Implications of Buying HELOC in 2nd Position

Member since 2019 · 10 posts · 1 vote

Looking for some help. I'm looking at buying a secondary lien (HELOC) via foreclosure auction.

Would I then have the right to pay off the first lien and own the property outright? That would be my goal.

The owners have a recent loan modification on the primary lien claiming hardship, but not sure that would matter if I own the secondary?

Any help would be greatly appreciated!

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Chad U.

Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes

Quote from @Brendan Couture:

The owners have a recent loan modification on the primary lien claiming hardship, but not sure that would matter if I own the secondary?

Any help would be greatly appreciated!

As long as there is equity above the combined 1st payoff and 2nd payoff (CLTV) you should be OK. I would have an attorney review the collateral and foreclosure file to ensure everything is legit heading into the sale. The only issue is you won't likely know the payoff balance of the 1st, so make sure there's tons of equity.

BTW, tax liens take precedence over 2nd AND 1sts as well, so check those as well as any involuntary liens, municipal liens etc

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Jason WrayPro Member
Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
4y
Brendan,
Just my opinion but I would stay away from ever buying a HELOC especially in a 2nd lien position. First lien positions always takes precedense as first pay position and it usually leaves the second mortgage unpaid. Beccause the first must be paid off first as the "Superior" lien the second gets the lesser amount or not paid at all. Yo also have to consider tax liens as they take precedence over junior or secondary liens.
When the home goes to short sale of foreclosure the mortgage is generally not paid in full on the first mortgage, leaving a loss. So buying a second is very risky...
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Chad U.
Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes
4y
Quote from @Brendan Couture:

Looking for some help. I'm looking at buying a secondary lien (HELOC) via foreclosure auction.

Would I then have the right to pay off the first lien and own the property outright? That would be my goal.
The owners have a recent loan modification on the primary lien claiming hardship, but not sure that would matter if I own the secondary?
Any help would be greatly appreciated!

As long as there is equity above the combined 1st payoff and 2nd payoff (CLTV) you should be OK. I would have an attorney review the collateral and foreclosure file to ensure everything is legit heading into the sale. The only issue is you won't likely know the payoff balance of the 1st, so make sure there's tons of equity.

BTW, tax liens take precedence over 2nd AND 1sts as well, so check those as well as any involuntary liens, municipal liens etc
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Brendan Couture
OP
Member since 2019 · 10 posts · 1 vote
4y
Thank you!
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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
4y
Quote from @Brendan Couture:

Looking for some help. I'm looking at buying a secondary lien (HELOC) via foreclosure auction.

Would I then have the right to pay off the first lien and own the property outright? That would be my goal.
The owners have a recent loan modification on the primary lien claiming hardship, but not sure that would matter if I own the secondary?
Any help would be greatly appreciated!

If there is equity in the property, more likely than not the borrowers will file bankruptcy. If you are buying the lien as chad mentioned you would be taking on any liens senior to yours which could be taxes, utility liens and the first lien. You will want to know what that balance is- especially on the first as if the property is only worth $300k and they owe $320k on the first, you are paying more for a property than it is worth.
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Brendan Couture
OP
Member since 2019 · 10 posts · 1 vote
4y
They owe ~$300k on the primary. The secondary (HELOC) is ~$150k. House is worth considerably more than that.

Goal would be to Secure the secondary to have the ability to pay off the primary.
But if they file for bankruptcy that’s an angle I did not think of.
If I were to buy the secondary and they file for bankruptcy, what happens? Am I SOL?

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Caroline Gerardo
Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
4y
Bankruptcy can stall two or more years. If there is a HOA they are in first position. If owners get into a lawsuit they can lien the property. No I would not buy a HELOC with a first borrower who isn't paying as agreed, they are players. If you have the huge cash to payoff the first you do not own the property, you just own the HELOC which then gives them a reason to stay for free until you actually foreclose and get a Sheriff to move them along.
If you can buy a $150000 HELOC in such a scenario for $50 it's worth the gamble.
Rather than that offer to buy the house from them and provide the moving truck.
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Abby Shemesh
Investor · San Francisco, CA · Member since 2014 · 21 posts · 31 votes
4y
@Brendan Couture
This is a very specific investment strategy that involves some acrobatics and definitely requires you to stick the landing in order to succeed. If you do not have a clear roadmap or clean info on the circumstances / motivations of the borrowers as well true data on the 1st lien holder, you will put your self if a precarious position. That being said, you would want to find out if the 1st lender would be willing to sell the loan (hopefully at a discount), in order to build in enough emergency runway, aka equity, for a crash landing). You will also want to see if you can perform a borrower interview prior to purchasing the HELOC to see what they plans are if you are able to give them a way out fo this mess without them filing for BK (this may be more challenging then said). A bankruptcy is the not end of the world but could definitely stop you dead in your tracks for executing a FC action. This could be years that you are frozen in place. This is also dangerous as the market could (and probably will) change for the negative, thus draining your of your built-in equity position. Make sure you are 100% certain that you are buying this 2nd HELOC at a steep discount in order to align the equity position with your goals.
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