Junior liens and your surplus

Priority, in short

A foreclosure wipes out liens junior to the one being foreclosed, but those liens attach to the surplus instead. So the money is distributed roughly in the order the liens sat against the property: the senior debt was already paid by the sale, then junior lienholders to the extent actually owed, then the former owner.

What typically shows up

• A second mortgage or home equity loan
• A HELOC, often long since paid down but never released of record
• An abstract of judgment from a creditor lawsuit
• HOA assessment liens
• State or federal tax liens
• Mechanic's and materialman's liens from a contractor dispute

Recorded does not mean owed

This is where a claim is won or lost. Lien releases are frequently never recorded. Balances shown are years stale. Judgments expire and abstracts have their own duration and renewal rules. A lienholder who wants a share of the surplus has to come forward and prove what is currently owed — and often cannot.

A $70,000 surplus that looks eaten by a $60,000 second lien can be a $70,000 surplus once that lien is shown to have been released in 2014. That analysis is part of the work-up, not an afterthought.

Lienholders are watching too

Junior lienholders and the companies that buy their paper monitor registry deposits. Being early, documented and represented is materially better than being late and improvised.

What this means for your estimate

Any honest surplus estimate is two numbers: the gross above the payoff, and the net after realistically enforceable junior claims. If someone quotes you only the first number, they are quoting you the number that makes them look good.