Regardless of how much a property sells for at foreclosure auction, the creditor(s) are only entitled
to receive as much money as they are owed. If there are multiple creditors and the first mortgagee is the one foreclosing, any funds from the auction exceeding what they are owed trickle down to the secondary and tertiary mortgagees.
If a second mortgagee is foreclosing, a successful bidder at auction is responsible for paying, above and beyond the auctions sale price, the outstanding amount due to the first mortgagee.
She/he is not responsible for the amount due to the third mortgagee. Bear in mind that a successful bidder will be responsible for paying any outstanding real estate tax liens, water charges or transfer taxes on the property.
EXAMPLE SCENARIOS of Multiple debts against a property.
1234 Imaginary Lane , owned by John Johnson, has a market value of $425,000.
The property is encumbered by three mortgages: 
- 1st mortgage: $300,000 from Countrywide Home Loans
- 2 nd mortgage: $100,000 from HSBC
- 3 rd mortgage: $50,000 from Wilshire Credit Corp.
In addition, John Johnson has not paid his federal taxes in 6 years and the IRS has a lien against the property for $10,000
Example 1: The first mortgagee is foreclosing
The first mortgagee, Countrywide Home Loans, is foreclosing.
With the mortgage amount being $300,000, plus legal fees, Countrywide’s upset price may be $339,969.83.
If at foreclosure auction the property sells for $345,000, Countrywide Home Loans receives the amount due to them ($339,969.83). The remaining balance of $5,030.17 goes to HSBC, the second mortgagee.
If at auction the property sells for $425,000, Countrywide Home Loans and HSBC both receive the full amount due to them, and Wilshire Credit Corp. would receive the remaining funds.
2) The Second mortgagee is foreclosing:
If HSBC is foreclosing, the upset price may be $125,809.49. The property sells at auction for $127,000. The successful bidder still needs to pay the full amount due and owing to Countrywide Home Loans, however he does not need to pay Wilshire Credit Corp. or the Federal tax lien.
Sarah Swanson is a real estate investor. She has several options.
Sarah has the option to:
- Buy the property from the owner before the auction sale
- Bid on the property at auction
- Buy the note for cash from Countrywide Home Loans
- Buy the note for cash from HSBC (more risky)
- Buy the note from Wilshire Credit Crop. (even more risky)
It is before the auction sale.
Sarah knows the estimated market value is $425,000
The first mortgagee, Countrywide Home Loans, is foreclosing for $340,000
Sara has a relationship with the current owner.
Sarah can negotiate a short payoff with the owner’s creditors.
Sarah succeeds in getting HSBC to take $5,000. for the underlying note, Wilshire to take $1,000 for their note, and the IRS to take $4,000.
Sarah has succeeded in purchasing the property, worth $425,000, for $350,000
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