What is Lien Priority? To put it simply, it’s the order that creditors with a legal right to the property get paid in the event of a Foreclosure sale. Why is this important? It’s not if you are purchasing a property in a standard real estate transaction, as the Title Company will make sure all liens are settled before the Title changes hands. However, with more people trying their luck at flipping homes, Foreclosure Auctions have become a popular way to find deals.
Yes, It’s true. I can tell you from first-hand experience; it is not uncommon to purchase property at auction for well under market value. However, if you do not know the Lien Priority and which Liens will survive the auction, you are playing with fire. There are many horror stories of people purchasing a second mortgage and only owning the property for a few days before it is sold to another investor who did his homework.
So let’s look at Lien Priority, as a general rule most investors are only interested in purchasing the first lien at an auction. However, there are cases when buying a second mortgage or an HOA Lien can be a profitable endeavor, but for now let’s just look at the first mortgage. So how do we determine the lien with first priority? Well, some properties are very easy. Simply locate the date of purchase on the deed and if there is an active mortgage acquired on or about the same date, that’s the first mortgage. If another mortgage is obtained at a later date and the first mortgage is then satisfied, the new mortgage now becomes the first mortgage of record. Continue to follow the mortgages in chronological order until you find the first mortgage which is still active. Also, be sure to pay attention to the Assignment of Mortgage, as banks commonly swap mortgages back and forth.
So that part is pretty straight forward, now let’s talk about “Super-priority Liens.” It’s a scary sounding term and for good reason. A Super Lien takes first priority even if the lien does not predate others on record. Tax Liens are a good example of a Super Lien, as you can always count on Uncle Sam getting his money first. Other Super Liens are dependent on which state the property is located. Home Owners Association Liens in most states are first priority because the date of Declaration of Covenants, Conditions, and Restrictions (CC&Rs) usually predates the purchase of the home. Though in approximately 20 states, they are given a Super Lien status. Also, there is an ongoing battle in the courts in various states regarding the thought that Municipal Liens should receive this “Super” status. The case in Florida can be referenced here: https://www.floridabar.org/the-florida-bar-journal/code-liens-are-not-superpriority-liens-is-it-the-end-of-the-debate/
So as you can see, it’s up to you to do your homework and research your state’s current laws regarding lien priority. It’s also a good idea to consult a qualified foreclosure attorney to review the property of interest. Successful navigation of the real estate foreclosure game can be very lucrative; however, just make sure you are aware of potential pitfalls and always practice your due diligence.