Real Estate Law
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I can't tell you what to do, but if the home won't realistically sell for what the first is, then I find it unlikely that the second would actually follow through and spend thousands on an attorney to pursue this if there is little chance of them getting their money. It is much more likely they are simply trying to bluff you into paying them..
So you can always just sit back and see what they do and then bid on the property up to the first mortgage amount if you wanted to keep it.