Legal Question in Real Estate Law in California

When the second has the foreclosure sale, the buyer at the sale gets the property subject to your first. So you can either foreclose your self or accept a new owner whose owes you money. If your first is equal to or greater than the current value of the home, no one will buy at the foreclosure sale, and the owner of the second will probably just walk away. So then you will need to foreclose on the first unless the owner is now able to pay you.

Mr. Shers is correct in what he says. I'm not sure that it answers your concerns, however. It is unclear, to me at least, what you mean by "protect ourselves" and "protected by the law." Without knowing what you think you need protection from, it is impossible to really directly and clearly answer your question.

You are "protected by the law" to the extent you have a protectible interest. To avail yourself of the benefits of legal protections such as laws setting the priority of liens, you might benefit from consulting with, or perhaps even retaining, a lawyer. I think the first step for you is to discuss with your borrower (or the buyer) his prospects and intentions. At the same time, or soon thereafter, do a little financial modeling to see whether, post-foreclosure, your new obligor or original borrower if there is no sale will be able to pay you, and if not, how badly under water the property is. If you are adequately secured with your first, vs. current market value of the collateral, you are less likely to get any net benefit from spending money on an attorney.

I agree with Mr. Whipple in that you should speak to an attorney. You may have to plan a foreclosure strategy with an attorney, to maximize the recovery of the unpaid debt.