Zombie Properties can even hurt 2nd lien holders and the dangers of buying a mortgage note for $ 1.00.

While speaking with one of my clients who purchases 2nd lien properties, I heard a painful story on how zombie properties can cause huge losses even for 2nd lien investors. If you are investing into 2nd liens, you are most likely doubting that is possible, as the 1st lien should be responsible for maintaining the property and monitoring for code enforcement violations. Once we break down this case, you will understand what to monitor for during the acquisition due diligence process.
The city of Chicago is known for placing Code Enforcement liens on properties. If the property is vacant or the owner is not responsive, the city of Chicago goes after the lien holders on the properties, including mortgage note holders at the present time. The lien can be converted to a judgment against the lender to compensate the city.
Our 2nd lien investor purchased the note as a 2nd lien; however, at the time of the origination of the loan, the title company made a mistake and recorded the 2nd position mortgage first, with the 1st position mortgage in second. Therefore, the 2nd lien appears to be in the first position based on the recording date to the city of Chicago. The 1st position mortgage, while reviewing the title documents, realized that the city was going after the lien holder, as they knowingly refused to file a subordination agreement to fix the position of the filing. Why would they expose themselves to the city of Chicago’s lawsuit? The client also had been threatened by the city of Chicago with criminal prosecution.
The painful part for our client was that the 2nd position loan was sold for $1.00, basically a free loan to collect, and with the owner still being on title. The client’s due diligence showed that the owner is still on title and the loan was secured. The main red flag was the sales price. The client suspected that there had to be something wrong on this asset and ordered an unrecorded lien search against the address, which showed the Code Enforcement lien and huge fines.
My recommendation is to run an O&E (Current Owner Search) on any assets that look secured to the property in the first position and also check for Code Enforcement Liens and/or permit violations. Let me describe the city’s process of placing a code enforcement lien against a property.
1. The process begins with a notice of code violation(s) sent to the property owner and an order to appear at a hearing. Typically, the city will maintain a few sites to search for building code violations. The Building Related Court Action Search appears to only involve any code violations that did not get remedied and proceeded to the Department of Administrative Hearings.

2. The code violations hearing is handled in the Department of Administrative Hearings, City of Chicago. It is a completely separate and closed court system than the public Circuit Court. Per the city, the purpose was to make a fast, easy to understand system to deal with building code matters that don't require a lawyer before being turned over to Circuit Court. The property owner has a chance to resolve it right away and pay any fees. An abstractor cannot go to this department to look at court cases, indexes, or pull files.
As a result of the hearing, if the person needs to pay a fine and/or rectify the situation, they are given a chance to do so directly with the City of Chicago Department of Revenue. End of story.
3. If the person does not comply, a case file is opened in Circuit Court (civil/municipal) and a Notice of Lis Pendens (this does not mean foreclosure, just a notice of pending court action) is recorded in the recorder's office. Any resulting judgment is then filed in the recorder's office. It is usually called a "Recording of Findings, Decision and Order" and lists the specific judgment amount.

4. Per Illinois law, a notice of Lis Pendens needs to be filed in the recorder's office, and all judgments have to be recorded in the Recorder of Deeds office in order for the judgment to exist. Because the judgment has to be recorded in the recorder's office, and a notice of Lis Pendens is filed by the Department of Administrative Hearings in the recorder's office, we do not conduct separate searches of the circuit court system for any judgments.

5. ProTitleUSA reports any Lis Pendens (notice of case action by the Department of Administrative Hearings) and/or any resulting administrative judgments that we find in the recorder's office. ProTitleUSA checks the case docket first to see if the Lis Pendens is cancelled or if the status is still open, and will report a copy of the docket along with the Lis Pendens if there is not yet a judgment filed. If a judgment has been filed, ProTitleUSA will only report the judgment as the case is closed. Here is an example of the docket:

So in summary, cases are held in the Department of Administrative Hearings first. If non-compliance, the matter goes to the civil division of Circuit Court. A Notice of Lis Pendens gets recorded in the recorder's office. If a judgment is filed, it gets recorded in the recorder's office. This is the City of Chicago’s system only. Below is a copy of a resulting judgment so readers will see what it looks like.

If it is another city other than Chicago in Cook County, they can file a municipal or code lien against the property in the recorder's office.
I hope this clarifies the situation so readers can be careful in investing into free or $1.00 cost investments.