2nd Foreclosing Before 1st

[kwerner]

Experts - Can you advise me on how to create a deal when the second mortgage holder is foreclosing before the first?

I've noticed a few of these lately, and they would seem to be great deals if you could discount the 2nd; but since the 2nd is foreclosing ahead of the 1st, it would seem that they would be less likely to discount their position. Am I correct in assuming this?


For example -

Property value - $100,000
1st Mortgage - $60,000
2nd Mortgage - $35,000


For conversation sake, let's say the 1st and 2nd are different companies; the 2nd is trying to protect its position and has began foreclosure proceedings ahead of the first. How do you make this a deal?

Also - How do you make it a deal if the 1st and 2nd are the SAME company?


Thanks for your assistance.

 

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[I85]

I've noticed a few of these lately, and they would seem to be great deals if you could discount the 2nd; but since the 2nd is foreclosing ahead of the 1st, it would seem that they would be less likely to discount their position. Am I correct in assuming this?

The first is going to get paid first, it all depends on the value and what the principal balance is on each of the mortgages.

For conversation sake, let's say the 1st and 2nd are different companies; the 2nd is trying to protect its position and has began foreclosure proceedings ahead of the first. How do you make this a deal?

I'm not sure what you mean by "protect their position", they are second and will stay second. With the numbers you've given I think the second might negotiate(I can't say they would, but I don't see any hurt in trying)., since I doubt they would get all their money back.

As for getting the deal done, I can't really help you there...hopefully someone else can. I have one question I would like to add that hopefully someone can answer.

If the second starts the foreclosure process, who pays? 2nd, 1st, a combination?

 

[kwerner]

I'm not sure what you mean by "protect their position"

Protecting their position, as related to a 2nd mortgage foreclosing, means that they're willing to foreclose then purchase the first - thereby owning both mortgages and protecting themselves (or their position) from being wiped out at auction.

Can anyone else help out with this question?

Thanks.

 

[SteveO]

Unless the second really wants the asset, they will likely negotiate with you. It really depends on who the note holder is. Companies with a lot of loans probably don't want the properties back in thier laps. Of course, they will do what they can to protect their investment.

There are people that buy these non-performing notes in bulk. They may get more attention than you will. There are also people that make a living out of finding these deals that you are looking at.

Is it easier to buy these deals if they are being foreclosed on by the first?

 

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[andviv]

Protecting their position, as related to a 2nd mortgage foreclosing, means that they're willing to foreclose then purchase the first - thereby owning both mortgages and protecting themselves (or their position) from being wiped out at auction.

Can anyone else help out with this question?

Thanks.

There is a thread by reipro where he explains how he does this. I suggest you search for that one.

Yes, the note holders are way more likely to negotiate if the first one is foreclosing. In a case like this example, the cost of foreclosing will be to high related to the note value and the property FMV. You should be able to buy that second note for $5K to $10K. But SteveO is right, it depends on the note holder.

 

[kwerner]

Is it easier to buy these deals if they are being foreclosed on by the first?

I would think that they would be more persuadable if the 1st is foreclosing, as they know that they're going to get nothing if it goes to auction.

But in this type of scenerio, it seems to me that if they're smart enough to be proactive, and start foreclosure proceedings ahead of the 1st, that they either
1) know what they're doing and are willing to take over the first or
2) are afraid of losing their investment and just want to get a jump on the first.

I don't know. I guess either way it couldn't hurt to ask if they'd consider taking a discount / let someone purchase their position...

 

[kidgas]

I would wonder if the holder of the second is concerned that property values would deteriorate further and want to get through the foreclosure process before they lose the entire investment.

 

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[Bilgefisher]

My 2nd "flip" (if you want to call it that) was done by purchasing the 2nd.

I think you mentioned it but it bears repeating, the 2nd mortgage will be wiped out if the property goes to foreclosure.

We had 3 exit strategies when we bought our 2nd. 15k for a 22k 2nd.

1. Let the property sell. You get paid for the current owed value of the note regardless of what you paid for it. A great way to make some money with little to no effort. We knew the owner was trying to sell the property. It had already been on the market 2 months.
The next 2 options involve exercising the first right of refusal. In CO the 2nd note owner has first rights.
2. Flip the property.
3. Rent the property.
We had a hard money lender lined up that would not only buy out the first but also the 2nd on the property. Hence pulling all of our money back out of the deal.

As luck would have it the property went under contract 1 week after we bought the 2nd. We made 7k doing pretty much nothing.

Now to get back to your question. Contacts are everything. Our partners had contacts at several major banks and they knew when certain notes might be available. They made the offer, we provided the capital. Not sure if I exactly answered what you are looking for, but I hope some of that info is useful.

 

[andviv]

Bilge, it would be awesome if you could describe the process your partners followed to buy the 2nd and get control of the property.

 

[Bilgefisher]

I'll be quite honest, I don't know the exact process they use to purchase the 2nd, but I'll be sure and ask.

I'll give you what I do know. Locating a potential 2nd to buy.
-The first and most important way they have is through the use of contacts at the bank. Many times they will be told of an impending foreclosure with an attached 2nd.
-The other way is to do a records search at your local county clerk and recorder office. Find which properties are going to foreclosure and research them. This can be quite a task at time. Find any 2nd lien holder and start contacting the bank. This can be tricky getting to the right person so be persistent.

The 2nd lien holder often enough is more then happy to get out from under the potential loss. Here where the math can get a bit tricky. You must evaluate your purchase price plus the full price of the 1st prior to purchase.

Also another extremely important item to watch for. If the property does get bid on at the auction (at least here in Co) you have to pay what ever that bid was for. Say the 1st is 130k and its bid up to 150k. If you want to redeem you will have to pay the 150k. The original bidder is then refunded their money. In many cases most folks at the auctions know each other. It never hurts to let them know you will be exercising your first redemption rights so they can decide not to bid on the property. Downside is a newb investor that jacks the price way up to the point where its pointless for you to redeem the property. Sad part its usually past the price that makes sense for the bidder either.

Actually had that come up once. My partners told the guy they would be redeeming. He bid and won for the foreclosed price and my partners filed the intent to redeem 1 week later (old rules). He lost out on the property and was livid. I don't know if he used a hard money loan or not, but thats would be a costly mistake. Some lessons just have to be learned the hard way.

Sorry andviv, I know you were looking for the transaction specifics, but I just don't know how that part is done.

 

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