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REAL ESTATE Second mortgage rules and strategy

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andviv

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In another thread reipro gave this advice:
There are other options to look at here. How much is the payment on your first mortgage? Can you afford just the first? If you can then do not pay the second only pay the first. The odds that the second will foreclose since there is no equity left in the property is very slim. Once your second has gone 6 months with out a payment the bank is forced by FDIC rules to charge the loan off. This when it is a great to to get them to take less than what they are owed.

I hope this helps!

I started this thread asking about the rules that banks need to follow for second mortgages and follow a strategy based on this.

I got a call today for a situation similar to the one that was described in that other thread. Here is the situation today:

3/2 SFH (with a small independent 1/1 apartment that is currently rented)
- Property in Orlando, FL
- Out of state owners
- Purchased for $199,500 a year and a half ago
- First mortgage: $170k at 9.5%, PITI $$1,450
- Second: $29,500 at 13%, Monthly payment $400
- The independent apartment is rented for $550 but the rest of the house is empty (it was rented for $1,000 but has been empty for two months now)
- Current FMV estimated at $195K based on a realtor's assessment, with an expected sale in 4 months after listing, if lucky (the realtor used those words)
- As of today they are current in their payments but will not be able to keep making the payments any longer.

Given this situation I was thinking of recommending the owner to stop paying the second for a couple of months and then we could try to buy the second for pennies on the dollar. That way they could afford the property as long as it is rented. I did recommend them to change their RE agent as she does not seem experienced and not being aggressive in marketing the property. They need to hurry up and get the property rented ASAP.

Obviously I told them about a short sale route but it seems they have no clue what it really means (their realtor told them to do this but couldn't explain them what it was :))... so they will contact the bank to see if they will entertain that route, although I told them it was not easy as they are not behind on payments so I don't see why the bank would talk to them about this possibility.

So, the reason for posting this is to get opinions about the strategy of not paying the second, get the property rented and keep the first one, and then sell the property with only one mortgage and rented, so this property would probably break even with a more decent loan (remember, the first one is at 9.5%)

Thanks in advance for your input.
 

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Adam

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Aug 12, 2007
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First, while I understand the strategy, you have to be careful when guiding people that are about to go into a foreclosure situation. When it comes to residential properties, that are owner occupied or owned by a non-professional landlard (IE - property mgmt is not their primary occupation), I would NEVER recommend that they not make a mortgage payment.

By doing so, especially if your motive is to purchase the property, you are opening yourself up to incredible amounts of liability. In many states, there are now implied agency relationships between a loan officer/realtor and the client. Recommending that a client not pay their mortgage (while it might make sense) is clearly not within the boundaries of an agency relationship. Andviv, i'm not sure if you are in the real estate/finance business, but those that are, need to be careful when giving this advice. Before not making a payment, they need to talk to both lenders (1st and 2nd). I have seen lenders cut interest rates to make the loan work for a borrower that is current. It tougher with investment properties, but I have seen it done.

I'll get off my soapbox on this topic...

Anyway, what this client needs is someone that can get the property rented. 60 days of vacancy is unacceptable in this market. After the property is rented, if their credit allows, they need a new loan. 9.5% on a investment property is a good 2.5-3% above market. However, lets assume that a new loan is not an option. They need to find an agent, like andviv said, that works only with investment properties and short sales (it goes hand in hand). Contrary to popular belief, it is very hard to SUCCESSFULLY negotiate a short sale if you don't know what you are doing.

This goes back to my firm belief that unless you are a seasoned investor, you need to keep all your properties within a 50 mile radius. The farther away they are, the tougher it is to manage. A 2-unit can be managed by a 3 year old, there is nothing to it. However, when your properties are spread out too far, management and property oversight is very tough.
 

randallg99

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I concur with Adam... he gets rep+++

anyone paying over 7% is getting robbed in broad daylight, unless his credit sux a$$. Then this owner should have spent time bettering the credit score before investing... but that's his/her fault and not anyone elses.

the only point of Adam's post I can possibly argue is that the second loan is at a rather insignificant level... I say ditch the that second loan (that probably bought a nice HDTV and a couple of vacations) and let it be a lien that can be resolved later (if the property is considered a long term hold, which is what I am assuming)

disclosure: I am not advocating in anyway shape or form avoiding obligations that people undertake when they sign contracts... when push comes to shove, make sure he/she/you make good on postponed obligations that were defaulted.
 

andviv

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Adam, thanks for your input.
More info:
I don't have either mortgage or real estate licenses.
I don't intend to buy the property either (actually, there are two in the same situation though the other one is rented so for now they can keep making payments for that one)

Yes, they already talked to the lender for the first loan, they did not entertained the idea of refi or consolidate first and second into one big loan with lower interest. Like I mentioned before, they are current on both loans so I don't think there is any interest for them to negotiate anything.

When the owners contacted me their first sentence was 'we are not gonna make more payments and let the property go', that's why I started talking to them about at least trying to keep the first loan current. The problem is that they also have credit card debt so the whole financial picture is very negative and they see the property as a burden. They don't even care about the credit report/score anymore. This is a typical case of distressed owners.

Trust me, I do understand about the new laws restricting who can approach the owners and wo can buy the owners, we actually discussed the same topic here (I brought it up in that thread).

