Non-Performing Note Investing: How to Prevent 2nd Mortgage Notes from Becoming Wiped


When my partners and I first started investing in non-performing notes, one of our biggest fears was what we call in the note industry, getting “wiped” on a note.  Keep in mind at the time we were just venturing into delinquent second mortgages, a category of notes that many find risky for just that very reason BUT also much like 1st mortgages, 2nd mortgage notes are a secured investment backed by property AND are much less expensive.  This was a time when there was a lot of equity still in the market and prices of real estate were actually increasing

Our biggest fear was that a first mortgage on the property where we held our second lien would foreclose ahead of us and we would in essence get “wiped “.  The reason for this is because the foreclosure attorney representing the first mortgage company at the foreclosure sale is only concerned about protecting their client’s interest and would either start the bidding at what the 1st mortgage was owed or at a number they’d be happy with. 

In most cases, they start with what is owed, and in a down market like we’ve just seen, the bank will take most of the properties back as an REO (Real Estate Owned), and just liquidate them.  If for some reason the bidding went beyond what was owed on the first mortgage any additional proceeds would be applied to any other secured liens (if there is any), and anything above that would go to the homeowner, (be sure to note that this is after any sheriff fees have been paid).

How Due Diligence Helps

As a newbie buyer to delinquent second liens, the one thing we did as part of our due diligence was to get clear on the status of the senior lien, and once purchased, we continue to monitor the senior lien on a monthly basis.  By knowing the status of the senior lien and the fact that they hadn’t started foreclosure yet gave us the ability to start our foreclosure on our Junior lien, ahead of the Senior lien, and this gave us the ability to control the foreclosure sale.  The reason this is so important is because our foreclosure attorneys’ bidding instructions would be for an amount acceptable to us, whether to cover all of our lien, or just a number that we were happy with.  So, if someone bought our lien at foreclosure sale, or we took the property back because there were no bidders, either way it would be “Subject To” the Senior lien.  But now, one of us would have the Sheriff’s Deed, and thus control of the property to either sell, rent, repair, etc.  Notice that the first has not been paid off, or on, at this point. (Also, keep in mind that this happens to us on LESS than 10% of our loans).   Now, if nothing is done in the near future, as far as re-instating, or paying off the first mortgage, in most cases, they would proceed to foreclose against the new owner.  But for the time being, the previous Junior lien holder, or investor is in control of the property.

But What About Equity?

To drive a point home, I have to tell you that, like everyone who is new, I had plenty of misconceptions about notes. Now, years later after working 1000’s of loans, I’m going to bring up one of the biggest taboos of all…BANKRUPTCY!

The second biggest fear towards being wiped, for a newbie investor in delinquent second liens, is if for some reason, property values plummeted and there was no longer any equity backing the second mortgage and a homeowner would just file bankruptcy and strip or “cram down” my Junior lien through the bankruptcy court (**NOTE** If there is a even $1 of equity backing your lien, than it should not allowed to be stripped)

Also remember, this is much easier said than done, for a couple reasons.  First of all, it can get expensive for the homeowner, and can become highly contested, thus requiring a full-blown, court ordered, appraisal.  And even if it is granted, the borrower must complete their bankruptcy plan and be completely discharged, otherwise, it’s as if it never happened.  Just so you know, after working with thousands of borrowers, we’ve seen the large majority of homeowners never complete their plans partly due to fluctuating restrictions that vary from state to state.  That being said, my company owns thousands of loans, over the last several years, and the number of cram downs is a very, very, low number.  You might be thinking, “Why doesn’t every homeowner try to strip an upside down lien?”  Well, when a homeowner is current on the first mortgage, they usually want to stay, and obviously they have a source of income.  They also have what’s called, ” Emotional Equity“. This was a very tough concept for me as a real estate investor to grasp and understand.

