When my partners and I first started investing in non-performing notes, one of our biggest fears was what we call in the note industry, getting \u201cwiped\u201d on a note.\u00a0 Keep in mind at the time we were just venturing into delinquent second mortgages, a category of notes that many find risky for just that very reason BUT also much like 1st mortgages, 2nd mortgage notes are a secured investment backed by property AND are much less expensive. \u00a0This was a time when there was a lot of equity still in the market and prices of real estate were actually increasing<\/i>.<\/p>\n
Our biggest fear was that a first mortgage on the property where we held our second lien would foreclose ahead of us and we would in essence get “wiped <\/i>“.\u00a0 The reason for this is because the foreclosure attorney representing the first mortgage company at the foreclosure sale is only concerned about protecting their client\u2019s<\/span> interest and would either start the bidding at what the 1st mortgage was owed or at a number they’d be happy with.<\/p>\n In most cases, they start with what is owed, and in a down market like we’ve just seen, the bank will take most of the properties back as an REO (Real Estate Owned), and just liquidate them. \u00a0If for some reason the bidding went beyond what was owed on the first mortgage any additional proceeds would be applied to any other secured liens (if there is any), and anything above that would go to the homeowner, (be sure to note that this is after any sheriff fees have been paid).<\/p>\n As a newbie buyer to delinquent second liens, the one thing we did as part of our due diligence was to get clear on the status of the senior lien, and once purchased, we continue to monitor the senior lien on a monthly basis. \u00a0By knowing the status of the senior lien and the fact that they hadn’t started foreclosure yet gave us the ability to start our foreclosure on our Junior lien, ahead of the Senior lien, and this gave us the ability to control the foreclosure sale<\/b>. \u00a0The reason this is so important is because our foreclosure attorneys\u2019 bidding instructions would be for an amount acceptable to us, whether to cover all of our lien, or just a number that we were happy with.\u00a0 So, if someone bought our lien at foreclosure sale, or we took the property back because there were no bidders, either way it would be “Subject To<\/i>” the Senior lien.\u00a0 But now, one of us would have the Sheriff’s Deed<\/b>, and thus control of the property to either sell, rent, repair, etc. \u00a0Notice that the first has not been paid off, or on, at this point. (Also, keep in mind that this happens to us on LESS than 10% of our loans).\u00a0\u00a0 Now, if nothing is done in the near future, as far as re-instating, or paying off the first mortgage, in most cases, they would proceed to foreclose against the new owner.\u00a0 But for the time being, the previous Junior lien holder, or investor is in control of the property.<\/p>\n To drive a point home, I have to tell you that, like everyone who is new, I had plenty of misconceptions about notes. Now, years later after working 1000\u2019s of loans, I\u2019m going to bring up one of the biggest taboos of all\u2026BANKRUPTCY!<\/p>\n The second biggest fear towards being wiped, for a newbie investor in delinquent second liens, is if for some reason, property values plummeted and there was no longer any equity backing the second mortgage and a homeowner would just file bankruptcy and strip or “cram down<\/i>” my Junior lien through the bankruptcy court (**NOTE** If there is a even $1 of equity backing your lien, than it should not allowed to be stripped)<\/p>\n Also remember, this is much easier said than done, for a couple reasons. \u00a0First of all, it can get expensive for the homeowner, and can become highly contested, thus requiring a full-blown, court ordered, appraisal. \u00a0And even if it is granted, the borrower must complete their bankruptcy plan and be completely discharged, otherwise, it’s as if it never happened. \u00a0Just so you know, after working with thousands of borrowers, we\u2019ve seen the large majority of homeowners never complete their plans partly due to fluctuating restrictions that vary from state to state<\/a>.\u00a0 That being said, my company owns thousands of loans, over the last several years, and the number of cram downs is a very, very, low number. \u00a0You might be thinking, \u201cWhy doesn’t every homeowner try to strip an upside down lien?<\/i>\u201d \u00a0Well, when a homeowner is current on the first mortgage, they usually want to stay, and obviously they have a source of income.\u00a0 They also have what’s called, ” Emotional Equity<\/a>“. This was a very tough concept for me as a real estate investor to grasp and understand.<\/p>\n Another interesting thing happened to us while we were relatively new to nonperforming note buyers, when the market finally did crash. \u00a0You see, up until that point we only focused on equity deals.\u00a0 There had still been plenty of them available and we were petrified to death of anything without equity.\u00a0 But after the crash, all of a sudden the majority of our portfolio had no equity.\u00a0 At first, we didn\u2019t know what to do! When we had previously bought 2nd mortgages that were current on the first mortgage, we would get out of, nine out of ten equity<\/i> deals. \u00a0Now, we didn’t know what was going to happen, but we continued to work the loans because we didn’t have much choice since we already owned them.<\/p>\n You’ll never believe what happened. We continued to get seven or eight out of ten deals, regardless of ‘equity’,<\/i> (< than 200% loan-to-value), when current on the senior lien.\u00a0 Today, we make most of our revenue off loans without equity<\/b>, and we purchased them for a fraction of what our equity deals had cost.\u00a0 In fact, we sell off most of our ‘equity’<\/i> deals, since we can do so at a premium. \u00a0Besides, there’s not as much potential upside to these loans either, once the equity does come back into the marketplace.<\/p>\n So, the good news is, all our original fears when starting out have proven for the most part to be unfounded.\u00a0 If you do the proper due diligence and you\u2019re diversified enough, the fear of being wiped is not even worth worrying about. \u00a0And if you\u2019re like me, after you work a lot of notes, you start to get excited about getting wiped on a loan because that means you get a tax break to offset revenue! When my partners and I first started investing in non-performing notes, one of our biggest fears was what we call in the note industry, getting \u201cwiped\u201d on a note.\u00a0 Keep […]<\/p>\n","protected":false},"author":807,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5527],"tags":[],"class_list":["post-46670","post","type-post","status-publish","format-standard","hentry","category-commercial-real-estate-investing"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/46670","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/807"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=46670"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/46670\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=46670"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=46670"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=46670"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}How Due Diligence Helps<\/h2>\n
But What About Equity?<\/h2>\n
What We Learned From the Market Crash<\/h2>\n
\nPhoto: Orin Zebest<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"