Laguna Niguel, CA · Member since 2015 · 71 posts · 29 votes
I am in contact with a 2nd position private lender who is willing to sell his note at a small discount. The property is in California, the sale date is scheduled for mid December and he is the foreclosing lender. There is a 1st in place which was previously in preforeclosure but that has issued notice of rescission and I can't find any default notice since then. The current owner has filed for bankruptcy about a month ago and the 2nd position lender is saying that he is in the process of getting a release of stay from the court which should happen pretty soon. I do not yet have information on whether it is a Chapter 7 or 13 bankruptcy as I have yet to make more detailed contact with the lender. There is plenty of equity in the house.
I'm thinking about purchasing the note from the lender after bankruptcy is lifted and taking over his foreclosure process.
Being this my first note purchase experience, what are the risks and potential complications that could arise from this? If the bankruptcy was filed just one month ago by the owner, why would the court grant the release so soon especially if there is a payment plan in place, and can the 2nd position lender request for the release? Can the court order the 2nd lien to be reduced or even relinquished due to the owner being in bankruptcy? Do I run any risk of losing part or all of my investment?
I sincerely appreciate all of your responses in advance.
Lender · Austin, TX · Member since 2012 · 211 posts · 166 votes
10y
Hi Han,
There is nothing wrong with buying a loan in this condition. A few things you need to be clear on prior to purchasing. I am sure there are others but these immediately come to mind.
1. Find out the 1st mortgage payment amount and if it's current or in default.
2. Determine how much equity is really in the property. Be conservative and account for resale fees, legal, and other expenses. These can add up fast.
3. Find out what type of bankruptcy are they in.
4. Get the borrowers first and last name, and last four digits of their social. Go to pacer . gov and look up their BK filing. Learn everything you can about that situation and what has been filed. It is all available virtually for free at pacer.
5. I would also ask for a hefty discount in a situation like this. I realize the property has equity and is in California, which is a non judicial foreclosure state, but you should still be buying with a hefty discount, not a slight one. Regardless of the outcome you will be laying out money or waiting months before a resolution is realized. I am not saying this is a bad deal, just something to be aware of.
Since all you stand to gain is what is owed on the 2nd lien, you should be buying at much less than what it's worth. That difference between what you paid and what they owe on the 2nd lien is your profit. Your risk or exposure is having to extend legal fees and possibly carrying the 1st mortgage until you can sell the property once you have taken legal ownership through a foreclosure via the 2nd lien.
Here are my responses to your questions below in ITALICS.
QUESTION: Being this my first note purchase experience, what are the risks and potential complications that could arise from this?
ANSWER: Many things could arise. It could still be a good deal if you have all the information up front. I would suggest getting a title report to start with.
QUESTION: If the bankruptcy was filed just one month ago by the owner, why would the court grant the release so soon especially if there is a payment plan in place, and can the 2nd position lender request for the release?
ANSWER: A payment plan for debts will only be in place on a Chapter 13 bankruptcy. A chapter 7 will have no payment plans to many creditors. I don't have all the information to comment on why the stay would be lifted quickly. You need to find more information on the filings via pacer.
QUESTION: Can the court order the 2nd lien to be reduced or even relinquished due to the owner being in bankruptcy?
ANSWER: No. 2nd liens cannot be stripped or "wiped" in California. The bankruptcy could potentially stall your being able to foreclose or recover your investment for a good deal of time though.
QUESTION: Do I run any risk of losing part or all of my investment?
ANSWER: In almost all situations, the answer is yes. If you cannot afford to lose the money I would not suggest purchasing. However, this could be a solid deal. We don't have the actual figures here in order to make an informed decision. There are a great deal of nuances here. I would suggest having someone with more experience guide you on a purchase like this and not trying to do it yourself. Or, simply start with a more vanilla note purchase with a defaulted 2nd lien.
Flipper · Cupertino, CA · Member since 2015 · 265 posts · 27 votes
10y
i AM IN THE MIDDLE OF A NOTE Purchase w/out BK.
find out the deal is with the first. They are senior to their debt, so they can crush, make sur there are's any other secured interests on the property. worth the $100 or so for a prelim title report.
