The Problem: Confused Consumers

Sounds great, right? Now you don't have to be a seasoned professional investor to capitalize on all the great real estate deals out there. You just need an Internet connection and a bank account to wire funds to your auction account for the required 5% deposit. This means lots of novices are getting involved, but that's a problem. Even though disclosures exist to warn bidders that they should thoroughly research the properties they're bidding on, confused consumers who think they're getting a great deal are sometimes bidding on what might as well be toxic waste.

In fact, the auction websites contain listings for all kinds of foreclosed property. That means not all the listings are first mortgages: some are second liens. In some cases, bidders think they're getting an ownership interest on a condominium, when they're actually getting a worthless second lien that the condo association has levied on the foreclosed occupant for unpaid maintenance fees.

An Example

The best way to understand what's going on is through considering an actual example. Last Thursday, February 18th, a bidding war went on for a listing on the auction web site for Miami-Dade's Clerk of Court. Here's a screen shot of the listing (click for larger image):

As you can see, it shows the assessed value of this property as $213,969. Yet, the judgment amount is only $5,210. To an unsuspecting consumer, it sounds like you could get a great deal. Bidding started at $8,600 at 10:28am. The auction ended at 1:24pm with the winning bid of $20,500.

But this winner was actually a loser. If you perform a records search, you find out that the defendant (foreclosed occupant) has another foreclosure lawsuit pending on the same property by Chase Home Finance, LLC. Yet, the plaintiff in the lawsuit for the auction listing above is Walnut Park Homeowners Assn Inc -- not Chase Home Finance. And you can find that separate lawsuit pending through the records search too.

This implies that a title search will almost certainly show that Chase Home Finance has the 1st mortgage on the property, while Walnut Park Homeowners Assn has a 2nd lien for $5,210 on the occupant's unpaid maintenance fees. Remember, when someone stops paying his mortgage on a condo, he often also stops paying his fees.

The Consequences

So what happens to the "winner" of a second lien? Well, they've purchased garbage. Now, they may be able to move into that condo for a few days, weeks or months. But the bank that holds the mortgage will still ultimately foreclose, wiping out that second lien. She never had an authentic ownership interest. Then, the winner must then vacate the premises, unless she wants to pay whatever the bank demands to wipe out its first mortgage, often hundreds of thousands of dollars.

Think about the insanity of what's going on here. Bidders are paying a premium for a second lien. And it's worthless: a first lien foreclosure will automatically extinguish that second lien anyway. In the example above, the bidder agreed to pay approximately four times the debt incurred by the former occupant's unpaid maintenance fees. Why? Obviously because she thought she was getting an ownership interest in the condo for a steal. Unfortunately, she didn't do her homework.