Distressed Property Deals, Part 1: Security Deeds, Liens, and Mortgages

When you buy a distressed property, you aren't just buying a house. You're buying everything recorded against it. Before you can evaluate a preforeclosure, bid at a foreclosure sale, or negotiate with a behind-on-payments seller, you need to know three things: what kind of loan document is recorded, what other liens are attached to the property, and which of those claims gets paid first.

This series walks through distressed property deals from the ground up. Part 1 covers the foundation: the documents that tie debt to real estate, and the rules that decide who gets paid. Everything that follows (foreclosure timelines, preforeclosure negotiations, tax sales) depends on it.

The Note and the Security Instrument

Every real estate loan has two parts.

The promissory note is the borrower's promise to repay: the amount, the interest rate, the payment schedule, and what happens on default. On its own, it's a personal debt.

The security instrument is what connects that debt to the property. It's recorded in the county land records, and it gives the lender the right to take and sell the property if the note isn't paid.

When investors say "the mortgage," they usually mean the security instrument. But depending on the state, that document may not be a mortgage at all.

The Three Types of Security Instruments

Mortgage

A mortgage is a two-party agreement between the borrower (the mortgagor) and the lender (the mortgagee). The borrower holds title, and the mortgage creates a lien against it.

In many mortgage states, the lender must go through the courts to foreclose, which is called judicial foreclosure. Florida, New York, New Jersey, Pennsylvania, Illinois, and Ohio are examples. Some states allow a mortgage to include a "power of sale" clause that permits foreclosure without court, so the document type alone doesn't settle the question.

Deed of Trust

A deed of trust adds a third party. The borrower (the trustor) conveys title to a neutral trustee, who holds it for the benefit of the lender (the beneficiary) until the loan is paid.

Deeds of trust almost always include a power of sale. If the borrower defaults, the trustee can sell the property without a lawsuit. That's why deed-of-trust states tend to have faster foreclosures. California, Texas, Virginia, North Carolina, Arizona, and Colorado all use deeds of trust.

Security Deed (Georgia's Deed to Secure Debt)

Georgia uses a third type: the security deed, formally a deed to secure debt. Under a security deed, the borrower conveys legal title directly to the lender as security for the loan. There's no trustee in the middle. The borrower keeps the right to occupy and use the property and gets title back when the debt is paid.

Security deeds include a power of sale, so Georgia foreclosures are non-judicial. After a loan is paid in full, Georgia law requires the lender to file a cancellation of the security deed with the Clerk of Superior Court within 60 days. If it doesn't, the borrower can make a written demand and recover $500 in liquidated damages, plus other losses. If you're buying from a seller who "paid off" an old loan, a security deed that was never canceled is something your title search should catch.

Lien Theory vs. Title Theory

You'll see states described as "lien theory" or "title theory." In a lien-theory state, the borrower holds title and the loan document is a lien against it. In a title-theory state like Georgia, the lender (or trustee) holds legal title until the loan is repaid.

In practice, the label matters less than it sounds. Either way, the borrower lives in, rents, and sells the property, and the lender has to follow the state's foreclosure process to take it. What matters more for investors is whether that process runs through the courts. That's the subject of Part 2.

Liens Beyond the Loan

A security instrument is one kind of lien. Distressed properties often carry several others.

Voluntary liens are ones the owner agreed to: first mortgages, second mortgages, HELOCs, and the deeds of trust or security deeds that secure them.

Involuntary liens attach whether the owner agreed or not:

• Property tax liens: unpaid county or city property taxes
• Judgment liens: a creditor wins a lawsuit and records the judgment in the county where the owner holds property
• Mechanic's (or materialman's) liens: filed by contractors, subcontractors, and suppliers who weren't paid for labor or materials provided to the property
• HOA liens: unpaid association dues and assessments
• Municipal and code enforcement liens: unpaid fines, utility charges, or demolition and cleanup costs billed by the city
• Federal and state tax liens: filed by the IRS or a state revenue department for the owner's unpaid income or other taxes

An owner who has stopped paying the mortgage has often stopped paying other things too. On a distressed property, assume there's more than one lien until a title search proves otherwise.

Lien Priority: Who Gets Paid First

When a property is sold, whether at a normal closing or a foreclosure sale, the liens are paid in order of priority. The general rule is first in time, first in right: the earliest recorded lien gets paid first.

