Foreclosure Quirks

The vast majority of residential real estate transactions follow a fairly familiar pattern. Sellers put their house up for sale. Buyers make an offer to buy it. They agree on a price and go into escrow. Disclosures and inspections and financing and a zillion other details fall into place (thanks to an enormous amount of work on the part of Realtors, lenders, escrow officers and other real estate professionals), and the ownership of the property changes hands.

When transactions follow the rules, quirky agreements and exceptions can usually be handled to everyone’s satisfaction. However, if properties go into foreclosure, those quirky agreements can be problematic.

Usually, it’s the beneficiary of the quirky agreement who has trouble. This can happen when parents subdivide their property to allow grown children to live near them, for example, when parents live on Property A and Junior lives on Property B, and the parents provide an easement so Junior and his family can access their property. If Property A goes into foreclosure, Junior can no longer get to his home without a helicopter because the easement isn’t recognized by the lender (who now owns Property A).

Problems can also arise when relatives share resources. Recently, relatives on adjacent properties agreed to share the well on Property A because the well on Property B went dry. They neglected to mention this to the lender, so when the properties went into foreclosure, Property B lost its access to water.

The way foreclosure works is that whoever is owed money gets in line and puts their hand out. The priority of payment (who gets paid first) typically depends on which liens are recorded first. Liens are legal claims against a property and they come in lots of varieties.

Home loans are a type of lien because the real property (house) is collateral for the loan agreement. If the buyer doesn’t pay, the lender gets the house. A contractor can file a mechanic’s lien if he doesn’t get paid for work done on the house. A judgment lien happens if the homeowner loses a lawsuit and doesn’t have the money to pay the fine or damages or lawyers’ fees, so the house becomes collateral and the legal victor is paid when the house sells. Finally, local governments and the IRS sometimes collect unpaid taxes with liens.

Usually, it is the lender who forecloses on a property, but sometimes it’s the government hoping to collect unpaid taxes. Either way, as soon as the property goes into foreclosures, everyone with a lien lines up for payment.

If the property has a special loan called a PACE loan, which stands for Property Assessed Clean Energy, that lean is repaid first with property taxes and utilities like water and sewer. After that, it’s all about the date of the liens.

While it may sound straightforward to determine who gets paid in what order, sometimes it’s not. For example, a mechanic’s lien dated after a judgment lien might actually get paid first because the construction project start date is considered the date a surveyor first looked at the property to help the homeowner plan the project, not the date the contractor got involved.

Basically, whenever a quirky agreement reduces the value of a property and the agreement is made without involving the lender, chances are, the person who benefits from the agreement will lose out. It can get pretty complex and involved from a legal standpoint, but here’s the long and short of it: if you plan to make changes that affect the value of your property, involve your lender. If you have questions, call your Realtor. They can help you make good decisions when it comes to real estate agreements.

If you have questions about getting into real estate, please contact me at or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

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