Specialist · San Antonio, TX · Member since 2012 · 865 posts · 351 votes
A few years ago I sold a house to a couple that asked me to take back a second, since they could only quailfy for a 80% loan. I did and now they have stopped paying me, but they are still paying the first wich is a local bank with 2 branches. I contacted a attorney to start foreclosure. Yesterday I get a call from the attorney's office telling me that the local bank said that they would call the first loan due if I foreclosed on my second and took the house back. I had heard before that a second or junior lien holder could legally a make the payments on a senior lien in order to protect their position. My attorney doesn't know if this is correct or not. So I need some advice above and beyond someone telling me go talk to an attorney.
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
Lenders in junior position who foreclose and take the property back subject-to a senior lien are not exempted from the due-on-sale clause. (See Garn St. Germain). So the due-on-sale clause can legally be triggered by taking the property back at sale or by a deed in lieu, whether or not you bring the payments current. The lender has the right to call the loan due based just on the transfer. The bank is letting you know they believe there is equity and that they will pursue it if there is a due-on-sale event. As a lender I'd do the same thing.
If I were you, I wouldn't foreclose unless I was sure I could pay off the first if they call it due....and there were enough equity to make the payoff worthwhile. I wouldn't play with wrap ideas if I knew the senior lender would prefer to foreclose.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
If your attorney can't answer a question like that you may want a new attorney.
What's your equity position? If the first forecloses, which is likely, will anyone bid above the banks opening bid? As either second or the new owner you would get the excess, up to the amount owed. If your equity position is small or non existent then the value of your mortgage is very small. Sorry.
Did the bank know about this second? Was it on the paperwork at closing?
Ask your attorney if you can go after the borrower for a deficiency.
Specialist · San Antonio, TX · Member since 2012 · 865 posts · 351 votes
12y
Are there equity in the property?
Joe Gore
Yes there is some equity in the propery, Plus the second is around 27k.
What I had in mind was to,
1. scare the folks into paying me like they pay the local bank. or.
2. Take property back sub2 the first and resell it with a wrap or a lease opion.
The house is a nicer than normal house in a good area. It should cash flow $200-$300 a month.
Specialist · San Antonio, TX · Member since 2012 · 865 posts · 351 votes
12y
Did the bank know about this second? Was it on the paperwork at closing?
..Yes. The couple's boss sister or sister-in-law was the loan officier at the bank that did the loan. She had them ask me to take back the second in the first place. Since then the couple and their boss went different ways.
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
Lenders in junior position who foreclose and take the property back subject-to a senior lien are not exempted from the due-on-sale clause. (See Garn St. Germain). So the due-on-sale clause can legally be triggered by taking the property back at sale or by a deed in lieu, whether or not you bring the payments current. The lender has the right to call the loan due based just on the transfer. The bank is letting you know they believe there is equity and that they will pursue it if there is a due-on-sale event. As a lender I'd do the same thing.
If I were you, I wouldn't foreclose unless I was sure I could pay off the first if they call it due....and there were enough equity to make the payoff worthwhile. I wouldn't play with wrap ideas if I knew the senior lender would prefer to foreclose.
Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
12y
I second what K. Marie said. I wouldn't foreclose yet. Let the current owner pay down the first mortgage. You still have time to foreclose later and pay-off the first.
Some people make money by buying second liens with a performing 1st. It depends on your strategy. Not all is lost yet. Just sit tight.
Specialist · San Antonio, TX · Member since 2012 · 865 posts · 351 votes
12y
Marie,
That was insightful info. So should I just look the other way while I'm not getting paid? My thoughts are maybe the couple will pay me too if they think they will lose the house if they don't. They are paying the first lien.
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
Good advice above, but if there is decent equity you might want to foreclose. The first mortgage may contain language that they can call the loan orforeclose, even if the borrower is current, if a second forecloses. Then it would be sort of a race. Of the first wouldn't foreclose until you actually finished your foreclosure and took title, it would give you much more time. You could foreclose, and assuming you weren't paid off in full, or received whatever minimum bid you set, you would take the property. You could then sell it in a normal fashion attempting to get FMV, pay off the first and receive the rest of your debt. This is just a theory, and it would depend on the laws and foreclosure procedures in your state. You definitely need an attorney familiar with the local foreclosure proceedings. Just a thought, certainly no legal advice. Or, you could just wait it out for rising values, or until the point the owners decide to sell. Again, you may have some time limitations to do this, and you need that attorney to advise.
Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
12y
Furthermore, if there is no equity, and you foreclose the first want like that because they will lose money and the first might just buy you out. Don't let the first lien holder buffalo you.
Marie,
That was insightful info. So should I just look the other way while I'm not getting paid? My thoughts are maybe the couple will pay me too if they think they will lose the house if they don't. They are paying the first lien.
If the goal is to get the borrowers to pay, I'd absolutely send letters and file a notice of default or whatever it's called where you are. The threat of foreclosure may make them wake up. Lots of borrowers think jr. lienholders have no power. However, as mentioned your borrower's senior mortgage might have foreclosure rights for defaulting on jr. liens.
Definitely get good, experienced legal help for noticing the borrowers. There are regs that you have to follow when attempting collection and foreclosure on consumer loans. This includes proving that you attempted to contact the borrower in attempt to work out avoiding foreclosure, etc. If your attorney doesn't know the due-on-sale exemptions by heart, I wouldn't let them help me with a consumer loan
Good advice above, but if there is decent equity you might want to foreclose. The first mortgage may contain language that they can call the loan orforeclose, even if the borrower is current, if a second forecloses. Then it would be sort of a race. Of the first wouldn't foreclose until you actually finished your foreclosure and took title, it would give you much more time. You could foreclose, and assuming you weren't paid off in full, or received whatever minimum bid you set, you would take the property. You could then sell it in a normal fashion attempting to get FMV, pay off the first and receive the rest of your debt. This is just a theory, and it would depend on the laws and foreclosure procedures in your state. You definitely need an attorney familiar with the local foreclosure proceedings. Just a thought, certainly no legal advice. Or, you could just wait it out for rising values, or until the point the owners decide to sell. Again, you may have some time limitations to do this, and you need that attorney to advise.
All good ideas, if you know what you are doing. I'll just say that my experience says that jr. seller carryback lenders are the least likely to know what they are doing. Most are totally inexperienced, reluctant lenders and did the loan to get their property sold. Most know little or nothing about the risks, and often don't have the resources to deal with the first (even when there is equity). Most know nothing about collecting on the note other than hoping and praying and huffing and puffing. They have a huge misconception that foreclosure will give them the property back. If there is real equity and you foreclose on the jr. lien, you don't get the property back....you get paid off. But their worst trait, again my opinion only, is they are the least likely to know true values and fail to get professional help to figure it out. So they often end up throwing good money at bad. And for some reason, they are most likely to have hubris and act like they know what they are doing.
Nothing against the OP, as he may have it all figured out. But after getting calls from several dozen jr. lienholders and owners that took the properties back via foreclosure, there is a most definite pattern.
I'm told they don't notice seconds in TX when the first forecloses. If they are paying the first, as it sounds like they are, then no problem, but, if they stop paying the first and the first forecloses then you could wake up one morning and find that you are no longer in any position. You might want to check the status of the first periodically.
Specialist · San Antonio, TX · Member since 2012 · 865 posts · 351 votes
12y
I will think twice before I ever take back a jr. lien going forward. All the things Marie said I could not do, I thought was ok to do. It was my understanding that as long as I made the payments on the first that I could take the house back sub2 the first lien if the borrowers ever stopped paying me. I really just want to get paid like everyone else.
Specialist · San Antonio, TX · Member since 2012 · 865 posts · 351 votes
12y
About seven years ago I went to a three day traing where the speaker told us that a jr. lien holder could take over the payments on the first in order to protect their position without the first being able to call the loan due. That had been my understanding every since.
Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
12y
How about this:
You file a notice of default, while you try to find a partner with cash. Once you have that, you'll try to offer a little cash for keys , for them to transfer the property back to you.
Then you'll try to sell the property and split whatever profit there is with your partner, after the 1st and 2nd are paid off. If the 1st calls the loan, your partner has the cash to pay it off.
Of course, there has to be enough potential profit in it for someone with cash to be interested in partnering.