There are important exceptions:

• Property taxes typically take priority over everything else, including a first mortgage recorded years earlier.
• HOA super liens: roughly 20 states give homeowners associations "super-lien" priority over a first mortgage for a limited amount of unpaid assessments. For example, Colorado grants six months of priority, while Nevada grants nine. In some of those states, an HOA foreclosure on its super lien can wipe out the first mortgage.
• Mechanic's liens: in some states, a mechanic's lien takes its priority from the date work began, not the date the lien was filed.
• Federal tax liens follow federal rules. If the IRS has a properly filed lien and the property is sold at a non-judicial foreclosure, the IRS can redeem (buy back) the property within 120 days of the sale, or longer if state law allows. And if the IRS wasn't given proper notice before the sale, its lien can survive.
• Subordination agreements can change the order when one lender agrees to step behind another, which commonly happens on refinances.

What Survives a Foreclosure

Priority decides more than who gets paid. It decides which liens survive.

When a senior lienholder forecloses, the sale generally wipes out the junior liens, as long as the junior lienholders were properly notified. Any surplus from the sale goes to the junior lienholders in order of priority, then to the former owner.

When a junior lienholder forecloses, the senior liens stay in place. If a second-mortgage holder forecloses and you buy at that sale, you take the property subject to the first mortgage. The first mortgage lender still has the right to foreclose if it isn't paid.

That's one of the most expensive mistakes at a foreclosure auction: winning the bid and then discovering that a larger senior loan is still attached to the property.

Why This Matters on a Preforeclosure Deal

Here's a hypothetical. A house has an after-repair value (ARV) of $300,000 and needs about $50,000 in repairs. Using the 70% rule, your maximum offer is $160,000 ($300,000 × 70% − $50,000). You can run your own numbers with the Max Offer Calculator. The owner is three months behind on payments and agrees to sell to you at $160,000. The title search shows:

All of these are paid from the seller's proceeds at closing. After the $143,000 in liens and roughly $5,000 in seller closing costs, the seller walks away with about $12,000 and avoids a foreclosure. The deal works for both sides.

Now suppose the title search had turned up one more item: a $20,000 IRS lien. The lien stack jumps to $163,000, which is more than your $160,000 offer before the seller pays any closing costs. You can't raise your price without breaking your own numbers, so the deal now depends on a lienholder agreeing to accept less than it's owed. That's a negotiation, not a closing, and it's the subject of Part 3.

The takeaway: on a distressed property, two numbers have to work. Your max offer sets the ceiling. The lien stack sets the floor. The deal only exists in the space between them, and you don't know where the floor is until the title search is done. We covered what that search checks in Closing Costs, Part 2: The Title Exam, and how title insurance protects you from what it misses in Part 3.

How to Find Liens on a Property

Liens are recorded in the county where the property sits, usually with the county recorder, register of deeds, or clerk of court. In Georgia, real estate records are filed with the Clerk of Superior Court in each county and are searchable statewide through the Georgia Superior Court Clerks' Cooperative Authority (GSCCCA).

A records search is a good first look, but it isn't a substitute for a title search by a closing attorney or title company before you buy. Judgments, tax liens, and unreleased loans are easy to miss, and those are the liens that hurt the most after closing.

Coming Up in Part 2

The type of security instrument determines how a lender can foreclose. In Part 2: Judicial vs. Non-Judicial Foreclosure States, we'll compare the two processes, how long each takes, and what that timeline means for an investor trying to reach a seller before the sale.

When you find a distressed property, start with the ceiling. The free RE Data Metrix Max Offer Calculator shows the most you can pay based on ARV and repair costs, so you know your number before you talk to the seller.

Frequently Asked Questions

What is a security deed in Georgia?

A security deed (deed to secure debt) is Georgia's version of a mortgage. The borrower conveys legal title to the lender as security for the loan and gets it back when the debt is paid. It includes a power of sale, which allows non-judicial foreclosure.

Is a deed of trust the same as a mortgage?

Both secure a loan with real estate, but a deed of trust involves three parties (borrower, lender, and trustee) and usually allows non-judicial foreclosure. A mortgage involves two parties and, in many states, requires foreclosure through the courts.

Which lien gets paid first?

Generally, the lien recorded first. Property taxes are the major exception, as they usually come ahead of everything. Some states also give HOA liens limited super-priority.

Does a foreclosure wipe out all liens?

No. A senior lien's foreclosure generally wipes out properly notified junior liens, but a junior lien's foreclosure leaves the senior liens in place. Property taxes and certain federal tax liens follow their own rules.

How do I find out what liens are on a property?

Search the county land records where the property is located, then confirm with a professional title search before you buy.

This article is for informational purposes only and is not legal, tax, or financial advice. Foreclosure and lien laws vary by state and change over time. Consult a licensed attorney in the property's state before acting on a specific deal.