What happens when JR lien holders don't play ball

We all know that when a property is foreclosed upon that more often than not all Jr. Lien holders lose everything. This of course is why most of the time it is possible for us to negotiate the second lien holder’s payoff to $1,000. But what happens when they refuse to accept that much of a loss?

When a negotiator begins negotiating with the lien holders it is becoming increasingly more common for the primary lien holder to require that all Jr. lien holders accept no more than $1,000 as a short sale payoff for their liens. If they do not, then often the primary will not accept a discount on their own lien. This effectively kills your short sale deal with that property.

Unless there is a neutral ground where both primary and Jr. lien holders can agree on their payoff amounts there is little you can do to keep the deal alive. Once solution I have found that works is by making a deal with the primary that essentially cuts out all Jr. lien holders. This method requires documentation from the primary lien holder that indicates their acceptance of the agreement. This document is important because it allows you more control over the situation at the Sheriff sale.

When a lender forecloses the property is auctioned off on the court house steps or in the court house. For the purpose of this writing I will be referring to the Judicial Foreclosure process.

The Agreement

This agreement best works when you have already negotiated a payoff number with the primary lien holder. If you have not, you will need to do so.

Inform the primary lien holder that the Jr. lien holders will not accept a short pay within the acceptable amount in which the primary requires. Because of this a short sale is not possible and you will not be able to purchase the property unless the primary is willing to honor their short sale payoff amount upon the Jr. lien holders claims on the property being void. Other than accepting a payoff and willingly providing a release of the loan the only other way I know of is for the property to be sold at Sheriffs sale.

The agreement with the primary is to honor the negotiated payoff amount of ‘X’. At the auction the primary lender will have a representative present to bid on the property. This is generally someone who works for the lenders attorney filing the foreclosure. The lender will inform the attorney, which should inform their representative at the auction, of the situation. If they fail to do so, this is when you would present that individual with the letter from the lender.

You will be bidding on the property at the auction for the amount you agreed upon with the primary. The lenders bidding representative should not bid against you, or at least not past the specified amount, if you are sure to speak with them prior to bidding.

Upon successfully winning the bid at the auction, all Jr. liens are removed from the property’s deed and the primary get the amount they agreed upon through your negotiations.

The down side to this is that you must follow all auction rules. Also, it doesn’t help the homeowner out much. They still get the foreclosure on their record because it went through the foreclosure process and was bought at auction. Because of this, this method is only for those who are focused on obtaining an investment property, or owner occupied, and NOT for those who are focused on the homeowners best interest.

Have you successfully used this process or has it been challenged by other bidders at the auction? It sounds like auction rigging or collusion imo.

The representative who bids on behalf of the bank is provided with a number to bid up to for each property. (It is the foreclosing lenders decision as to what that number is.) One of their job is to make sure they bidding goes up to the desired number, this is why most bank buy back the properties at auction rather than an investor getting them…because the number is always more than the property is worth.

If the Jr. lien holders do not have someone there to bid on the property also, then they are out of luck. It is their right to have the chance to also bid on the property. If the sale amount is not enough to cover the primary, taxes, fees, AND the Jr. liens, then they get nothing.

To the best of my knowledge and my research, there is no indication that this is illegal. But just to be on the safe side I will not answer your question as to my success or use of this method. :biggrin I’m not “rigging” anything by doing this. Everyone has a fair chance to bid on the property at the auction. I only ask the primary NOT to bid above what they have agreed to accept in a short sale offer.

As I said, this is ONLY if the primary lender is already willing to accept your offer and the Jr. Lien holders will not. If by chance (Very slim chance) the Jr. lien holders to show up, and bid against you, then you will have to play it by ear.

At an auction the item (in this case, property) goes to the highest bidder, plain and simple. It’s also difficult to try to “hide” a bid from anyone, as everyone bidding is there. See no way to “rig” this deal.

If you have convinced the lender to, let’s say, take $70K on a $100K balance, and at the auction, the lender’s man stops at $69K and you bid $70K. At that point, ANYONE else at the auction as the SAME opportunity as you to get the property for less than the $100K. In short, you could have very well negotiated a deal for SOMEONE ELSE.


This is true. Obviously this only works if nobody else bids on the property. My experience in bidding at the Cleveland Ohio Sheriff Sale there is very little interest in others bidding on properties they have not inspected. Unless I or the homeowner give someone the opportunity to inspect the property prior, they don’t get that chance.

I have yet to meet someone who blindly bids on properties. The only person I have ever bid against is the representative from the lender. The only time I have people, other than the bank reps, bid against me is when the subject property is commercial.

Either way, bidding at a Sheriff auction is a risk. I do my best to control as much of the situation as possible. So far, I have been very fortunate.

I would prefer to work the SS since it is in the best interest of the homeowner as opposed to allowing it to go to auction.

Get a preliminary letter from the 1st confirming they will not allow more than 1k to the 2nd. If that doesn’t work then submit docs to the first and get the actual approval, then submit the approval to the 2nd. Be sure to include any other docs such as the NOD and attorney letters etc. Keep leaning on them as you approach the auction date.

If that doesn’t work but the deal still makes sense then you and/or the homeowner will have to dish out the difference between what the 2nd will accept above the 1k. If you are not willing to do that then the deal may not make as much sense as you thought anyways.

I agree with deaak. The way we usually handle junior lien holders that will not accept the standard $1000 is to pay them out of proceeds from our side of the transaction. If they will take 10% of their amount and the 1st is willing to shor the transaction and that number is not good enough to do a deal there then there really is not deal there in the first place.


Don’t highjack a thread. You should post as a seperate question.