2nd Lien Question

9 Replies

Good morning All,

I am looking at a nonperforming 2nd lien and while doing due diligence. I find out that the property is in preforeclosure from the 1rst lien lender. If I were to purchase this not how would I go about recouping the UPB on the 2nd, or would the foreclosure wipe it out all together. The property is in Las Vegas if that matters..

Please advise and Thank you all for your time,

Hello Christopher

If you bought the second and the first completed their foreclosure then you would indeed be wiped out. However, if you bought the second and could take over payments on the first by bringing it current, you may have something there -- so long as the numbers work and there is time to reinstate the first.

I hope that helps!

The situation you're describing is a pretty typical junior lien buyout. I trust that you bought the 2nd at a significant discount to the UPB. Now pay the owner's arrears on the 1st and start the foreclosure from 2nd position adding your expenses, including the arrears payment to the UPB.

Now generally you'll proceed to auction and one of two things can happen. Either someone will bid on the property, in which case you'll receive the all of your costs plus the UPB, netting the difference between the your price on the note and the UPB. Or no one will bid and you will take over title subject to the senior liens. Provided that you bought well, the market value of the property will exceed the total of the surviving liens and your total costs.

If no one bids on the property, you don't have to sell the property that you just took title to. You could hold it for cashflow, though I'd recommend that you refinance to retire the existing loans as they could be called anytime after you record the title change.

This being said there are a bunch of possible exceptions to all this, like HOA liens and IRS liens, but this is how the general case works. You don't need to be any trickier than this. The Hardest Hit Fund is not intended to bail out lenders, but rather homeowners. As the lienholder you would not qualify for assistance. Just make sure that you buy the 2nd with a significant discount.

If any of this is not completely clear, please post your lingering questions or send me a PM. I'll do what I can to help. Just don't guess. Often I find that even people who think they understand the foreclosure process are confused enough to lose a lot of capital. Don't risk a big mistake.

Hi Christopher. It almost sounds like you are attempting to modify the terms of the existing 1st Trust Deed. There is nothing in the law preventing you from assisting the homeowner free in filing his paperwork. To do so and get paid for it is not allowed unless you are an attorney. If you are considering taking the second down..then I would enter into contract with the owner and purchase the home subject to existing financing. Now you are responsible to keep his payments current. If the homeowner is in default this could be a good  option for him as it will keep his credit intact and avoid a potential foreclosure. Keeping the first current is now your responsibility so ethically you are responsible so do  alot of homework on the property before committing to it. Ok..so there is my 10 cents..

Christopher,

I would avoid purchasing an asset like this. The primary indicator we look for as investors in NPN 2nd's is the first lien performing. I am sure there is some "angle" to make money when 1st is in foreclosure, but it's not worth the hassle or the risk. Buy 2nds when 1st is performing and you are ahead of the game.

If the 1st mortgage has already initiated foreclosure they are now in the drivers seat. Meaning, they only need to recoup THEIR investment which is what the borrower owes them. They do not need to include enough to pay the 2nd off, i.e. you.

If the property has substantial equity, this could be a different story as they need to sell at a relatively agreeable FMV. Little bit of nuance here, but short story is just pass it up and do not buy it. No need to get real creative. Plenty of other 100% legitimate deals out there.

Josh

Originally posted by @Christopher Montgomery :

Good morning All,

I am looking at a nonperforming 2nd lien and while doing due diligence. I find out that the property is in preforeclosure from the 1rst lien lender. If I were to purchase this not how would I go about recouping the UPB on the 2nd, or would the foreclosure wipe it out all together. The property is in Las Vegas if that matters..

Please advise and Thank you all for your time,

 @Joshua Andrews and Tom Mole broke it down for you. As we were discussing in another thread, there is money to be made with this type of note (through short sale, helping homeowner do a modification on 1st etc) but there are much better opportunities for you elsewhere. 

These are only good when you buy a stack of them - understanding that some will completely fail, some will break even, and some will be big winners. The play is that over the 10 or 100 that you buy, the ones that make profit outweigh the ones that lose.

As a one off, you would want to protect your capital by investing in safer notes.

Thank you all so much for your very candid responses!!! I have taken very good note of them and this definitely adds another level of due diligence as far as 2nds are concerned...

I truly appreciate the input

@Christopher Montgomery ,

Allow me a follow up, please. I don't agree with @Joshua Andrews that buying this asset is a bad idea. If the numbers work and I could get the 2nd lien to sell at a discount, then I would absolutely do it...and I would NOT lose money. I would only do it if the numbers made sense, but if they do, the first would never get a chance to foreclose.

You can only win on this kind of deal if you do you're homework, but that's true of any other kind of deal as well. First, you want to be sure that you can buy the note and get it at a substantial discount. Second, you'll need to know what the property would be worth to the retail market (ARV). If there's enough equity to make it worth your time and you have the funds to buy the note and make up the arrears to the foreclosing lender, then make an offer on the second. Make certain that your offer includes a due diligence period.

Once your offer is accepted the real fun begins. Just like buying a property you would do your homework and back out if you find too much hinkeyness. However, if all goes as planned, you would pay the first in order to get it out of foreclosure, then start a foreclosure from second position. You have no moral, ethical or other obligations to continue making the payments on the first for the current property owner. You just need to get the first to cancel the original foreclosure action so that you can file yours. You can add the amount you paid the first to your filing, so you don't lose anything there.

If this isn't freaking you out, then make the offer. (Let me know, if you'd like help with that) When you get it accepted let me know and we'll worry about the rest of the details.

When I'm looking to buy a junior lien I really don't care whether the first is performing or not. It works the same either way. Mostly I want to know what condition the property is in, how much it would take to get it to ARV and what is ARV, then I want to know what the senior liens are, especially any delinquent property tax.

Once you know all that, the formula is pretty simple:

ARV
- Repairs
- Min Profit (always pay yourself first)
- Sr. Encumbrances (liens mostly)
- Foreclosure Costs (include fees and holding cost of money since this often takes a while)
---------------------------------
Max Allowable Offer on the 2nd

OK, so it's not as simple as we're used to, but that's just because we're mostly not taught to buy 2nd's. This isn't that hard once you do it. So, do it. Just do it right. Be not afraid as you have the incredible braintrust of BiggerPockets to tap into. We will help you if you will just ask. I want to see you succeed. Let me know if you have any questions.

Originally posted by @Tom Mole :

@Christopher Montgomery ,

Allow me a follow up, please. I don't agree with @Joshua Andrews that buying this asset is a bad idea. If the numbers work and I could get the 2nd lien to sell at a discount, then I would absolutely do it...and I would NOT lose money. I would only do it if the numbers made sense, but if they do, the first would never get a chance to foreclose.

your plan should work ..however how would you know the plaintiff's attorney would even talk to you about paying off somebody's missed payments ? imagine, there is an ongoing foreclosure, you can review the file and figure out at which stage the foreclosure is ..but are you certain that e.g. Pierce and Associates would even respond to your phone calls or inquires ? you are not part of the case....you could possibly file motion to intervene, have a judge listen to you and allow you to move along with your plan... to me there are a lot of unknown...dont have that much gamble in me ...