If you’re an investor and you’re looking at a property, such as a foreclosure auction or some other distressed sale type of transaction, you may find that many of these have liens. If a property has been through foreclosure it’s most likely that the prior owner or the borrower may have other financial problems. If someone is being foreclosed then they may have tax liens, child support liens, or other delinquencies. In fact, it’s more likely that they do because they probably stopped paying other expenses before they stopped making mortgage payments. Most people pay their mortgage up until the last minute because they want to have a roof over their head. They may not care too much about their car payment or credit card payment, but a house payment is very important. So, there are most likely other liens that accrue on a property prior to the foreclosure, and knowing about them is an important part of the due diligence in looking at a foreclosure property.
So, what do you do if there’s a lien on a property you’re bidding on at auction?
One way to deal with liens on a property at auction is to factor them into the price. For example, if a property is worth $500,000 and there’s $50,000 worth in liens, then you should only bid up to $450,000 so you account for the lien expense. However, if your financing the property and you’re getting a mortgage, it’s easy to get a mortgage for the property itself, but when it comes time to pay a $50,000 lien you may not be able to borrow that money, So, you may have to come cash out of pocket, which for most investors is not a desirable way to use your cash.
A trick to dealing with these types of circumstances, that many of our investor clients use, is lien mitigation. This works by listing out all the liens that show up on a certified title search prior to bidding at an auction. Then, in advance of that auction, contact each one of the creditors directly, one at a time. Let them know that you are a potential investor, that you want to buy the property and you’re not the borrower, you don’t owe them money, you just want to buy this property. Once that is clearly stated, ask if they be willing to negotiate to get the lien removed from the property. You can also remind them that in doing so they’re not waiving their right to the lien. They are still owed that $50,000 from the individual associated with it, but the lien is not attached to the property anymore.
Sometimes after a foreclosure or auction part of a lien might be wiped out anyways, or harder to collect. In most cases many creditors are willing to take pennies on the dollar just to get some money coming in. The federal government is notorious for taking less money for liens that are owed to them. For example, we have had clients who’ve reported paying a couple hundred dollars to erase a $50,000 federal tax lien.
So, once you have your lien mitigation taken care of you can go to the property’s auction and bid for it knowing that the $50,000 lien will not affect you. The other competing bidders won’t have this valuable piece of information so they’re going to lower their bids to account for the lien. This in turn gives you a competitive advantage over the other bidders at that sale.