What We Learned From the Market Crash

Another interesting thing happened to us while we were relatively new to nonperforming note buyers, when the market finally did crash.  You see, up until that point we only focused on equity deals.  There had still been plenty of them available and we were petrified to death of anything without equity.  But after the crash, all of a sudden the majority of our portfolio had no equity.  At first, we didn’t know what to do! When we had previously bought 2nd mortgages that were current on the first mortgage, we would get out of, nine out of ten equity deals.  Now, we didn’t know what was going to happen, but we continued to work the loans because we didn’t have much choice since we already owned them.

You’ll never believe what happened. We continued to get seven or eight out of ten deals, regardless of ‘equity’, (< than 200% loan-to-value), when current on the senior lien.  Today, we make most of our revenue off loans without equity, and we purchased them for a fraction of what our equity deals had cost.  In fact, we sell off most of our ‘equity’ deals, since we can do so at a premium.  Besides, there’s not as much potential upside to these loans either, once the equity does come back into the marketplace.

So, the good news is, all our original fears when starting out have proven for the most part to be unfounded.  If you do the proper due diligence and you’re diversified enough, the fear of being wiped is not even worth worrying about.  And if you’re like me, after you work a lot of notes, you start to get excited about getting wiped on a loan because that means you get a tax break to offset revenue!
Photo: Orin Zebest

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.


  1. I know this is pretty off topic, but I recently read an article on real estate that was pretty funny. A lady came back from vacation and found out that her house was foreclosed and sold to someone else. The funny thing is, she had already paid off her mortgage! She looked deeper into it, and the bank that foreclosed her house wasn’t even her own bank! Turns out, the bank foreclosed the wrong home – they were supposed to foreclose her neighbor’s.

  2. Hi Dave,

    Great article and as you know this is what is on the top of note buyers minds.


    1.WHAT do you do that the banks holding the seconds and servicing them do not do to get them performing again. If banks handle millions of loans and are supposed to be the experts how do you get the home owners to pay a loan again?? Why wouldn’t banks try these options rather than selling at 5 cents on the dollar?? I would think an investor owning the loan would want to try these things or do they just get insurance payout from the bank on the loan??

    2. What about loans that were originated privately?? Do you buy those?? I have heard stories of those not complying with the safe act and a judge wipes them out as invalid agreements so I would want to stay with regular bank originated notes correct??

    3. How do you know if the 1st mortgage is current?? Here in Georgia we have a 30 day non-judicial foreclosure process. There is no notice but an acceleration letter to the home owner and then it goes in the public newspaper legal section for 4 weeks. That’s the only way you know about it. There are not recordings at the courthouse liked judicial states to get advanced notice. So do you watch their credit or something to know they are 30,60,90 days behind??

    Are there some states you just absolutely like to stay away from owning notes in?? If seconds are so lucrative why sell them off and why not just keep them all for your company??


    • Dave Van Horn

      Hey Joel,

      Thanks for the positive feedback!

      And all these are great questions.

      1.) “WHAT do you do that the banks holding the seconds and servicing them do not do to get them performing again.”

      – Banks tend to be in more of a “Pay up or get out” mode when talking to borrowers, which is partially because they are into the loan for the full amount because they originated it. This “pay up or get out” mentality doesn’t usually work for homeowners who are defaulting because they simply can’t “pay up” or reinstate their loan.

      “If banks handle millions of loans and are supposed to be the experts how do you get the home owners to pay a loan again??”

      – Banks typically specialize in originating/servicing loans NOT in the Collections of delinquent loans. What makes us different is we ask the borrower “What happened? Where are you at now? What would you like to do?” Since we are in a more flexible position in terms of time and how much we spent on the loan, we’re able to create a VIABLE plan with Homeowners. The main thing is we help to create THEIR plan, NOT the bank’s plan so the borrower is much less likely to re-default.

      “Why wouldn’t banks try these options rather than selling at 5 cents on the dollar??”

      – And the reason their selling notes at 5 cents on the dollar is because they have no time to work the assets due to regulators and reserve requirements.

      “I would think an investor owning the loan would want to try these things or do they just get insurance payout from the bank on the loan??”

