Make sure you know if this is a primary, secondary, or association foreclosure!!

There are often auctions that catch my eye and although there is NO WAY I would bid on the property, I am so curious about it that I go to the flagpole just to see what happens.  I watched a very concerning auction last week and was sad to see a third party bidder take the property for well over what I thought was a reasonable price.  Although my Judicial Foreclosure Auction FAQ page tells bidders to "Make sure you know if this is a primary, secondary, or association foreclosure!!" I don't think that advice was followed this week, so I thought I better go a bit further into detail on this.  

Liens are ranked.  I'm sure there are exceptions, but for the most part it is: 
1 - IRS tax liens.  No matter when they are attached to a property, IRS tax liens are always #1.  
2 - State and county property tax liens.  (This is why there is rarely any back property taxes owed.  The mortgage companies keep them paid up so the properties aren't taken at tax auction.) 
3 - Mortgage liens.  There can be one, two, three, etc.  They are ranked in date order.  
4 - Association liens.  

When a creditor forecloses, they can try to remove the other liens by naming all the other creditors as defendants.  Junior liens are removed this way.  Prior or priority liens are determined during the court process.  The way a junior creditor can recoup their funds when they are named as a defendant in the foreclosure is to bid against the foreclosing bank.  I've seen this happen.  I was surprised at an auction years ago to watch a second mortgagee credit bid against the first mortgagee and take the property.  Confused?  

Let's say the house was worth $400k (this was a while ago!) 
The first mortgagee that was foreclosing was owed $250k
The second mortgagee was owed $50k
The first mortgagee bid $250k
The second mortgagee, in order to protect their $50k, outbid the first mortgagee.  
The first mortgagee receives the $251k that was bid at auction, so their note is paid off by the second mortgagee. 
The second mortgagee takes title to the property and sells it for $400k, recouping their original $50k, the $251k they paid at auction, and a bit extra.  

Whew, hope that made sense.  

A second mortgagee could foreclose just their mortgage, leaving all higher-ranked mortgages in place.  Imagine the scenario above if the first mortgagee is still getting paid but the borrower defaults on the second mortgage.  If a bidder goes to auction, unaware that he or she is only bidding on the second mortgage, that bidder could win an take ownership of a property that is STILL subject to the first mortgage.  

The same can be done with an association lien.  If association dues aren't being paid, the association can foreclose on the unit.  This does not wipe out any of the mortgages!  Anyone bidding on an association foreclosure needs to know if there are any mortgages on the property because they do not go away.  They are still owed, and they can foreclosure in the future if they aren't paid.  

Last week's auction that concerned me was an ASSOCIATION foreclosure for a unit at Kona Kai.  Remember, as we learned above, this means it does not wipe out any mortgage liens.  The unit was absolutely trashed and needed a top to bottom gut and remodel.  The average sale for a one bedroom unit at Kona Kai over the last 6 months is $123k.  These are leasehold units, currently charged $323 per month lease rent.  Because I was not interested at any price, I did not pull a title report to see if there is an existing mortgage, but as a Realtor, I can see that a mortgage was used when the unit was purchased.  In Hawaii, when a lender forecloses and names the association, the association by statute can only collect 6 months of back maintenance fees.  However, I have no idea if that is the same for leaseholders.  In this case, the leaseholder - Queen Liliuokalani Trust - was not named in the foreclosure so even if it was possible to wipe out any lease liens, the association did not attempt to do so with their foreclosure.  

The association was owed approximately $68k in past due maintenance and fees.  Typically Mortagees only bid once, but in this case the association started at just $1000 and continued to outbid the other bidders until they hit $65k.  At that point, the winning bidder jumped the bid up to $75k. 

IF the bidder had done his due diligence, he would have known only $68k was owed, and he could have likely won the unit at $69k instead of jumping all the way up to $75k.  Since he hadn't even done that much research, I am concerned that he did not pull a title report to check for a mortgage or call Queen Liliuokalani Trust to see how much they are owed in past due lease fees.  If he is lucky and there is no mortgage and no lease fees owed or any other random liens.  At $75k he will still be cutting it very close if he intends to rehab it for a profit, so any additional liens will make this a loss for him.  

If you want to avoid these types of issues, I'm available for hire to guide you through your auction purchase.  Contact me to discuss.


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