Specialist · San Antonio, TX · Member since 2012 · 865 posts · 351 votes
12y
How about this:
You file a notice of default, while you try to find a partner with cash. Once you have that, you'll try to offer a little cash for keys , for them to transfer the property back to you.
Then you'll try to sell the property and split whatever profit there is with your partner, after the 1st and 2nd are paid off. If the 1st calls the loan, your partner has the cash to pay it off.
Of course, there has to be enough potential profit in it for someone with cash to be interested in partnering
Wow, That's a lot of moving parts. I'm not ready to jump from 5th grade to 11th.
Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
12y
Joe,
Don't feel bad. There's nothing wrong with Seller carrying a 2nd lien. You just have to know how to use it effectively. I'm not as experienced as K. Marie & Ellis in this arena, but I have seen it done by my coach, a professional flipper/investor. Sounds like K.Marie was spot on again in your situation that you're brand new to this and didn't understand the risk associated it with and what steps you have to take when the buyer defaults on your loan.
In general, when you do seller carry back, you typically sell at a premium price say 5%-10% above FMV. You have the buyer put at least 10% down (skin in the game). All in all, you will get 90%-95% of your money when it closes, and the buyer doesn't have to pay PMI on the first.
You might want to PM K. Marie and hopefully she can walk you step by step on what you need to do, but I agree that you need a new attorney, and you need to file a Notice of Default as Ellis suggested, and monitor the 1st mortgage for defaulting as David said above. If you did the paperwork correctly, you should get notified by the 1st lender if the buyer has defaulted on their 1st mortgage.
What a mess and I hope you will be made whole. Let me echo what K. Marie said above, don't let your emotion get in the way and throw good money after bad.
I will think twice before I ever take back a jr. lien going forward. All the things Marie said I could not do, I thought was ok to do. It was my understanding that as long as I made the payments on the first that I could take the house back sub2 the first lien if the borrowers ever stopped paying me. I really just want to get paid like everyone else.
You might have misunderstood my post about the due on sale clause. Jr. lenders can and do foreclose and take back properties subject to the senior liens all the time. Some arrange to take over payments, some pay off the lien in full. In some states, you have specific rights to bring the loan current. The challenge is that you are not protected from the due-on-sale clause. Meaning the sr. lender has the right to call the loan due upon transfer from borrower to a new owner. It doesn't mean they willl. But again, the due on sale clause is still in the lender's favor. In general, I'm not fearful of the DOS and would risk (and have risked) taking properties subject to.
The challenge here, as you presented what your attorney found out, is that the senior lender says they are planning to call the loan due if you foreclose. It may be as scare tactic, but regardless I would pay attention to a lender that is on the alert for a due on sale event.
Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
12y
If the 1st lien holder is willing to call a loan due that mean there is equity in the property, I would question the motivation why the 1st lien holder would consider calling a loan do when the 1st is paying.
Philadelphia, PA · Member since 2013 · 8 posts · 1 vote
12y
..Yes. The couple's boss sister or sister-in-law was the loan officier at the bank that did the loan. She had them ask me to take back the second in the first place. Since then the couple and their boss went different ways.
@Joe Jones. Also, your mortgage should be recorded, so it should be clear on the title work.
Specialist · San Antonio, TX · Member since 2012 · 865 posts · 351 votes
12y
Marie,
The investor/ instructor at the 3 day traing said that a senior lien holder could not call a loan due if you had a jr. lien and wanted to take over the payments on a senior lien in order to protect your intrest. I could list what group the guy worked with, his first name, the city he lived in,ect, ect. I took what he said as gospel. Have you heard of this being taught before now?
P.S
Surely someone else out in biggerpockets net work has heard this taught as well.
Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
12y
@Account Closed
I think you might be too close to friends/relatives of relatives. How would the bank even know what you might want to do? If they're getting paid, there's no problem on their part and they wouldn't just throw out that they'd foreclose, unless someone told them what you're considering.
A professional bank would not even talk to a 3rd party about a particular loan. So, what you were told was by someone who works at the bank and who's emotionally involved and who might not be all aware of how the bank should handle this legally.
The other thing you can do Joe is simply relax and do nothing. Maybe in a few years you will get a call from a closing agent when they sell or refinance asking for a payoff demand and you will get all your principal and interest ... you never know. Or, better yet, they may file BK and you will start getting monthly payments again.