      If you’re talking about the investor behind the loan, there are cases where some loans being serviced by the bank are insured by FHA or PMI (Private Mortgage Insurance) but most 2nd mortgages aren’t backed by any type of mortgage insurance.

      2.) Nope, we don’t originate or buy seller financed loans. We buy institutional because we don’t have those issues since institutional loans are underwritten by professionals adhering to government guidelines. Private notes are also not as affordable and profitable as institutional notes for my firm.

      3.) Yes, we pull credit and the credit report normally validates the senior lien’s status.

      And is there anywhere in the US that we won’t buy? Nope, we buy in all 50 states and territories because we only foreclose on less than 10% of 2nd mortgages. We’re diversified enough that it’s a non-issue.

      We do keep some loans, but we sell many 2nds because of the velocity of money. We only keep our average loan for 6 to 8 months, but we sell them to go back to the market to buy more notes. It’s the same reasons people flip houses as opposed to holding them all.


  3. Great Info Dave!
    When you buy no equity 2nd notes, I am assuming they are performing right?
    How long does it take you to typically make back your investment if they are paying?
    If they stop paying on a no equity 2nd do you do anything or just let it go?

    • Dave Van Horn

      Thanks Mark!

      – We do buy both non-performing and performing 2nds, but we buy mostly non-performing.

      – We mostly buy pools of non-performing loans, and we typically get our outlay of capital back within 6 months.

      – We do the same process for all of our non-performing notes if they’re current on the 1st mortgage (regardless of equity): We do a mail campaign, a phone campaign, a door knock service, and start the foreclosure process by day 16. If the borrower isn’t paying their 1st mortgage and they’re no longer in the property, our strategies are different, which is really on a case by case basis because there are a lot of variables. For example, market rent vs. the size of the 1st mortgage payment.


  4. Dave,

    I own a NP 2nd mtg note, that is post-bankruptcy (Ch 13, dismissed) and post-foreclosure. I happen to know this person has other assets, such as a personal residence. The borrower has no intention of paying a penny on the loan. Is it worthwhile to get try and get a judgement? Is there a market for the note, or for the judgement if I succeed?


  5. Very informative article Dave.

    A few quick questions.

    1. How does one get a deeper knowledge of the note industry in today’s climate? I am sure BP forum is the natural starting point, just wondering if you had any additional resources that one could use to get added knowledge.

    2. When you first began were you buying pools of notes from lending institutions, or were you buying them from private lenders? I’m pretty sure buying opportunities boil down to relationships. Especially for those who are buying pools of notes. Can you describe some ways those relationships have been forged when you were just starting out?

    Sorry for these rookie questions. I am very interested in note buying, and how properties can be acquired or controlled through the paper.

    Thank you,

    • Thanks Roc!

      1. If you haven’t already, you should check out Jimmy Napier’s “Invest in Debt”. You can also check out our e-zine that goes a lot more in depth:

      2. When I first started, we were buying individual loans from a mortgage servicer. We then moved on to buying pools from smaller loan servicing companies before we were direct to major banks. The first major bank we got to was by accident because the Trade Desk manager for the small servicer moved to a large bank, so you’re right relationships help greatly.

      Hope this answers your questions,

      • Thank you for your response Dave.

        I have read Mr. Napier’s book, along with Frank Gallineli’s book and learned a ton. What I am struggling with is how to now turn that specific knowledge into transactions.

        For the time being, I will continue to monitor this forum, and I will be sure to check out your e-zine as well.

        Thanks again for your reply.

        • Roc,

          Please do, but remember it’s a learn by doing business. Eventually at some point, you have to take the leap and purchase a note (or a few) to really learn the business. When we started we purchased 4 notes. 1 was a home run, 1 was a grand slam, and 2 we got wiped and lost money. I can’t tell you how valuable it was to learn from those 2 notes.

          Best of luck,

  6. Steve Johnson on

    Dan, I love the idea of liens. It seems like such a hands off guaranteed profit as long as you have done your due diligence. My long term plans consist of investing in notes as over. Who knows, maybe I’ll end up foreclosing on some famous movie stars home, or perhaps a building owned by the government. Is there a scenario where you would recommend note buying as a starting out strategy if partners were involved?

