why buy a NPN in 2nd position?

From what I know about short sales, usually 2nd mortgages only get about 1K regardless of the amount owed.
Also I've read that it's not advantageous to start a foreclosure action when there is a mortgage ahead of you. Just curious in what situations it makes sense to buy a note when there is a mortgage in a better position.

Edited: 06/26/2010 at 10:47AM

G. F.

Real Estate Investor · New York, New York

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Dec 09 '09, 04:55 PM

Here's an example.

$100K House - Purchase Price
$80K 1st
$20K Second

Property value depreciated. Now worth $70K
Borrower has hardship.
Borrower defaults on loans.
Your note buying company buys 2nd for 1% - $200

YOU CAN

Offer borrower a discounted payoff of $1000 and get them in contact with the 1st to pursue a loan modification.

OR

Help borrower with short sale.
Your property purchasing company (disclosures to 1st probably required) or a friend or partners property purchasing company submits offer to purchase property
1st agrees to a discounted payoff of $50,000 with $1K to 2nd.

Your note buying company nets a 400% return on investment
Your property buying company or that of a friend or partner sells at fair market value and nets $20,000.

Many ways to structure this. 2nd's are not always junk. They can be very lucrative because no one wants them.

Edited: 06/26/2010 at 10:47AM by G. F.

Francisco Tejada

Real Estate Investor · New York, New York

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Dec 09 '09, 11:14 PM

Thanks G.Founder.
In that scenario, would it be legal for my friend's property purchasing company to pay me a referral fee after I've purchased the 2nd note. assuming of course they close on the short sale.

Edited: 06/26/2010 at 10:47AM

G. F.

Real Estate Investor · New York, New York

107 posts
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Dec 10 '09, 09:50 PM

Transactions such as these are considered to be between sophisticated investors. The key to all this is disclosures. If your friend purchases the property and uses financing such as a hard money lender or a private money source, disclosing this to his/her lender will keep you out of trouble. Many who get in trouble don't follow this rule.

Edited: 06/26/2010 at 10:48AM

Dave Van Horn

Note Investor · Newtown Square, Pennsylvania

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Feb 25 '10, 06:37 AM

Francisco,
WOW! I'm not sure where to begin. You said that in a short sales the 2nd only gets $1K. This is totally false. I just received $5500 payoff on a 2nd my company owned in Toledo. We paid $1200 for the low equity note that had a face value of $39K. the 1st mortgage was $105K & the property was worth @ $105K. The short sale went through for $80K.
The 1st , who was taking a haircut, only wanted to allow us to get $2500 in the beginning, but we got them up.
The real answer to your question is it depends. My company literally buys hundreds of delinquent 2nd's every year. If a property has enough equity to back it, you can get a full payoff. We just had one outside Phila. that we paid $65K for, and we got a full payoff of @$120K on it. but there was a boat load of equity. the first was about $250K & the property sold for $620K. As for starting FC, we initiate that on close to
40% of the notes we buy, but we actually FC on less than 8%.
If you buy a loan in a better position, you'll have a higher price pt. & pay more. If I buy a delinquent 1st for $200K, all my risk & $ is tied up in one deal. I might be able to buy 10-20 2nds for the same $$. Hope this helps.

Dave VH

Edited: 06/26/2010 at 11:49AM

Marc Faulkner

Note Investor · Kalamazoo, Michigan

Pro Basic

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Apr 30 '10, 08:18 AM

When there is a bunch of REAL equity.

Edited: 06/26/2010 at 12:40PM

Arnold Camps

Residential Real Estate Broker · Seattle, Washington

119 posts
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Jun 10 '10, 10:00 AM

@Dave - We need to talk!!!

"Today, I prefer holding paper as opposed to holding real properties."
Your profile says it all! Great to have you here! I'm going to contact you directly about a NPN here in Seattle. Check your inbox for my friend request.

Edited: 06/26/2010 at 01:10PM

Dean Anastos

Real Estate Investor · Miami, Florida

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Aug 02 '10, 01:24 PM

Investing in second lien notes allows you to leverage alot more position than a 1st lien note. We have many deals in house that the properties have more than enough equity to cover the second lien position yet the entry price on them is only a fraction of the amount owed. We have only been around for two years but have been growing pretty quickly because of this niche market.