If the bankruptcy was filed just one month ago by the owner, why would the court grant the release so soon especially
I have not seen the 2nd spin new rules. You may end-up being a 2nd for ever. I have seen bk last 2+years, all the time cost legal fees (if you have atty), but earning interest at the same time. See what the default interest rate is. Make sure all paperwork has been filed correctly. Many new CA laws to be aware of. The deal I am looking at the borrower lived in NYC, but was service at the property in CA. What that proper service.
if there is a payment plan in place, and can the 2nd position lender request for the release? Can the court order the 2nd lien to be reduced or even relinquished due to the owner being in bankruptcy? Do I run any risk of losing part or all of my investment?
How do you prevent at the trustee sale of the 2nd bidding up what they will pay. Sue you get your money, but the land is the grand prize. I have been looking at a way to foreclose and keep the land.. Deed in lieu is all I have come up with.
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
10y
Yeah, no great upside to "a small discount". After you do get it to the foreclosure sale, you're only entitled to what you're owed, not any excess. If there's good equity, there will be other bidders.
If, as a junior lien holder, you foreclose and are able to force a sale and receive title to the property, you now become responsible for payments on the senior lien(s).
That is, if you are in second position and successfully complete the foreclosure, any 3rd, 4th, etc. liens "fall off", but not the first lien or any tax liens.
Not trying to discourage you, just want to make sure you are aware.
Yes I'm aware that if I buy the 2nd and take back possession of the property I'm taking it subject to the 1st. I'm willing to reinstate the 1st if it's in arrears and keep it current until I sell the property or decide to rent it out.
In this case the 2nd is foreclosing, not the 1st. I pulled title docs and did a bit of research to make sure there is no NOD or NTS pending on the 1st, else there is no point in buying the 2nd lest I get wiped off by the 1st. One of the contingencies on my offer to the 2nd lender is to verify the balance and status of any senior loans.
My intention (and hope) is that nobody bids at the auction and I become the foreclosing beneficiary. If I get bid out, I'll just take the small discount I paid as my profit, but I'm shooting for that other possibility. I have nothing to lose in that case except that my return on money would not be as attractive. Do many people bid on junior liens (in this case it's the 2nd) even if there was equity?
What do you mean by "I have not seen the 2nd spin new rules. You may end-up being a 2nd for ever"? Do you mean that because of the BK if I'm not able to get a release from the court I run a risk of being in deadlock without being able to do anything as a junior lender?
Attorney · Attleboro, MA · Member since 2015 · 412 posts · 165 votes
10y
You need to talk to a bankruptcy attorney who knows the rules in your jurisdiction. You need to review the bankruptcy plan and see how the second is getting treated.
For example, in MA one reason owners file a Chapter 13 is to get current with the first AND potentially stripe off the second. They are able to do this if they are upside down on the first. The second is then treated as unsecured and paid whatever the other unsecured are getting under the plan, if anything. Since values have been rising not as easy to do this.
You may also need permission from the Court to buy the loan
Flipper · Cupertino, CA · Member since 2015 · 265 posts · 27 votes
10y
>Chapter 7 or 13 bankruptcy
you cam log into pacer.gov, and look up the case docket
I may misunderstood your post, but I understood you to be saying that the BK court might do things for you, like restructuring a payment plan that the borrow has.
Flipper · Cupertino, CA · Member since 2015 · 265 posts · 27 votes
10y
>Chapter 7 or 13 bankruptcy
you can log into pacer.gov, and look up the case docket
I may have misunderstood your post, but I understood you to be saying that the BK court might do things for you, like restructuring a payment plan that the borrow has.
Investor · Adkins, TX · Member since 2012 · 193 posts · 93 votes
10y
The Supreme Court has recently ruled that the second can not be wiped out if under water.
Go to Pacer.gov and look up the BK filing.
Also don't forget that if you foreclose on the 1st CA allows 1 year right of redemption so if you get title to the house you are in limbo for 1 year.
If you pay more than 20% of UPB you are paying too much. Don't put yourself in the position of a bidding war. Do not be attached to the outcome.
I have a VA call finance companies within a 100 mile radius of where I live and ask if they have non-performing paper. It is a gold mine if you are persistent. Why because no one else does it.
Right now I have a car note paying 92% yield that I bought. Had a GPS installed so if the payor is late then by my iPhone I disable his ignition. I then no longer have payment problems.
Don't follow the heard. Be like Warren Buffet look for deals where no one else is looking.
Have the seller pull a 3 bureau credit report on the payor and see if he/she has the capability to pay the second. What other debt obligations does the payor have? Most people buying non-performing notes do not do their due diligence.