    I am curious as to how one monitors the status of the senior lien? You mentioned you monitor the credit report of the owners. Would you mind expanding on that cost, time, effort for that part of your business?

  7. Steve,

    It’s funny that you say that, we did have a few famous people we’ve run into in this business.

    And could you elaborate on your first question? I started with two partners myself, and I’ve personally found it to be very beneficial.

    Before we purchase the loans, we pull credit through a company called Universal Credit (if the seller doesn’t provide credit reports). It’s not expensive, and the more loans you do the more of a discount you get (we pay approximately $7). After we purchase the loan, we monitor the lien by calling the senior lien. Many banks have an automated system in place that will give you the status, and that takes a few minutes.


  8. If you buy notes in all 50 states do you register your business as a foreign entity in the other 49?
    Do you not have to since you are only buying the paper?
    If not what about when you take a property back?

      • What about when you do?

        I’d think if you did and rented it until the 1st decided to foreclose (as I think you said happens on occasion in the podcast) you are supposed to.

        Personally I am glad to hear you don’t when just holding the paper. I have gotten some differing opinions from attorney’s on that when talking about holding (or writing) paper in different states.
        Seems that getting a deed would change the dynamics.


  9. Brett Synicky on

    Great post Dave! I just signed up for your ezine and I can’t wait to dig into past publications!

    I’ve been a buy and hold investor for several years and for a while I’ve wanted to get into another niche of REI so I can generate more income to acquire more buy and holds. Until now I wasn’t sure what niche to focus on. After hearing your podcast I’ve decided that niche should be notes!

    I’m struggling with the “criteria’ part of my biz plan, max purchase amount, minimum cash flow, and all the other numbers I should be worried about when note investing.

    Thanks again for all the great information!


    • Brett,

      Thanks so much for the positive feedback! Glad to have helped you find your niche!

      And keep in mind with institutional notes, you never know how any borrower will eventually perform over time or if/when they’ll cash you out (e.g. the earlier the cashout the higher the yield!). Plus the discount is so great when you buy that the numbers aren’t always the most important thing to consider (it’s the numbers on the new workout agreement, not the original note, that are the most relevant).

      If you need anything, feel free to message me here on BP.

      Keep in touch,

  10. Dave,
    As Sharon has, I am responding to be able to watch others with their questions, and the answers. This is very interesting to me. I am also going to check out your e-zine, haven’t ever heard of that either 🙂

  11. In this blog, you mention that as a new buyer to delinquent second liens, what you did was to get clear on the status of the senior lien.
    Question 1): How do I go about getting “clear on the status of the senior lien” during the due diligence period before I decide to buy a note, since time is limited?
    Question 2) How do you “continue to monitor the senior lien on a monthly basis” once purchased?
    Question 3): What can you do as the owner of the second lien if the senior lien already started the foreclosure, if my main strategy is to flip the second lien to another investor and just get my money out with some return?


    • Dave Van Horn

      Hi Johnny,
      Thanks for your comment!
      As part of your due diligence prior to purchase, you can pull a credit report to get clear on the status of the senior lien. After purchase, you can still pull credit, or you can call the senior lien holder’s automated system or fax over the assignment (showing ownership of the note) to speak with a representative. With regard to your third question, you could always reinstate the senior lien if needed. However, with the strategy you mentioned, you may want to sell it sooner rather than later.

  12. Hi Dave,

    Thank you for the quick response. I’m not clear on “pulling credit”. Is this for a particular property, or the actual borrower? Wouldn’t I need the borrower’s authorization to do that? Are you referring to running quick title?
    During the due diligence period how would I actually go about “pulling credit”? Are there some companies you can mention?

  13. Stephen Anderson

    Can you send the link to the podcast because I missed it and I would love to hear what you had to say in it. I also looked at your site and I think its great wealth of knowledge. I have looked at other sites in which it had far less information on there.

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