Risky 2nds - Why a Paying 2nd can also completely wipe you out.

Tax Liens & Mortgage Notes
2yFollow

Risky 2nds - Why a Paying 2nd can also completely wipe you out.

Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

We are seeing a big uptick in second loans on the market, including those who own investment properties look to take equity out of an existing property by getting a second loan. Getting a 2nd is extremely difficult and for those who buy seconds or are considering them here is an example of "what the guru does not teach you"

In Georgia, a non-judicial state, a foreclosure is not done through the courts. Georgial Law does not require the first lender to notify the subordinate lender of the foreclosure. So lets say you own a second position loan on a property in Georgia that is performing, but the first was non-performing. There is the possibility that the property could go to foreclosure without you knowing it.

Lets say it does go to foreclosure and you thought you still had equity coverage but realize it sells out auction for $1,000 above the first lender. Guess what, you are now wiped out.

Lets say you find out before the foreclosure sale, what can you do? Well you better have a large wad of cash sitting around to either pay off the first mortgage to not get wiped out or reinstate the loan. Would you risk it going to foreclosure?

Just some food for thought for those who invest in mortgage notes and think buying seconds cheap gets you in the business at a low barrier to entry  - it is cheap until you have to reinstate or payoff a first lien.

7e investments53 Reviews
WebsiteView Page
4Reply
28 views

Most Popular Reply

Eddie Fernandez
Rental Property Investor · Platte City Missouri, United States · Member since 2020 · 37 posts · 45 votes
2y

Appreciate @Chris Seveney for "keeping it real" for all of us. The biggest thing that frustrates me most about the guru's is how most are not transparent about all things notes, yet they send post after post on LinkedIn or FB wanting you to watch a Podcast or something else about how much money they made on notes to get you sucked into their web.  Rarely if ever are the negatives brought up.  Be wary and seek advice about everything before you dive into the deep end.       

4Reply
See this reply in the discussion

15 Replies

Jump to latestLatest
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    2y

    That's definitely good to know about Georgia. I know laws regarding foreclosures and how subordinate loans are dealt with vary wildly by state. In some, like California, it's best to not even deal with that.

    Seconds can be very lucrative, particularly shortly after 2010. I had a friend who was buying non-performing seconds behind performing firsts (a small market for sure, but one with lots of obvious potential). He started buying them around 10 to 15 cents on the dollar. Given most properties appreciated to the point the equity was above both the first and second, he mostly got paid in full when the owner sold or refinanced and made a ton of money off it. Unfortunately that opportunity has come and gone. 

    Podcast Guest on Show #121
    2Reply
  • Eddie Fernandez
    Rental Property Investor · Platte City Missouri, United States · Member since 2020 · 37 posts · 45 votes
    2y

    Appreciate @Chris Seveney for "keeping it real" for all of us. The biggest thing that frustrates me most about the guru's is how most are not transparent about all things notes, yet they send post after post on LinkedIn or FB wanting you to watch a Podcast or something else about how much money they made on notes to get you sucked into their web.  Rarely if ever are the negatives brought up.  Be wary and seek advice about everything before you dive into the deep end.       

    4Reply
  • Patrick Roberts
    Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
    2y

    Ive also noticed a big trend in private lenders originating 2nds and gap funding and whatnot. I think Chris nailed it perfectly - you have to take your DD to another level and also be in a position, both financially and contractually, to take control of the situation if the borrower defaults. The probabilities of heavy losses due to default are much, much higher with 2nds than with firsts. Equity is great on paper, but it may not mean much when the first position balance has grown exponentially due to accrued late fees and penalties and the property is selling for maybe 70 cents on the dollar at auction. 

    2Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    2y
    Quote from @Chris Seveney:

    We are seeing a big uptick in second loans on the market, including those who own investment properties look to take equity out of an existing property by getting a second loan. Getting a 2nd is extremely difficult and for those who buy seconds or are considering them here is an example of "what the guru does not teach you"

    In Georgia, a non-judicial state, a foreclosure is not done through the courts. Georgial Law does not require the first lender to notify the subordinate lender of the foreclosure. So lets say you own a second position loan on a property in Georgia that is performing, but the first was non-performing. There is the possibility that the property could go to foreclosure without you knowing it.

    Lets say it does go to foreclosure and you thought you still had equity coverage but realize it sells out auction for $1,000 above the first lender. Guess what, you are now wiped out.

    Lets say you find out before the foreclosure sale, what can you do? Well you better have a large wad of cash sitting around to either pay off the first mortgage to not get wiped out or reinstate the loan. Would you risk it going to foreclosure?

    Just some food for thought for those who invest in mortgage notes and think buying seconds cheap gets you in the business at a low barrier to entry  - it is cheap until you have to reinstate or payoff a first lien.


     The above is true UNLESS as second lien holder you have an INTER CREDITOR AGREEMENT with the first lien holder.

