With constant news reports that foreclosures are on the rise and investment gurus preaching real estate schemes, our office has been getting a lot of calls about how to buy at foreclosures. We don’t teach how to classes on high-risk investing (we leave that to the professionals), but we can educate our clients on the risks.
The primary factor for a foreclosure purchaser, whether equity purchasing or at Trustee’s sale is to understand what liens have priority.
There are a number of different types of liens that can affect a property, such as Abstracts of Judgment, Mechanics’ liens, garbage liens, child support judgment liens in addition to the normal mortgages (or rather, deeds of Trust for California) that you would expect to see.
Smart investors do their homework. Some investors have relationships with title companies and will actually obtain a Preliminary Title Report. What does that guarantee? Well, absolutely nothing. The report is a snapshot of what liens a quick search revealed and how the vesting of title is held. The results are only an offer to sell title insurance subject to those exclusions.
Often those reports will miss Abstracts of Judgment–especially if the debtor has a very common name. Abstracts are recorded by judgment creditors who have obtained a judgment against the debtor. They are in recorded in the county and attach to any property that debtor may own in that county. The Judgments are good for ten years but usually can be renewed. In some cases, the debtor may have filed bankruptcy and discharged the judgment. Does that make the Abstract go away? Not necessarily. If the Abstract itself was recorded before the bankruptcy petition was filed, it is deemed a perfected security instrument that stays attached to the property.
However, once the underlying Judgment itself has been discharged in bankruptcy, it can no longer be renewed so the Abstract itself can never be recorded again once the Judgment has expired.
Will you be bidding on a property subject to a judgment lien ahead of you? If you acquire that property, the judgment creditor will have the power to levy against the property until that judgment is paid. While you could always cross your fingers and hope to outlast the creditor–keep in mind that Judgments accrue interest at the rate of 10 percent per annum. The best approach is to negotiate with the judgment creditor. An attorney can be a good investment at any juncture in the process to advise as to the risk of the transaction or to negotiate a discount on the liens.