Know Which Mortgage You’re Bidding On

It never fails.  Several times each year, we shockingly watch inexperienced real estate investors come to the foreclosure auction and bid on a junior mortgage which they mistakenly think is a senior mortgage.

For example: Let’s say a $100,000 house is being sold at this month’s foreclosure auction.  The mortgage being advertised for foreclosure reads $20,000.  An inexperienced investor, who doesn’t know the difference between junior and senior mortgages or how to look them up, shows up ready to bid.  The bidding opens at $18,968.35.  The inexperienced investor confidently bids $19,000.  Slowly, all of the experienced investors back away.  They’re terrified of catching a terminal case of “stupid disease,” which has obviously infected this inexperienced investor.

“Going once, twice, sold!” quickly cries the foreclosing attorney.  With that, the inexperienced investor – who stands there with a cocky “what do you think of me now” look on his face – just bought a $100,000 house for $109,000!  You see, this property had an $80,000 first mortgage that this investor – because he didn’t know how to do a Deeds Room lookup – didn’t know anything about.

It’s critical to remember that when buying property at a Georgia foreclosure auction, you must immediately pay for the property in full, with either cash or certified funds.  Second, you are buying the property in an “as is” condition.  Third, all senior mortgages (if any) remain with the property.  Fourth, all junior mortgages (if any) are wiped away.  Fifth, property taxes are not wiped away by a foreclosure.  Sixth, IRS tax liens remain with the property but are wiped away 120 days after the auction.

Now to the big question: How do you know which mortgage is senior and which is junior?  The senior mortgage is the mortgage (a.k.a. Security Deed) that is recorded first in the courthouse of the county in which the property is located.

In distinguishing junior mortgages from senior mortgages, many wrongly think that the amount of the mortgage is the determining factor.  Others mistakenly believe that it is the date the mortgage was made.  Again, to tell which mortgage is junior and which is senior, go to the Deeds Room in the courthouse and look at the date/time stamp on the recorded mortgage (Security Deed).

The only time this isn’t true is when a senior mortgage – even though it’s recorded first – agrees to become “subordinate” to a junior mortgage.

To help you better understand, let’s look at an example.  A property has three mortgages: Mortgage A for $90,000, recorded on 1-7-07; Mortgage B for $20,000, recorded on 6-23-05; Mortgage C for $15,000, recorded on 10-13-07.  Now, put these mortgages in order from senior to junior.

Answer: 1^st Mortgage for $20,000, recorded on 6-23-05; 2^nd Mortgage for $90,000, recorded on 1-7-07.  3^rd Mortgage for $15,000, recorded on 10-13-07.  Remember: The key is to look at the RECORDED date/time.

Is it important to have an understanding of the Deeds Room?  Absolutely!  The Deeds Room is our second office.

Bill & Kim Cook are a husband and wife real estate investing team. They live in Adairsville, Georgia and have been investing in real estate since 1995. They specialize in buying single-family homes, mobile homes and mobile home parks. They also run North Georgia REIA and teach folks how to successfully invest in real estate.