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Should I buy a property at a foreclosure auction? 

Posted by Katherine R. Kyle | Dec 30, 2021

Should I buy a property at a foreclosure auction? 

Proceed with caution.

I received a call from a gentleman that recently purchased a mortgage foreclosure property.  After his purchase, he received a notice of foreclosure that he needed to pay $1,000,000 that was owed.  He said, “Didn't I get the property free and clear from the sale?” 

The simple answer is no.

Florida law provides a subordinate lender can foreclose on a property and the successful bidder who purchases the property can still be liable for other liens on the property. 

Most recently, the gentleman purchased property at a foreclosure auction for $800,000 that had an estimated value of $2,000,000.  He thought he just got the deal of a lifetime and the document said it foreclosed all liens and encumbrances.  Then, he received a foreclosure notice demanding $1,000,000 to be paid on the first mortgage.  The purchaser instead of having $1,200,000 in equity just went to having $200,000 in equity and he now needs to figure out how to pay the $1,000,000 owed on the first mortgage since he really wants to keep the property to rent out.

It turns out he bought the property at a foreclosure auction that foreclosed on the second mortgage on the property.  After he purchased the property and the second mortgage was paid off, the first mortgage filed a foreclosure auction to recoup the funds it was owed on the first mortgage.  Therefore, the language in the foreclosure that said the court foreclosed all liens and encumbrances does not mean the property is free and clear of any title issues.  In this case, the first mortgage was not foreclosed and stripped from the subordinate loan foreclosure.  This meant after he bought the property at foreclosure auction, the first mortgage filed a foreclosure action against the property.  The first mortgage on this property was $1,000,000.

Many times, the first mortgage is worth as much as the property or a substantial amount and, therefore, you as the buyer can end up underwater because you purchased it for more than it's worth.  When you add the $800,000 you paid at auction and now $1,000,000 that is owed on the first mortgage, you actually paid 1,800,000 dollars for the property. 

If you are considering buying a property at a foreclosure auction, consider the following before proceeding:

  1. There could be liens, claims, or encumbrances on the property.
  2. Get a title report to make sure there are no other liens, claims, or encumbrances on the property.
  3. Know the total amount owed on any other lien on the property.
  4. Proceed with caution as foreclosure sales do not have any guarantees or warranties.  You buy the property as is.
  5. Once you buy the property, get title insurance.

Most importantly, remember if you are the successful bidder at a foreclosure auction, you will take title to the property subject to any existing mortgages and liens.  If the mortgage or lien is not satisfied, the lender will foreclose on the property.

In the client's case discussed above, he still has equity left in the property and the client has the additional funds to be able to keep the property.  This is not always the case.  In this case, he has hired Kyle & Kyle Law to negotiate with the lender to try to work out a short payoff or a payment plan.  If successfully negotiated, he will pay off the lien on the first mortgage for less than currently owed, less than the $1,000,000.  If this isn't successful, we can negotiate a payment plan that will reduce the principal balance, interest, late fees, attorney's fees, and court costs that have accrued during litigation and nonpayment.  Another option this client has is to refinance for $1,000,000 to pay off first mortgage.  This option would prevent additional late fees, interest, attorney's fees, and court costs from accruing.

While negotiating these strategies, Kyle & Kyle Law is also defending against the foreclosure case in court.  Defending the case in court will allow the client to have additional time to work through his options to come up with the best possible outcome for his future.

If this client did not hire Kyle & Kyle Law to defend his case in court and negotiate these options on his behalf, the first mortgage would have foreclosed and took the property to pay off the amount they were owed.  Once the property was sold at the foreclosure auction, the first mortgage would have been paid $1,000,000 and if there were surplus funds, he would receive them up to what the property sold at auction, minus the $1,000,000 owed.

Many people who buy a home at a foreclosure auction, do not have an extra $1,000,000 lying around to pay off an additional loan on the property or the ability to refinance.  Therefore, proceed with caution if you are thinking about buying a property at a foreclosure auction. 

Contact Kyle & Kyle Law at 877-595-3529 if you have received notice of a foreclosure on a property you recently purchased at a foreclosure auction.  You have options and we can help you understand them and find a way forward. 

About the Author

Katherine R. Kyle

Katherine grew up in the beautiful mountains of Western North Carolina in the small town of Sylva.  At the age of nine her parents were divorced, and it was then that she aspired to pursue a career as an attorney.  After high school, Katherine attended Western Carolina University in Cullowhee, ...

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