You are also correct about short sales. Everybody seems to 'know' what it is, but not that many have actually negotiated one successfully.

Any more details needed? Anybody else has more input?
 

andviv

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Yep, I concur, that rate seems high, however it seems their credit wasn't good enough when they bought the property and that was what they did. I am not that big into the 'you stupid made a mistake now pay for it', I prefer to take a positive approach and look forward. Being a cynic at this point does not make the distressed owners feel any better and does not improve the situation at all.

Like I mentioned in the first post, the purpose of this thread is to find a strategy that works for them and I am exploring the possibilities based on the input from REIPro. David, could you please give us your input here, as you have done this successfully many times?
 

bflbob

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Hey Andres:

This sounds similar to a guy I was talking to on the phone this morning.
He was trying to buy a 13-unit using seller financing and a HML.
Seller was offering 9%/15 years. HML wanted 10 points and 18% annual.

I begged the guy not to do it. He had no income/credit/assets.
As it turned out, the seller backed out, as he was selling his financing to a third party.
The third party want a first mortgage, since a second was too risky.

At any rate, understanding what little I do about finance, I tend to agree with David on this one.
The guy in the second position here it carrying a lot of risk, without a prayer of collecting.

If the first forecloses, he's out of the picture.
If he wants to prevent the first from foreclosing, he has to keep the first current.
If he wants to foreclose on the second, he has to keep the first current, pay the attornies to file the foreclosure, go through the entire process, bid at auction (as amount in excess of $200k) to get a house that is 'maybe' worth $190k.

If I were in the second position, I'd scream and stomp and call the owner every name in the book.
But I'd walk away.

Now, I'm not sure if the second is held by a bank, or a private investor.
I would think that David is right on the 6 months if the lender is a bank.
But if it is a private lender, he can just sit on the loan for years.
Not that he'd want too...

It seems like there was a situation like this on one of the tape series I've listened to.
The investor created a separate 'financing company' that would go in and buy the second.
They'd buy for pennies on the dollar, but never (obviously) foreclose.

As for a short sale, I'd also agree that this is a poor candidate.
Of course, in 4-6 months, with late/missing payments, that would change.
But even then, the banks look at not wanting to pay differently than not being able to pay.

One final thing...in re-reading your post, I want to make sure you understand one thing.
When David is mentioning the bank has to write the loan off after 6 months, that doesn't mean it goes away.
The bank just can't list it as an asset anymore.

You mentioned renting it up and selling with only the first due.
I don't believe that is what David meant.
To the bank, the value of that asset (the 2nd) just went WAY down.
That's why they'll sell it so cheap.

Of course, this is just my opinion, based on my understanding.
 

andviv

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Bob, thanks for you input.
Yes, I read about the guy you mentioned in the 13-unit in the RD forum. Incredible situation. Lucky him it did not happen.

What you mentioned here makes sense. The point here is to buy the second for pennies on the dollar given the high risk the bank now has for a paper with almost no value.

I am not sure who has the second, I assume it is a bank but I will ask for more details next time I talk to the owners... they told me they can provide me with a copy of the last statement they have.

Anybody else has more input? This has been very interesting from my perspective as I've never dealt with anything like this before.
 

tbsells

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Andviv,
I think you're on the right track here as far as the thought process goes. The problem is...even if the second mortgage holder would settle for ten cents on the dollar this is still not a deal. The purchase price was probably inflated to cover points, downpayment, prepaids, etc. If you could buy it for first mortgage payoff and give the second $3,000 you're probably still paying FMV.
I have successfully worked about 20 short sales. The sad truth is that most institutions will not work out anything unless the borrower is 60 + days behind and has no way of catching up. I have also had very little success in getting a first mortgage holder to accept a short sale. The second mortgage holders have been pretty cooperative. I'm currently working on one where the second has agreed to accept $21,000 as payoff on a $50,000 second.
 

andviv

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I just got another call from the homeowners. They have decided enough is enough, they just simply can't making the payments anymore. Their employer has been reducing the hours (not making 40 hours anymore, a year ago they were working overtime and the company kept asking them to put in more hours, but now there is not enough work for them).

I got the loans information with me. The first one is serviced by America's Servicing Company, the second one is GMAC mortgage.

First loan:
Balance as of 11-16-2007: $157,548.61
Monthly payment (due 1st day of the month): 1,407.03 (if paid after the 16th, add $62.62)
Interest rate 8.750%

Second loan:
Balance as of 11-1-2007: $39,644.36
Monthly payment (due 1st day of the month): $451.97
Outstanding late fees: $112.95
Interest rate 13.375%

I went to zillow.com to see their estimate: $194,000
Zillow says it is a 3/2 however the owners tell me it is a 4/2 plus the newly built independent 1/1, so it could be said it is a 5/3. They also added a new shed ($2,800) plus new fridge and stove.
The asking rent for the 4/1 is $1,100 and the 1/1 is rented for $550 (they said it could get $600 but the couldn't so they rented for 550 to the first serious renter they found).

Any viable alternative to avoid foreclosure?
 

reipro

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I guess after reading this post I have only one question. Why are you even messing with this deal? The only play on this property is to buy the first mortgage at a discount there is no room to pay the 2nd any money:smx4:
 

andviv

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Thanks a lot for your input, David.
 

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