Motivation(s) of different lien holder positions at sherriff sale

[jmc]

This all made sense to me at one time but I've got a little "vertigo" in my thinking right now - set me straight please!

Particulars:

1st lien payoff = 256k

2nd lien payoff = 56k

Sherriff's sale set for November.

Sherriff's appraisal on their roster is 249k.

Actual value is closer to $295k (according to actual nearby comps within last 30 days, been trying to sell for over two years though so who knows).


In a traditional real estate sale, if their were multiple liens they would all have to be satisfied (i.e. paid off) in order to provide clean title to the Buyer.... correct?

If - and I guess this is the heart of what I'm trying to wrap my head around - when the sherriffs sale occurs and the 1st lien "buys" the house, wouldn't they have to payoff the 2nd lien in order to have a clean title?

What's the motivation of the 1st lien to bring the sale? Or is there one because they would be using their own money to buy something that they already own?

Is it a game where they're trying to force the hand of the 2nd lien holder to purchase the property? Thereby recouping a good chunk of their balance? If that occured, then the 2nd lien BECOMES the 1st lien and we start the process again?

Good chance I may not be asking the right question but any feedback is appreciated

[justbroke]

In a traditional real estate sale, if their were multiple liens they would all have to be satisfied (i.e. paid off) in order to provide clean title to the Buyer.... correct?

In a traditional sale, yes... unless there is an agreement done through a short sale; for example, all lienholders agree to release the mortgage/note under certain conditions. Usually it's for some sort of payment. It's typical, these days, for the second lienholder to want a few thousand in a short sale.

If - and I guess this is the heart of what I'm trying to wrap my head around - when the sherriffs sale occurs and the 1st lien "buys" the house, wouldn't they have to payoff the 2nd lien in order to have a clean title?

No!!!!! It's a foreclosure. The first lienholder gets a "credit" of the balance of the first mortgage and can "credit buy" the home up to that value without taking a penny out of their pocket. A smart 2nd or junior lienholder will check to see if there is equity "above" the value of the subordinate liens (1st lien in this case) and if so, the 2nd lienholder may purchase the property. However, the 2nd would need to come up with the balance to pay off the first lienholder! This usually won't be done unless there is some great equity there and it's easy to get to.

What's the motivation of the 1st lien to bring the sale? Or is there one because they would be using their own money to buy something that they already own?

Motivation is solely to recover as much money as possible "now" and reduce how much the loss is. Waiting could improve the recovery, but waiting could also cause the property to depreciate more causing a larger loss.

Is it a game where they're trying to force the hand of the 2nd lien holder to purchase the property? Thereby recouping a good chunk of their balance? If that occured, then the 2nd lien BECOMES the 1st lien and we start the process again?

No. It's not game for the 1st lienholder. The 1st lienholder yields the power. (Unless there are other super-lienholders or the State has strict foreclosures.)

For the average person, you don't really care about what the lienholders do to protect their interests. However, in the grand scheme of things these days, most homes are underwater and there is nothing for the lienholders to do except dump and run.