Owner sells home. 1st Note current. 2nd Non-performing. Now what?

14 Replies

Good day, All! 

New to this whole note buying business and I have run across an interesting scenario that I'm hoping you all can help me out with. I just bought a non-performing 2nd note on a home where the 1st note is current, but I just found out the house is under contract and listed for 189K.

1st note balance is 196K.

2nd note balance is 51K.

Market Value is 232K, but it's listed at 189K.

To me, the math just doesn't add up. If this house sells for the listed price, what happens to my 2nd note?

Thanks In Advance, 

Amber

You need to be addressed. You're on title and need to sign off on the transaction. It will most likely be a short sale. If the 1st Mortgage approves the transaction and accepts less than what they are owed, they usually offer the 2nd Mortgage between $6k to $10k. You can play hard ball and try to get more. I usually ask for my 2nd mortgage to he paid down by a certain amount, before I sign off on the amount I'm offered through the short sale. At this point, the goal is to deal with the person, who is handling the transaction and try to get out whole.

well I am not a NPN expert by any means but this is an interesting question so this is my best guess's

1. the 189k is all the property is worth.. in reality.. so that's why its listed at that price.. and probably in contract for around that number.

2. the seller does not realize you own the 2nd and who ever sold you the second probably realized the value was not there and unloaded it to you..

3. your in the drivers seat in that this deal can't close without you signing off on your payoff.

4. this is a short sale .. the first lender will be asked to take a short and will usually only cooperate if you as the second take no more than about 5k for your position.

5. if you paid for than a few grand for the 2nd your in jeopardy.

6. if you don't cooperate and the 2nd is in default you can foreclose payoff the first and deal with the asset..

7. if the seller gets frustrated they just walk and squat stop paying on the first it forecloses and you either pay it off or it wipes you out completely .

either way.. 2nds for most folks are pretty risky.. unless of course you paid next to nothing for it and its just mad money.. that you can easily lose. and just chalk it up to well that did not work.

@Chris Seveney is an active NPN investor he may have a different or more thorough take on this situation. I personally don't do NPN and except I will buy the occasional first but don't do any thing with seconds.

Originally posted by @Bill McCafferty :
You need to be addressed. You're on title and need to sign off on the transaction. It will most likely be a short sale. If the 1st Mortgage approves the transaction and accepts less than what they are owed, they usually offer the 2nd Mortgage between $6k to $10k. You can play hard ball and try to get more. I usually ask for my 2nd mortgage to he paid down by a certain amount, before I sign off on the amount I'm offered through the short sale. At this point, the goal is to deal with the person, who is handling the transaction and try to get out whole.

 glad to see my guess of 5k was about right.. that's what I have personally seen on the short sales I have been involved with.. never really seen more than that.. just hoping she only paid pennies on the dollar and is not in that deal like 15 to 25k.. if that's the case I think she is going to lose some dough.

Yeah, I usually saw 5%, maybe 10%, going to the second in a short sale....the alternative for the second is not very good. I’m guessing whoever sold/dumped this note came up with the $220k value.....

Thanks, everyone. Your responses are greatly appreciated!

I’m just a bit confused about how it could possibly be a short sale if the first mortgage is current. How could that possibly happen?

Seller wants out of an upside down situation before they start defaulting on primary mortgage?

Originally posted by @Amber Bennett :

Thanks, everyone. Your responses are greatly appreciated!

I’m just a bit confused about how it could possibly be a short sale if the first mortgage is current. How could that possibly happen?

 Just because they want to do a short sale doesn't mean it will be accepted. If they're current and have income then it's frivolous and the 1st mortgage owner doesn't necessarily have an incentive to take a loss on it.

Its a short sale because they want to sell, the net proceeds are insufficient to pay off the outstanding debt and they don't want to bring cash to closing to make up the shortage.  If they sell for $189K they will net about $174K after closing costs and commissions.  That's not enough to pay off the first, let alone the first and your note.

Originally posted by @Jon Holdman :

Its a short sale because they want to sell, the net proceeds are insufficient to pay off the outstanding debt and they don't want to bring cash to closing to make up the shortage.  If they sell for $189K they will net about $174K after closing costs and commissions.  That's not enough to pay off the first, let alone the first and your note.

 as we know quite common last 10 years not so much these days..  only hope for the second holder is the owner continues to pay on first and the house starts to appreciate to cover her investment.. Or she bought a rental.

@Amber Bennett ,

I see this all the time where some overzealous real estate agent lists a house as a short sale without even okaying it with the bank. I have no idea what they are thinking. Anytime I inquire about a short sale the first thing I ask is if they have the blessing of the lender. If they don't it is highly unlikely the deal will happen because, as pointed out, the bank has no incentive to take a huge loss on a performing asset. So you could reach out to the listing agent and see if they even have a clue what they are doing. It is quite possible they are just taking a shot in the dark. Hoping the 1st will roger up to a huge loss and that you won't show. They may not even know that there is a 2nd on the property.

I'll say this too. If you are confident in your estimate of FMV, start your foreclosure immediately! You want to be ahead of the first on this.

You can always take the property subject to the first and deal with it that way. If the 1st truly is underwater, though, you may be in a hurt locker.

My last 5 Short Sales from the 2nd Mortgage position where the 1st Mortgage took a loss, the higher the FMV, the better. The 1st Mortgage has to agree to the Short Sale. 1. $6k from the 1st Mortgage & $24k from my paydown. $30k. Sold for $525k. 2. $10k from the 1st Mortgage & $10k from my paydown. $20k. Sold for $290k. 3. $6k from the 1st Mortgage & $0k from my paydown. $6k. Sold for $77k. 4. $10k from the 1st Mortgage & $7k from my paydown. $17k. Sold for $300k. 5. $12k from the 1st Mortgage & $3k from my paydown. $15k. Sold for $112k. The goal is to get out whole. We did on 4 of the 5. 3 of the 5 we made money. Lost money on the $6k short sale.

This is not legal advice:

They'd contact you to negotiate a settlement if they plan on closing. Depending on who the investor on the 1st mortgage is will determine the guidelines on what payoff the 1st lien servicer may offer a subordinate mortgage. It'd be up to you to play ball according to those guidelines or to try to get more money from contributions etc from the agents, buyer, etc if allowable. 

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