I also have a question about foreclosures. It is my understanding that for most forclosure the property is put up for public auction. The money recieved is first is use to pay off property taxes, workman liens, legal fees, then 1st , 2nd, 3rd mortgages. Any excess money goes to the property holder.
Need to check for IRS liens as well. Not sure how easy it is for the defaulter to declare bankrupcy these days and hold things up a bit - I understand not nearly as easily as several years ago.
In the early 80's we bought some discounted second mortgages. Most turned out well with good returns at the time - Total loan to value ratio for us was about 70% on conservative appraisals. One property defaulted - and on this particular property there was also a small 3rd. We foreclosed - and assumed the first. The 3rd note holder lost his equity to the fees and missed payments, and he walked away. It wasn't a good market for selling at the time, so we rented the property and sold it after a few years to the tenant. About broke even on that one.
Recently, I've given some thought to buying a few discounted firsts from seller financed properties - it could work if someone really knows what they're doing and especially if the seller is also carrying a separate second - maybe 15-20% as a cushion. I wouldn't know what return to expect from a borrower with a decent credit rating - would need to do research. These notes may become more common soon with houses so hard to sell. Think I'll pass at this stage though - too much work - slow and steady is just fine.