortgages and judgments, are removed.

The buyer, Michael Thompson, receives a sheriff’s deed, which guarantees ownership of the property free and clear of any liens that were placed by the previous owner, John Smith. This case study emphasizes the buyer’s protection and the lack of liability for the previous owner’s debts.

Case Study 2: Auction Sales and Debt Prioritization

Robert Johnson is the buyer and when the buyer’s payment is allocated, tax liens and unpaid employee wages take priority. The remaining funds are used to satisfy other liens, starting with the “first mortgage,” held by Amanda Anderson.

Any additional liens, such as a home equity line of credit (HELOC) or a judgment lien, are considered based on their order of attachment. The case study emphasizes that Robert Johnson is not responsible for the previous owner’s debts and underscores the importance of conducting a thorough title search in property transactions to avoid potential issues.

Case Study 3: Buying Property at Auction and Title Search

Emily Davis is the buyer that in a foreclosure sale or auction, the buyer obtains a sheriff’s deed that clears all existing liens on the property, making a title search unnecessary.

However, it also underscores that in any other property transaction, such as a traditional sale, a comprehensive title search is crucial to identify potential issues and mitigate risks. The case study highlights the importance of conducting due diligence to ensure a smooth and secure property transaction.