The listing says clear title, preliminary shows a second deed of trust and a tax lien

I can't answer the lien question but I can tell you what I've watched happen. Exceptions on a preliminary report are the title company's starting position, and a lot of them come off once someone in their underwriting department actually pulls the trustee's deed and the notice file. Ask for a written commitment showing the exceptions removed, and put the deadline for that inside your contingency period rather than after it. If they won't put removal in writing, that itself is the answer.

Price the risk instead of arguing about the law. 179k purchase, worst case is you clear the tax lien yourself at 6,780 plus maybe 2,500 of legal work to quiet title or get a release, call it 9,300. If your spread supports 9,300 of surprise, you can proceed on a policy and a reserve. If it doesn't, the title exceptions aren't your problem, your margin is.

What's your ARV and rehab? You gave the purchase price and nothing else, and the exception question is unanswerable without knowing whether 9k matters. On the deed type, special warranty is standard for REO in my experience and I'd stop treating it as a red flag. The policy is what you're buying protection from, and the exceptions are exactly the list of things the policy will not cover.

The thing I'd want to know is who the title company works for. If the servicer chose them and they're also issuing your policy, the exceptions they're comfortable leaving in are the ones that don't create risk for the seller. Getting your own review, from a company you pay, changed the exception list on a deal a friend of mine looked at last year. Costs a few hundred.

Two mechanical points.

First, an uncanceled junior deed of trust is common after a nonjudicial sale because nobody has a duty to record a reconveyance for a lien that was extinguished by operation of law. Title companies routinely insure over it once they've reviewed the sale file, and the tool for that is an endorsement or an affirmative deletion of the exception in the commitment. Ask in writing: "will you delete items 6 and 9 from Schedule B in the final policy, yes or no." Verbal comfort is worth nothing at claim time.

Second, read your purchase agreement's title objection clause before you decide anything. REO contracts typically give the buyer a short window to object and give the seller the option to either cure or terminate, which means pushing hard can get you canceled instead of cured. The specific dates and whether your deposit returns depend on that contract language and on your state, so have the attorney read the contract at the same time as the lien question. One hour covers both.

And sextant is right that this all resolves into a number. If the answer is that the exceptions stay and you're insured over item 6 but not item 9, then you're buying a 179k house with a 6,780 open question and you decide whether that's a deal.