Interview with an Asset Manager: How Do 1st Lien Mortgages & 2nd Lien Mortgages Compare?


One of the cool things I get to do as an instructor on note investing is that I get to interview all types of people who have some form of connection to real estate or note investing in general. Everyone from attorneys, rehabbers and flippers to REO agents, banks, contractors, note buyers and investors — and everyone else in between. I also get to see who some of the best of the best are.

So one evening last week, I had the opportunity to interview one of the best asset managers I know, Matthew Kadash. The reason I know this is because Matt works for me at PPR.

Our topic that night was: “An asset manager’s view of working first and second liens.”

Just to give you some background on Matt: he’s worked at PPR for over 5 years, working with hundreds of delinquent second mortgages, and he’s seen it all. Over the last couple years, he’s been working primarily with first liens as we’ve started to move into the space.

So, with a guy who has worked with hundreds of notes, it’s fun to ask him his viewpoints, especially since he has more of an operational and managerial perspective, as opposed to that of an investor with his/her own capital at risk.

To get the ball rolling, we started discussing the similarities between first and second mortgages.

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Interview with an Asset Manager: 1st Lien Mortgages vs. 2nd Lien Mortgages


For example, obviously they’re both notes and mortgages secured by real property with a borrower to reach out to. Both types of notes have their risks and rewards, but what really separates the two is their position. The recording date of each lien defines the position of the note, and this position determines how you manage it.

Related: What’s Your Exit Strategy? A Case for Converting Your Real Estate to Paper Assets

As far as management, we quickly realized that they really had more differences, including everything from due diligence to exit strategies.


The big one is Risk Management.

Me: If you own the first lien or if you own the second lien, what are you monitoring in order to protect your lien position?

Matt: With first liens the biggest risks are taxes, insurance, and other liens because when you purchase the note, you inherit the lien and the back taxes. Insurance is also an important safety measure to protect the property’s value.

With second mortgages, it’s most important to monitor the senior lien, especially since the senior lien holder is already monitoring the other risks mentioned above.

Me: What are the variations of due diligence for first liens vs. second liens? What should you really be looking at?

Matt: With first liens, Equity and (FMV) Fair Market Value are much more important. Note buyers usually at least get a BPO (Broker’s Price Opinion) when buying first liens. Buyers often get an E&O (Encumbrance and Occupancy) report as well, so as to determine any back taxes or outstanding liens.

This varies from second liens, with which we rarely pull BPOs or E&O reports. Our big thing in seconds’ world is credit and maybe an electronic value. Equity is less important than Senior Lien status (e.g. currents) and occupancy (e.g. vacancy is usually less valuable because it isn’t as profitable to exit through the property, especially with an upside down asset).

There are many other differences with due diligence as well. For example, bankruptcy is not much of an issue with first liens, as there is little threat of being stripped in a bankruptcy. This is why you can buy many more seconds than firsts when investing in delinquent assets. You can spread your risk around.

First liens, on the other hand, are much more consistent with predictable outcomes. The conversation with the homeowner can be much more abrupt and is often quicker as far as exiting a deal. With first liens, there are usually many more local, state, and federal programs available to homeowners.

Related: The ABC’s of Real Estate Asset Classes

That being said, with second mortgages, it’s more likely that the exit will be through collaboration with the borrower, as opposed to first liens where it’s more likely that the exit will be through the property. Of course, equity and borrower intent both impact which exit strategy will be employed.

Exit Strategies

By exit strategies, what I’m referring to is how the asset manager is able to exit the deal. This could be anything from a discounted payoff, a payment plan, a short sale, or foreclosure, etc.

It’s much more common to have more REOs and DILs (Deeds-in Lieu of Foreclosure) with first liens than with seconds.

Also, seconds tend to take longer to exit, but you have a better likelihood of a work out agreement with the homeowner. You also normally have a bigger discount that you can share with the homeowner to get something done if they want to try to stay in the home. And although your exits are more predictable with firsts, it does require more creativity when it comes to exiting a deal. Everything from lease backs, rent to own, owner financing, and rehab funding to finding investor/buyers nationwide through REO agents, or any other means possible.

As I was winding the interview down, I asked him the million-dollar question: “What would you rather manage, second liens or firsts?” He said seconds, since he likes having more assets to work with, with more upside potential. I’m not so sure I agree, especially when starting out with my own money. Unlike Matt, who doesn’t have any capital in the game, I think I’d like to take the safer and more predictable road of working a delinquent first mortgage. After all, buying a first is almost like buying a property, especially since a higher percentage of them are vacant.

So whether you’re looking for a way to cash flow without tenants or to find some bank owned deals ahead of the REO and sheriff sale market, hopefully the perspective of Matt the Asset Manager can be of some help to you. I am very curious to hear some other BP folks’ opinions on this topic.

If you’re already an investor in notes, which do you prefer to manage (first or second liens)?  If not, would you be more inclined to manage one over the other?

Weigh in in the comments below, and let’s talk!

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. Hey Dave,
    You’re known for being a 2nds guy so it’s pretty odd to read you saying you would rather start with firsts. Do you think PPR would have been much bigger if you stated your 1sts fund years before?

    We typically buy 2nds but 1sts seem to have a lot less stress associated with them. Even though I’m a natural risk taker, we’re very small and there’s a lot of anxiety about getting wiped or having to put them in the drawer pretty much at the borrower’s whim. The same events with 1sts (ie BK, FC) only feel like pebbles on the road.

    The one difference Matt didn’t talk about is the difference in collateral you can get with 1sts and 2nds. Most 2nds we have are on houses in the 100-250k FMV range that are owner occupied. If you’re able to source those equivalent 1st notes in the first place, they trade at a premium. Most of the 1sts sold by newbie-friendly companies are in the 0-100k FMV range and there’s a lot of horrible houses in there.

    • Dave Van Horn

      Hi Patrick D.,
      Thanks for your comment.

      Regarding your first question, we found opportunity in the second lien space, and that opportunity remains. That being said, as our company has grown, we’ve seen value in expanding our portfolio to include both first and second liens. They’re both so different, and I only imagine that we’ll continue to do both.

      We created PPR with OPM, but we had limited capital. If I put myself in the shoes of a newer note investor who has a background in real estate and has much of his/her own capital in the game, I can see why this individual would be inclined to invest in first liens.

      Also, you brought up a good point regarding the difference in collateral and pricing. Since the more common exit for first liens is through the property, FMV plays a huge role in pricing, as does the status of tax liens and insurance.

      With seconds, on the other hand, the more common exit is through communication with the borrower, and so UPB, senior lien status, and equity above the first lien have more of an impact on pricing than FMV. For example, you’re going to pay more for a non-performing second lien with partial to full equity that is current on the first than you’re going to pay for a non-performing second lien without equity that’s delinquent on the first, regardless of the FMV for each property.


  2. David Putz

    Depending on the position. If it’s a 1st then the property value is more important. Once you establish value you then pull title or look at your o&e report, to ensure that your in 1st position. Lastly look at local taxes and municipal liens (water) so you know who is in front of you incase you need to foreclose.

    Multi family or single does not matter as much as does with majority of bigger pockets focus on brick and mortar. You care how strong your comps are(for value), ensuring lien position, taxes, and that the collateral is all together.

  3. Mark Gibbs

    Hi Dave-

    Probably a basic question, but what is the concern with insurance? From the perspective of needing to have insurance on a property to protect your interest I can understand. But do you deal with lien’s on property from an insurance lender?

    Also, during a due diligence phase, how would you verify if there is insurance on a property currently?

    Great post, thanks!

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