Whenever any sale is negotiated, the new buyer should be buying the property free and clear of all liens. All liens have to be paid or negotiated in the short sale. If the new buyer is purchasing with a mortgage, the new mortgage holder will require a thorough analysis of title to make sure no other liens exist and also require title insurance to insure that nothing was missed. In the past, it was cutomary to get this title work prior to closing. It's important to get it done as soon as possible in today's market.
There is more danger for cash buyers as they are usually rushed to closing what's called an "as is" transaction. If cash buyers do not do their own due diligence in researching the property liens, they could be saddled with surprise bills after the sale. I have seen this frequently as many distressed properties are offered for sale stating "cash buyers preferred" and then the contracts are written with very quick closing dates. The cash buyer thinks they are getting a great deal because they have the capability to close quickly. Instead the seller's bank ends up getting what they can for the property and dumping large liens on a new unsuspecting owner. I personally have saved buyers from this fate by simply doing a public record search on the property. In one case, a property had more than 2 times the purchase price in code violation fines against it. In another case, the 1st mortgage lender and the seller did not disclose that there was a second lien on the property.
Of course the seasoned investor is doing their due diligence and either has an attorney and/or title company representing them. Some still make the mistake of allowing the seller's attorney or title company to provide them with the information. It's the non-seasoned buyer that is targeted on these "cash buyer preferred" listings most frequently. The banks involved in these sales are definitely knowledgeable enough to know about these "oversights". I can't believe that their research doesn't disclose all the liens on a property. It happens too often for me to believe that it's always just a mistake.
Some buyers are lucky to find out about cumbersome liens before closing and therefore do not close. Unfortunately, by that time they have invested money in inspection, appraisal and other miscellaneous fees. Also, it ties up a buyer that could pursue the acquisition of another viable property and sometimes discourages them out of the market altogether.