Helping homeowner negotiate short on a 1st: they accept how often

Tax Liens & Mortgage Notes
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Helping homeowner negotiate short on a 1st: they accept how often

Brian Kempler
Member since 2021 · 87 posts · 14 votes

You hold a 2nd and are trying to help the borrower negotiate a short on the 1st so he can short sell.

For those who've dealt with this scenario can you give some idea of a percent success rate getting the 1sts to accept debt forgiveness?

If it's low, say 30% of the time, 2nds seem like a tough game unless you buy at huge discounts.

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
4y

@Brian Kempler If the first agrees to a short sale, they'll typically only allow the 2nd to get 5-10% of their UPB from the sales proceeds. And if the value of the property is above Their balance, they have no incentive whatsoever. I'm not seeing the play here?

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    4y

    @Brian Kempler If the first agrees to a short sale, they'll typically only allow the 2nd to get 5-10% of their UPB from the sales proceeds. And if the value of the property is above Their balance, they have no incentive whatsoever. I'm not seeing the play here?

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  • Brian Kempler
    OP
    Member since 2021 · 87 posts · 14 votes
    4y

    Hi @Wayne Brooks:

    1. You purchase a deeply discounted 2nd on an underwater home

    2. Borrower agrees to a 5% payoff on the 2nd

    3. You help borrower negotiate a haircut on the 1st

    4. You help borrower conduct a short sale

    So as you can see, the question of how often a 1st mortgage is open to a short is very important. Hopefully someone has a general idea from experience!

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  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    4y

    @Brian Kempler

    I’ve got to be honest. Either you read some crazy fantasy (or misunderstood what you read) or you’ve come up with something yourself that due to your inexperience you don’t realize has no basis in reality. If you “negotiate” a 5% payoff with the borrower, and have purchased the note at a “deep discount”, say 80% discount from unpaid balance, you just took a 75% loss on your investment.

    But it's all based on the assumption that the 1st lien holder is willing to "take a haircut". In todays hot SFR market, this is a rarity. The short sale was a result of a 40% drop in real estate values during the 2008-2009 financial panic, and lasted into 2012. Since then the amount of short sales has declined to where it's no longer a significant part of the landscape.

    Further, the SAFE Act and the regulations put forth by the CFPB have introduced very strict licensing requirements on who can “help” a borrower obtain a discounted payoff. Basically, unless you’re a licensed real estate broker, you can’t help the borrower sell his property, unless you’re a licensed loan originator and or mortgage broker you can’t help the borrower negotiate a reduced payoff.

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  • Ned CareyPro Member
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    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    4y

    @Brian Kempler you've had two of the smartest people here tell you this is not likely going to happen.

    Buying a second in this situation would require 99% discount to make it worth your while - That is assuming the first will play along.

    2nds can be a good play but there has to be enough equity in the property to cover both the first and the second. 

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  • Brian Kempler
    OP
    Member since 2021 · 87 posts · 14 votes
    4y

    Don't take my word for it guys, this strategy was posted here, I am only gathering details.

    https://www.biggerpockets.com/... 

    the posts by G.F. and Dave Van Horn. 

    Yes, 12 year old post and the 2nds were picked up for 1% probably because they were attached to deeply underwater assets. If you're going to say no 2nds sell for that much anymore, I'm curious what price range you'd expect for G.F. or Dave's examples

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  • Ned CareyPro Member
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    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    4y

    @Brian Kempler It is not that the strategy can't work. It is just that market conditions generally determine that now is not a good time for that strategy. 

    @Dave Van Hornknows his stuff when it comes to notes. Perhaps he will chime in. My guess is he will say what I just said. This is not the right time for that strategy. It still might work today but that would be the very rare exception. 

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  • Chris SeveneyBusiness Member
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    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    4y

    @Ned Carey

    I agree with you. As others mentioned as well, if you own the second negotiate a payoff on the second. Don’t worry about the first as there is nothing you can do about it.

    Seconds right now are selling for what I would consider stupid pricing. What was 20 cents on the dollar 3 years ago is now 60-75 cents on dollar from those I talk too - unless you are buying $100M at a time like DHV is.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    4y

    @Brian Kempler 

    -What NPN 2nd's were selling for in 2008, the heart of the bank turmoil, is like referencing what gold sold for in 1932....totally irrelevant.

    -Even if you got the underwater 2nd for free, most would be not be the effort and costs with a 5% of balance payout.

    1Reply
  • Maurice D.
    Coppell, TX · Member since 2015 · 485 posts · 310 votes
    4y

    the first wont do a short if there is equity, and as others have stated to do a short they want the property listed on the open market with a broker.

    they days of negotiating a short payoff directly with the lender are long over.

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  • Dave Van HornPro Member
    Fund Manager · Wayne, PA · Member since 2009 · 1k+ posts · 1k+ votes
    4y

    @Brian Kempler

    Don't completely hold me to quotes from 12 years ago lol! But let me try to answer this in our current situation:

    First and foremost, what happens here is going to depend on the capital needs of the seller. But there's other factors behind the scenes going on. It's correct that in the current market the 1st lien holder is less likely to agree to a discount but there are situations that they will but to give you an idea beforehand, you'll have to have answers to some of these questions:

    1.) Is the 1st lien current? (If you aren't sure you can pull credit or check Pacer for legal status.)

    2.) Is it occupied?

    If the answer is "yes" to both of those, they could probably care less about the 2nd lien. But if it's not current, how deep of a discount are you asking for?

    Consider there's legal fees for foreclosure attorneys ($3k to $10k depending on the state) and carrying cost of capital, so it ends up being a math equation for them. If I'm the 1st lien holder, do I want to take a short train to a payoff? Or a long train to a foreclosure sale especially with moratoriums?/Or a possible fix and flip?

    But at the end of the day, if you don't ask you won't find out. We would not be apposed to discounting a 1st if the math made sense for us.

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  • Brian Kempler
    OP
    Member since 2021 · 87 posts · 14 votes
    4y

    Thank you @Dave Van Horn ! With the post being so old I wasn't even sure if you were here anymore. 

    Based on the other replies the math probably won't work for a small investor, so I'll probably wait for the next downturn to get some cheap 2nds when there's too much debt for the bigger players to gobble up themselves.

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  • Chris SeveneyBusiness Member
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    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    4y

    If you want to be a note investor, you can get the math to work it just takes alot of work and consistency to learn the business. If you want to invest in notes, that is very different and you can learn the business and try and buy on your own but for most it is more profitable to invest in a fund or other structure where you are not as active in the day to day business. 

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