Foreclosure Auctions: Preferential Liens

Foreclosure auctions can be a good opportunity to acquire a property at a lower price. However, it is important to know the encumbrances that exist in them to avoid problems. The encumbrances in an auction are divided into encumbrances prior to the executed debt, encumbrances subsequent to the executed debt, and preferred debts. Misreading the property's registry certificate or being unaware of these encumbrances will almost certainly result in a failed investment in the auction.

When we delve into the world of foreclosure auctions of real estate, it is important to remember that there are different types of encumbrances that can affect our investment and that we must know to avoid unpleasant surprises.

Firstly, it is important to differentiate between encumbrances prior to and subsequent to the executed debt. Prior encumbrances, such as a mortgage or lien, are not cancelled after the auction and the bidder must take care of them, so it is very important to know their total value to subtract it from the value we give to the property, as the sum of those debts and our maximum bid will be what we actually end up paying for the property. On the other hand, encumbrances subsequent to the executed debt are automatically cancelled after the auction, which means that the new owner acquires the property free of those encumbrances.

However, there are certain exceptions to this rule, such as the so-called preferred encumbrances. These encumbrances are debts that, although they are subsequent to the executed debt, have preference over other creditors and are not cancelled after the auction. Let's see some examples of preferred encumbrances:

Property Tax Debts: Debts corresponding to Property Tax have preference over any other encumbrance, including mortgage creditors. If we acquire a property in an auction with outstanding Property Tax debts, we must take care of those that have not expired; bearing in mind that these expire after 4 years.

Community of Owners' Debts: Debts with the community of owners also have preference over other creditors, including mortgage creditors. It is important to note that community debts are not cancelled after the auction, so if we acquire a property in an auction with outstanding community debts, we must take care of them, at least for the last 4 years, as from that moment on they also expire (unless they are previously registered).

Finally, there are a series of encumbrances that, even though they are preferred, do not harm bidders in a foreclosure auction, but creditors. These encumbrances include debts for workers' salaries for the last year, debts arising from the exploitation rights of the author, and Social Security contributions. The preference of these encumbrances over other debts can be claimed in the corresponding Third-Party Claim and does not affect the bidder, but it is only a preference for collection against the executed credit by the plaintiff who auctioned the property.

As we can see, it is important to know the preferred encumbrances that can affect our real estate investment in a foreclosure auction. Otherwise, we could be in for unpleasant surprises and end up paying debts we did not expect.

In addition to preferred encumbrances, it is important to consider other aspects when participating in a foreclosure auction. For example, we must investigate the real estate before the auction to know its condition, value, and possessory situation, among many other things.

If you're considering attending an auction to purchase a home and you have doubts, we recommend that you request a Legal Verification from Valido Home completely online and within a maximum period of 24/48 hours. Our real estate legal experts will carry out a legal study of the property in question and send you a detailed report with all the charges that are registered to the property. Don't risk your money, invest as a professional would!