Deed in Lieu, Short Sale, or Cash4Keys on 2nd NPN

7 Replies

Scenario:

House is worth $65,000. (BPO)

Homeowner has a 1st for $58,000 and a 2nd for $15,000. (CLTV 112%)
Purchased the NPN 2nd for $2,000

She is behind on both her 1st and her 2nd by about 30 days now.   The homeowner no longer wants to keep the property, but doesn't want a foreclosure. 

My question is what would be the benefit and/or drawbacks of doing DIL, SS, or C4K? 

Thanks for the advice in advance! 

Have you purchase the second lien?  I'm going to assume you have.

A deed in lieu is the least painful.  So you could agree to a deed in lieu and take possession of the house.  Given these numbers I wouldn't give much, if any, cash to the owner.  Because once you get it you still have that $58K first to deal with.  If you were to sell for $65K you might net about $60K.  That's enough to pay off the first, but doesn't leave you any profit.  Is there an option to fix it up and sell for more?  If you could do that you might turn a profit.

Short sale may be an option.  As the second lienholder you might agree to a short payoff of, say, $3000.  That gives you a profit and results in only a small short payoff to the first.

Or, have the owners bring some cash to closing.  That's the best option if they care about their credit.  You're in a position to make that only a grand or two. 

Jon Holdman, Flying Phoenix LLC

You'll be lucky to get your $2k back if the BPO is accurate.  With a DIL/c4k, then you need to sell the property and net above the pay off for the 1st.

What would the property rent for?  Another option is to take the property subject to the 1st and hold it as a rental.  This may produce decent cash flow if the rate on the 1st is good and the 1st lien holder is willing to play ball.

I hate to harp on details but some of this does not line up.

A loan, any loan, that is less than 30 days past due is NOT a non-performing loan.  If it is less than 30 days past due, it is technically not even delinquent yet.  It is simply late.

Does that detail matter?  Yes,  You start harassing the Borrower and treating the loan like it is in default and you can find yourself in hot water.  The Borrower has to be 120 days past due before you can issue a Notice of Default which is step 1 in foreclosure process.

I like Jon's idea the best.  It is the most practical.  Reality seems like you over paid for this a loan a bit.  The challenge now is get out whole and any balance above your investment is a blessing.  I would suggest to the Borrower you would be interested in a Short Pay but the Borrower needs to take up the conversation with the Mortgagee in first position.  You can play the game a little bit by throwing a conversation number out there for the Borrower to chat with the First Mortgagee with say $4,500 or so and know that if you can get a payment of $3k net you did just fine.  As Jon mentioned, a Borrower showing up to a closing with a couple of dollars to make everything right is also an option as well.  

Personally, I would not explore DIL until I floated that idea and see how the first lien holder responds.  If the first doesn't want to play, then maybe consider a DIL and try and recover with rent proceeds but I think sometimes that sounds easier than it is in reality.  

Originally posted by @Dion DePaoli:

I hate to harp on details but some of this does not line up.

A loan, any loan, that is less than 30 days past due is NOT a non-performing loan.  If it is less than 30 days past due, it is technically not even delinquent yet.  It is simply late.

Does that detail matter?  Yes,  You start harassing the Borrower and treating the loan like it is in default and you can find yourself in hot water.  The Borrower has to be 120 days past due before you can issue a Notice of Default which is step 1 in foreclosure process.

I like Jon's idea the best.  It is the most practical.  Reality seems like you over paid for this a loan a bit.  The challenge now is get out whole and any balance above your investment is a blessing.  I would suggest to the Borrower you would be interested in a Short Pay but the Borrower needs to take up the conversation with the Mortgagee in first position.  You can play the game a little bit by throwing a conversation number out there for the Borrower to chat with the First Mortgagee with say $4,500 or so and know that if you can get a payment of $3k net you did just fine.  As Jon mentioned, a Borrower showing up to a closing with a couple of dollars to make everything right is also an option as well.  

Personally, I would not explore DIL until I floated that idea and see how the first lien holder responds.  If the first doesn't want to play, then maybe consider a DIL and try and recover with rent proceeds but I think sometimes that sounds easier than it is in reality.  

 In your experience would you buy a note like this and what would you of paid for a note of this caliber? 

@Arthur Mayer  we don't mess with second liens.  They are a numbers game and you need to be able to throw a bunch of cheap capital at a large pool and then hope to have a recovery rate that gets your money back, I frankly think they are fairly bad investments.  I always think of pull through rates as bulk mailers around 1% to 2% recovery.  I know everyone wants to talk about the home runs they occasionally find but nobody talks about the 99 losers it took to find the 1 winner.  That statistic is not too far from reality either.  I frankly can't name one institutional investor who was buying second liens who still do and most imploded or moved to first liens.

A bid for this from us would be $0.00 if standing alone.  If I could buy it with the first at the same time, maybe $5.00.  I am not be funny with those prices either.  

If I was that first lien, I would have zero interest in making your life as a second lien holder easy, it is not my problem. First lien holds all the cards here. Simply look at the value proposition here. Assuming a sale nets $60k, I can hold out for my $58k and force you to take $2k. If I think the Borrower has money, I would probably make it her problem to deal with you and not deal at all. If you are get too aggressive with me, I will just tell you to go pound sand and deal with the remedies on my own. Either you stand to take the $2k net from sale and whatever the borrower gives at close or you increase your cost base by at least that much to create any type of disposition. If you do not play ball with me an advance or two to protect my interest wipes you out completely. If the borrower gets begrudged and goes into default by the time I file NOD you are wiped out with interest arrears. You get the point, experienced Mortgagees know the game.

That is why my suggestion is you act and talk first, make it happen.  You actually need to, your position is eroding by the second.  Get the conversation started about the borrower liquidating the property or paying you off at a discount.  Just tell the Borrower you would take a discounted payoff at $4.5k see how that feels, if she can't handle it drop slowly to $3k. Give a 3 or 5 day window for the deal to be funded and be done.  Obviously be careful on how you present your willingness to drop to $3k if the Borrower ping pongs between you and the first.

Show you are willing to come down to make a deal, compromise first.  Talk first.  Make the deal first.  As a first Mortgagee, I would not talk first in a deal like this, I would ask what the Second Mortgagee is doing.  I don't have to talk first, I have all the cards.  

I am inclined to work when the other Mortgagee is offering to work but I am not going to arbitrarily take a discount on anything.    I think coming in a little under 1/3 of your balance is the right place to open negotiations.  You might get lucky and strike right at your ask.  I would be inclined to let $3k to $4k fly ($1k to $2k short) depending on the financial capability of the Borrower and total due.  If the Borrower has some money, these numbers likely float around her combined housing obligation anyway, she can just pay you and we are done.      

As a first Mortgagee, I can have patience here.  As a second Mortgagee the building is on fire and you need to get out!  

I think one of the most common errors newbie loan investors make is they misunderstand what the real prize and purpose is.  To get paid.  Not own the property or pull off exotic dispositions.  Just get your money and go.  That is why I say, anything you can get above your $2k position here is a blessing, take it and run.  Don't get greedy or silly as you can slip to zero in a heartbeat.  Good luck.

No, I wouldn't have bought the second in the first place (been waiting to say that, LOL)

unless, I knew there was a DIL in the mix and the property had other potential.

As mentioned, this isn't a NPN its a slow pay, you can discuss a DIL in collecting a debt.

Tell the bank a DIL to a note holder is often agreeable to assume payments.

BP is not responding again, one letter per second or slower. Later. 

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com