These are some of the things you need to know before buying the second:
Credit score of payor
Place of employment
Yearly income
Other real property owned?
Any pending lawsuits?
Are property taxes current?
Check municipality for code violations
Unfortunately all you hear about all those that made money from NPL you never hear about those that lost their shirt.
Go to Amazon and read Gordon Moss's book on seconds.
Lender · Austin, TX · Member since 2012 · 211 posts · 166 votes
10y
Hi Han,
There is nothing wrong with buying a loan in this condition. A few things you need to be clear on prior to purchasing. I am sure there are others but these immediately come to mind.
1. Find out the 1st mortgage payment amount and if it's current or in default.
2. Determine how much equity is really in the property. Be conservative and account for resale fees, legal, and other expenses. These can add up fast.
3. Find out what type of bankruptcy are they in.
4. Get the borrowers first and last name, and last four digits of their social. Go to pacer . gov and look up their BK filing. Learn everything you can about that situation and what has been filed. It is all available virtually for free at pacer.
5. I would also ask for a hefty discount in a situation like this. I realize the property has equity and is in California, which is a non judicial foreclosure state, but you should still be buying with a hefty discount, not a slight one. Regardless of the outcome you will be laying out money or waiting months before a resolution is realized. I am not saying this is a bad deal, just something to be aware of.
Since all you stand to gain is what is owed on the 2nd lien, you should be buying at much less than what it's worth. That difference between what you paid and what they owe on the 2nd lien is your profit. Your risk or exposure is having to extend legal fees and possibly carrying the 1st mortgage until you can sell the property once you have taken legal ownership through a foreclosure via the 2nd lien.
Here are my responses to your questions below in ITALICS.
QUESTION: Being this my first note purchase experience, what are the risks and potential complications that could arise from this?
ANSWER: Many things could arise. It could still be a good deal if you have all the information up front. I would suggest getting a title report to start with.
QUESTION: If the bankruptcy was filed just one month ago by the owner, why would the court grant the release so soon especially if there is a payment plan in place, and can the 2nd position lender request for the release?
ANSWER: A payment plan for debts will only be in place on a Chapter 13 bankruptcy. A chapter 7 will have no payment plans to many creditors. I don't have all the information to comment on why the stay would be lifted quickly. You need to find more information on the filings via pacer.
QUESTION: Can the court order the 2nd lien to be reduced or even relinquished due to the owner being in bankruptcy?
ANSWER: No. 2nd liens cannot be stripped or "wiped" in California. The bankruptcy could potentially stall your being able to foreclose or recover your investment for a good deal of time though.
QUESTION: Do I run any risk of losing part or all of my investment?
ANSWER: In almost all situations, the answer is yes. If you cannot afford to lose the money I would not suggest purchasing. However, this could be a solid deal. We don't have the actual figures here in order to make an informed decision. There are a great deal of nuances here. I would suggest having someone with more experience guide you on a purchase like this and not trying to do it yourself. Or, simply start with a more vanilla note purchase with a defaulted 2nd lien.
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
@Wayne Brooks yes Wayne I don't believe that is correct. AS long as its a trustee's sale and not a Sheriff's sale.. In Oregon if its Sheriffs its a 6 month right of redemption. but most savvy investors own the redemption rights prior to bidding.
@Boyd McClean you just sparked an old fuse for me.. I used to buy paper from local Portland thrifts in the day.. but the manager that I worked with got transferred and the new manager would not engage... time to dust that one off. I would only buy firsts and usually about 2 weeks from the sale. worked pretty good.. I either got paid off and nice return or ended up with property.. had both happen.
One of my clients in Oregon is a car dealer and has a large finance component.. they do exactly what you do with the chips in the cars etc.
When I queried a used car dealer in Jackson MS about how he can sell used cars with 100 down 100 a month.. He said well brother my clients will be born live and die in a 5 square mile area we just drive around till we find the car LOL.. I thought that was a novel approach.. I would suspect his clients would know how to disable the Ignition thingee .. since they are pro's at hacking power water and gas...
Thank you for the detailed answers. Question: If I buy the 2nd, any legal fees or other expenses that I incur can be rolled in into the minimum bid amount so that I can recover all the expenses right?
Thank you for the detailed answers. Question: If I buy the 2nd, any legal fees or other expenses that I incur can be rolled in into the minimum bid amount so that I can recover all the expenses right?