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    2y
    Quote from @Don Konipol:
    Quote from @Chris Seveney:

    We are seeing a big uptick in second loans on the market, including those who own investment properties look to take equity out of an existing property by getting a second loan. Getting a 2nd is extremely difficult and for those who buy seconds or are considering them here is an example of "what the guru does not teach you"

    In Georgia, a non-judicial state, a foreclosure is not done through the courts. Georgial Law does not require the first lender to notify the subordinate lender of the foreclosure. So lets say you own a second position loan on a property in Georgia that is performing, but the first was non-performing. There is the possibility that the property could go to foreclosure without you knowing it.

    Lets say it does go to foreclosure and you thought you still had equity coverage but realize it sells out auction for $1,000 above the first lender. Guess what, you are now wiped out.

    Lets say you find out before the foreclosure sale, what can you do? Well you better have a large wad of cash sitting around to either pay off the first mortgage to not get wiped out or reinstate the loan. Would you risk it going to foreclosure?

    Just some food for thought for those who invest in mortgage notes and think buying seconds cheap gets you in the business at a low barrier to entry  - it is cheap until you have to reinstate or payoff a first lien.


     The above is true UNLESS as second lien holder you have an INTER CREDITOR AGREEMENT with the first lien holder.

    yes those making loans behind HML are taking on huge risks. Even with good communications between first and second .. first many times just wont answer .. And any loan basically at 65 to 70% LTV total if the first goes bad your going to take a huge risk of loss of interest ( almost guaranteed) and loss of principal.. Sophisticated Lenders can and do structure these with many safegaurds but thats not what you are seeing in the Gator world and the gap funding and loans being presented to new lenders.. Not only that seconds the interest rates need to be above 20% apr in my mind to take on the risk.. I dont do them often but did one up in Washington state and it was 50% LTV on the primary and then cross collateral on a really cool Ranch in North Central Washington that was free and clear so I got a first on that as a cross.. and I would have loved to own that property :) @Beth Johnson does a lot of seconds from what I see and like me she knows how to juice the equity portion of the deal.. But if your buying existing seconds these safeguards wont exist these have to be new origination. 

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    1Reply
  • Beth JohnsonPro Member
    Lender · Renton, WA · Member since 2018 · 215 posts · 216 votes
    2y

    I rarely, if ever, go behind HML for the reasons stated by others. There is too punitive measures and shorter time horizon for that loan to mature and eat away at your equity buffer. In WA state, we are deed of trust state and non-judicial (with an option for judicial) and requires a Notice of Default (30-day cure period) and a 120-day Notice of Trustee Sale with cure period. I'm extremely careful about how we originate 2nds and it's not for novice lenders and it certainly is not something I would buy - even at a steep discount. Yes, I've had to foreclose on a few in 2nd and it wasn't a problem because I was behind a conventional mortgage lender who could not act as fast as we could. But plenty could have gone wrong if it were not managed tightly - both during origination and while the loan was in service. There are some states like TX where the foreclosure process is so efficient, you could lose your equity position within 30-days of the borrower defaulting on the first. So, that's a state where we would be super cautious about lending in second position.

    And to @Jay Hinrichs's point, I see no safeguards for gators when teaching about gap funding, EMD funding, or any other tactic that they try and sell which tells you to get 0% interest credit cards and build business credit to be used to lend out. No thank you. I'll pass.

    [email protected]Podcast Guest on Show #210
    3Reply
  • Jamie Bateman
    Investor · Baltimore County, MD · Member since 2014 · 466 posts · 438 votes
    2y

    We have bought only a handful of 2nds but to me, the 2nds game is a volume play. Buy 10 and do decently well on 8 of them. Lose $ on the other 2 but you are still ahead (hopefully). Unfortunately, a lot of people jump into 2nds initially because they are newer investors and don't have a lot of capital to work with.

    It is very important to establish your buy box (with specific states) before jumping into this game. 

    3Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    2y
    Quote from @Jamie Bateman:

    We have bought only a handful of 2nds but to me, the 2nds game is a volume play. Buy 10 and do decently well on 8 of them. Lose $ on the other 2 but you are still ahead (hopefully). Unfortunately, a lot of people jump into 2nds initially because they are newer investors and don't have a lot of capital to work with.

    It is very important to establish your buy box (with specific states) before jumping into this game. 

    Some good points above 
    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    1Reply
  • Chris SeveneyBusiness Member
    Moderator
    OP
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y

    @Don Konipol

    I see these all the time on commercial properties but have never seen one on single family residential

    Do they exist in that world? I would think trying to get the lender to execute one would be exhaustive

    7e investments53 Reviews
    WebsiteView Page
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    2y
    Quote from @Chris Seveney:

    @Don Konipol

    I see these all the time on commercial properties but have never seen one on single family residential

    Do they exist in that world? I would think trying to get the lender to execute one would be exhaustive


    well even if you have an inner creditor ... if you have a peer street situation wont matter much as that was a cluster of epic proportions.
    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
  • Brittany P.Pro Member
    Investor · Upper Marlboro, MD · Member since 2022 · 54 posts · 6 votes
    1y
    Quote from @Beth Johnson:

    I rarely, if ever, go behind HML for the reasons stated by others. There is too punitive measures and shorter time horizon for that loan to mature and eat away at your equity buffer. In WA state, we are deed of trust state and non-judicial (with an option for judicial) and requires a Notice of Default (30-day cure period) and a 120-day Notice of Trustee Sale with cure period. I'm extremely careful about how we originate 2nds and it's not for novice lenders and it certainly is not something I would buy - even at a steep discount. Yes, I've had to foreclose on a few in 2nd and it wasn't a problem because I was behind a conventional mortgage lender who could not act as fast as we could. But plenty could have gone wrong if it were not managed tightly - both during origination and while the loan was in service. There are some states like TX where the foreclosure process is so efficient, you could lose your equity position within 30-days of the borrower defaulting on the first. So, that's a state where we would be super cautious about lending in second position.

    And to @Jay Hinrichs's point, I see no safeguards for gators when teaching about gap funding, EMD funding, or any other tactic that they try and sell which tells you to get 0% interest credit cards and build business credit to be used to lend out. No thank you. I'll pass.

    Very rookie question for you, @Patrick Roberts and everyone else here: I thought that post-Dodd-Frank, the barrier for mortgage lender accreditation/licensing was essentially raised to a point that HML’s and private lenders were effectively iced out of securing loans with a mortgage or DOT. I guess I had (naively?) assumed that hard/private money loans were either unsecured or collateralized against non-real estate. Is that not the case? Is it possible to get licensed as a hard/private lender and secure loans with a mortgage/DOT? Do hard/private lenders have to get licensed by NMLS? I thought this day and age all lenders had to be individually licensed and working for a brokerage…?
    [email protected]
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    1y
    Quote from @Brittany P.:
    Quote from @Beth Johnson:

    I rarely, if ever, go behind HML for the reasons stated by others. There is too punitive measures and shorter time horizon for that loan to mature and eat away at your equity buffer. In WA state, we are deed of trust state and non-judicial (with an option for judicial) and requires a Notice of Default (30-day cure period) and a 120-day Notice of Trustee Sale with cure period. I'm extremely careful about how we originate 2nds and it's not for novice lenders and it certainly is not something I would buy - even at a steep discount. Yes, I've had to foreclose on a few in 2nd and it wasn't a problem because I was behind a conventional mortgage lender who could not act as fast as we could. But plenty could have gone wrong if it were not managed tightly - both during origination and while the loan was in service. There are some states like TX where the foreclosure process is so efficient, you could lose your equity position within 30-days of the borrower defaulting on the first. So, that's a state where we would be super cautious about lending in second position.

    And to @Jay Hinrichs's point, I see no safeguards for gators when teaching about gap funding, EMD funding, or any other tactic that they try and sell which tells you to get 0% interest credit cards and build business credit to be used to lend out. No thank you. I'll pass.

    Very rookie question for you, @Patrick Roberts and everyone else here: I thought that post-Dodd-Frank, the barrier for mortgage lender accreditation/licensing was essentially raised to a point that HML’s and private lenders were effectively iced out of securing loans with a mortgage or DOT. I guess I had (naively?) assumed that hard/private money loans were either unsecured or collateralized against non-real estate. Is that not the case? Is it possible to get licensed as a hard/private lender and secure loans with a mortgage/DOT? Do hard/private lenders have to get licensed by NMLS? I thought this day and age all lenders had to be individually licensed and working for a brokerage…?

    there are 12 to 15 states that require state Mortgage lender license and NMLS registration to make any loan on a 1 to 4 unit regardless if its owner occ or investor so yes many HML / PML are licensed But.

    The rest of the states require NO license or registration to make Non owner occ commercial purpose loans on any homes or commercial property.
    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    1Reply
  • Brittany P.Pro Member
    Investor · Upper Marlboro, MD · Member since 2022 · 54 posts · 6 votes
    1y

    Thanks! Do the rest of those states allow non-licensed lending on owner-occupied? Or maybe an easier way to ask: are there states that allow non-licensed lending on owner-occupied/primary residences?

    [email protected]
    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    OP
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    1y
    Quote from @Brittany P.:

    Thanks! Do the rest of those states allow non-licensed lending on owner-occupied? Or maybe an easier way to ask: are there states that allow non-licensed lending on owner-occupied/primary residences?


     You would have to go to nmls and research as state laws are constantly changing. Even if you do not need a state license, you are making a consumer loan and have to follow numerous federal statutes including CFPB etc. Many think if they only do 1 loan they have an exemption, which there are some things you may not have to do to do one loan, but you still have to follow federal guidelines such as using a servicer, sending compliant statements etc. 

    The note space is HEAVILY regulated since 2008 and continues to add further regulations which to me is a good thing as there are far too many bad actors in the space. 

    7e investments53 Reviews
    WebsiteView Page
    0Reply
  • Brittany P.Pro Member
    Investor · Upper Marlboro, MD · Member since 2022 · 54 posts · 6 votes
    1y

    Thanks, Chris—super helpful!

    [email protected]
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free