How can I find a buyer for mortgage note with 3rd position lien?

8 Replies

I'm not trying to offer this as a deal, I am trying to learn how to find people who do these kinds of deals. I'm the holder of a $350,000 mortgage note that is in the third position. I invested in a 4-unit rental property in Chicago. I'd like to exit the deal, but the owner/manager wants to keep the building as it provides nice cash flow. I don't want to foreclose and force a sale, mostly because I'm not an expert in this area. Most mortgage buyers only want first position. Is there a market for third-position notes?

Geez...that's not a good position.  There is - nor do I ever anticipate - there being active market for it. Foreclose?  You do realize that you would have to pay-off the first and second mortgage holders BEFORE any payment would come your way.  By the time the attorney fees get piled on and paid, you will most likely be paying out of pocket just to settle the first two positions.  It may be a good time to approach the borrower to see if he has any interest in refinancing the property now that rates are at historical lows and consolidating the three into one mortgage.  But be careful making any demands unless the note is due or in default because your only remedy would be to go to civil court.  Third position is not a place of strength.

It’s not true that, “Most mortgage buyers only want first position,” @Mike Moyer .  There is a thriving market for non-performing seconds and many associated strategies.  I assume your note is performing though.  There is a market for anything that reliably cash-flows (or not), even if only tenuously secured.

In this case, the combined LTV between the 1st thru 3rd would have to be low enough to cover all three loans in the event of a default.  Plus, the interest rate on the face of the note would have to be high enough satisfy another investor that his or her risks are covered.  Personal guarantee from a well-qualified, well-heeled borrower is also helpful.  I hope all of this is what motivated you to loan this money in the first place.

There is nothing you can do if the owner/manager is current. What would be your basis for a foreclosure? One option, as you know, is to sell the loan. However, be prepared to discount the note if there are any irregularities such as a high CLTV, low interest rate, missed payments, and so on.

Go to meetup and see if there are any real estate clubs in your area that focus on notes.  If not, just go to a few local real estate clubs and ask around for some who buy notes and see what they say.  With a decent and reliable ROI, you might be surprised. Or, at least you'll be educated.

Originally posted by @Mike Moyer :

@Jeff S. going to a meetup is a good idea. The note has a 10% interest-only payment for three years (which ended in October) I'm just looking to move on to other opportunities. 

So... now that the note period is up there is a balloon payment due?

 

Originally posted by @Benjamin Hurwitz:
Originally posted by @Mike Moyer:

@Jeff S. going to a meetup is a good idea. The note has a 10% interest-only payment for three years (which ended in October) I'm just looking to move on to other opportunities. 

So... now that the note period is up there is a balloon payment due?

 

 Sounds like there is a balloon which ended in October, so technically you can start the foreclosure process if he hasn't paid it out.  If you want to sell, try listing it on an exchange like Paperstac.   

We have purchased 3rd position notes and the way we look at it is what is the combined loan value for the first through third mortgages. If there’s some equity above that then it might be possible to sell that note.  Yes there will be a discount.  If it’s in default or if maturity date is past due you can foreclose and take title to the property and start collecting the rents yourself but you would have to continue to pay the 1st and 2nd or eventually they will foreclose on you.  Just the threat of foreclosure and them losing the title to the property should get that borrower off their butt to take action and pay according to the terms of three note.