Yes that is correct. Legal fees and costs within reason. So all foreclosure fees, attorney's fees, lender advances to protect the collateral, etc. Remember as mentioned you need to do your homework on a deal like this. It can be profitable but you need to do your due diligence and know as much as possible about what is happening in the transaction.
My intention (and hope) is that nobody bids at the auction and I become the foreclosing beneficiary. If I get bid out, I'll just take the small discount I paid as my profit, but I'm shooting for that other possibility. I have nothing to lose in that case except that my return on money would not be as attractive. Do many people bid on junior liens (in this case it's the 2nd) even if there was equity?
In California you'll have bidders at sale if there is equity, regardless of the junior position, even with the BK. You say you're willing to risk it selling at sale and your note purchase discount being the profit. Make sure you understand all the costs involved so you don't just break even.....after keeping your money busy for months.
@Ron S. A one year right of redemption after a 1st Mtg forecloses in CA??? Say it ain't so.
News to me too. But maybe Ron can clarify on the details. Under what circumstances is there right of redemption in CA trustee's sales? We don't have right of redemption at tax sale either.
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
10y
A California foreclosure which seeks a deficiency through a judicial process has a redemption period post sale of 12 months.
A California foreclosure which proceeds non-judicially through the DOT's power of sale is barred from deficiency and the redemption post sale is 3 months.
CCP 729.030
In a tax sale the right of redemption expires the night before the tax sale. Certain things can happen which revive the redemption period but not all that common in residential transactions. For instance, a failed purchase may revive the owner's redemption rights.
Foreclosure is the action of terminating the right or equity of redemption of all interested parties including owners, creditors and other lien holders. Those redemption rights or the equity of redemption is present in all states for all sales. (Comes from our common law heritage) Typically equity of redemption refers to prior to the sale event and a right of redemption is post sale. Not all states have a right of redemption (post sale legal right to redeem) but all states have at least an equity of redemption (a period of time to redeem prior to sale).
You confused me now. AFAIK and from what others have commented here, CA is a non judicial state so there is no right of redemption period post sale. The only post-sale right of redemption periods that I know apply are the HOA and tax liens.
Having said that, when you say "A California foreclosure which seeks a deficiency through a judicial process has a redemption period post sale of 12 months," is my case in any way related to this statement because a BK court is involved?
Laguna Niguel, CA · Member since 2015 · 71 posts · 29 votes
10y
Originally posted by @Account Closed:
In California you'll have bidders at sale if there is equity, regardless of the junior position, even with the BK. You say you're willing to risk it selling at sale and your note purchase discount being the profit. Make sure you understand all the costs involved so you don't just break even.....after keeping your money busy for months.
Yes, I'll probably have to JV with a more experienced person on this one or at least get close guidance to make this work. I certainly don't want my money tied up for a long time with very little or even negative return. Appreciate your inputs!
If, as a junior lien holder, you foreclose and are able to force a sale and receive title to the property, you now become responsible for payments on the senior lien(s).
That is, if you are in second position and successfully complete the foreclosure, any 3rd, 4th, etc. liens "fall off", but not the first lien or any tax liens.
Not trying to discourage you, just want to make sure you are aware.
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
10y
In California a foreclosure can be done non-judicially or judicially. In order for a Mortgagee to seek a deficiency against the borrower the foreclosure must be judicial. The common foreclosure is non-judicial but judicial actions still take place.
A deficiency is the amount due by subtracting the auction proceeds from the total due. Nothing to do with BK directly but can be affected by BK - as a discharged debt can not have a deficiency sought.
I posted the California code. After doing some digging for clarity when a Deed of Trust is used in California the borrower has an equity of redemption (pre-sale) which expires 5 days prior to sale. Also refereed to as "Reinstatement Period".
After a judicial proceeding which does not seek a deficiency California requires the 3 month right of redemption. If the judicial proceeding does seek a deficiency then the borrower has a one year right of redemption.
In both of those judicial settings, oddly enough, it looks as if the borrower can retain possession until the termination of the time. A bidder at auction is barred from filing writ for possession. In other words, they can not be evicted in that setting until the redemption period runs it course.
So my statement above is incorrect - the 3 month period is for judicial proceedings that do not seek deficiency. Not sales relying on the Power of Sale in a deed of trust.
The BK stays all collection efforts. The second lien filing for relief of that stay will probably not be granted until a plan is approved and a failure to address the second lien's payment fails. Could take a couple months from initial filing.
