Purchasing Seconds??
Another Green question.
Others talk about dealing with the second mortgage holder when the first is being foreclosed. If the first is 100k and the second is 50 K, what is the benefit of buying the second for 5k?? What affect does this have or what does it give you if the first is being foreclosed? Can you not simply buy the first out at foreclosure and not even have to deal with the second or any other junior liens?
I know I must be overlooking something but I just don't know what???
Thanks!
It helps if you have the deed to the property. If you have the deed to the property then you can create more equity by purchasing the second at a discount. You still get full value of the note when it is sold.
You can purchase the first and foreclose yourself. That would eliminate the second lien. If your state requires a long foreclosure process then this is not too great of an idea having all of that money tied up in a first mortgage. Really depends on your state laws.
Tom[ Edited by tbelknap on Date 07/16/2003 ]
I purchase seconds for the purpose of redemption. If the property is worth 150,000 and 100,000 first and 50,000 second and you purchased the second for 5,000 you would pretty much guarantee that you will end up with the property. If not and a subsequent lienor opts to redeem you just made 45,000
Guess I still don't get it. Are you saying buy the second if the first is foreclosing? That I understand, but if the first still goes to sale, your second would be wiped, correct?
Isn't that the only scenario where a 2nd would discount, if the 1st is foreclosing? Or will the second discount prior to the second being foreclosed.
Guess i still don't get it how your guaranteed the property or profitting 45k.
Shawnk,
How does it pretty much guarantee you the propoerty? WHat is the process once you have obtained the second? Do you buy out the first or wait for it to foreclose or is there another way to obtain the property? And lastly, they may redeem and pay you full face value of the note(2nd) you purchased at a discount.
Thanks
I only buy seconds when first is in foreclosure. In most states other lien holders have right of redemption. I use the second as a position of redemption. In most cases the face value of the second leaves no equity therefore eliminating the possibility of any other lien holders redeeming you out. If they chose to they would have to pay you face value. If other lien holders do not exercise their right of redemption then they fall off. Most banks do not redeem and is why they are willing to sell their note for less.
hope this helps.
ThanksShawnK,
So if i buy the second at the foreclsoure for 20K and the note value is 25K and the first is 69K, I should not try to buy out the first, just let it go to foreclosure and if someone buys it they will have to pay me 25k to sell the house or the bank will get the first back and I can deal wit them to discount it? Is that all correct? The house value is about 96K.
Hope I am not beating a dead horse, been thinking about this some more. If some one should answer the questions above, here is another:
Obviously I am trying to learn as much about the seconds as possible.
I assume timing may make adifference. If you purchase the second at a foreclosure sale, someone told me you then either have to pay off the first or take over payments. If you do neither,I assume it will eventually foreclose. If someone else buys it at foreclosure I assume they pay you off, but what if they don't? Do you both have right s to the property?
Any one know where to get some good info on these procedures?
If a first has foreclosed already, do the juniors get erased immediately or do they still need to go to foreclosure? I am asking because the property I am looking at has a second going to foreclosure and I am not sure of the status of the first. I know the orginal amount was 69k on the first. Will the second be interested in discounting a few weeks prior to the sale since they will have to be redeemed after the sale? Will the second discount at the sale or will it be full face value?
Thanks !
What state are you working in? I can only speak for those in which I am familiar.
I am in GA
In California, the second gets wiped out when the first forecloses. You'd be screwed. Here, if you buy a second, you're gonna have to assume the first, and if they call it, you'd have to pay it in cash. Usually the first doesn't care as long as they get their check.
My point is, check your state. The Colorado laws just about floored me when I read it. Redemtion upon the 1st foreclosing? HUH?!? Here in Cali, if you own the 2nd and the 1st forecloses before you do, you're up a creek with a worthless piece of paper.
Interesting learning the game in other states. Check your local info before acting on any out of state advice, including mine.
Makoinvestments,
If there is a lot of value over the 1st., buying the 2nd at a discount can prove to be profitable. You keep the bidding going til you have enough profit or you get the property. Nobody else gets the property till the 2nd has received all he is due (full face value + interest + costs) Obviously, you need to bring enough $$ to the sale to meet the full amount of the 1st, and to stay in the bidding. After that, you are bidding $$ that will be returned to you.
I assume we're talking CA here, right?
Keeping it friendly...
What happens if a whale comes and outbids you on the first? In CA that WIPES your 2nd completely. You're screwed. It may be different in other states, and if it is, great. But in CA there's no point in going after the 2nd if the first is going to foreclosure because the 2nd gets wiped. That's why I mentioned the state in the first sentence of my post. It may be different where you are.
At CA auctions ALL juniors get wiped, and that includes the 2nd. The way to make money is by finding properties with BIG seconds, because they usually mean instant equity when they are wiped out at the trustee's sale.
I'm interested in learning about which states allow the holder of the 2nd to redeem their money upon sale. Let me know.-MakoShark
I believe GA is the same as CA, all juniors get wiped, guess that is why I had such difficulty understanding the strategy of buying seconds! Is any one familiar with the GA process? Can you confirm the wiping of juniors in GA?
Mako, Question for you in CA, if you buy the second, do you automatically have rights to the first? What if the first is in early stages of foreclosure and you buy the second. Canyou deal directly with the first or do you still need consent of the homeowner?
Mako
All proceeds over the the amount that the lein forclosing bids go to the next lein holder til it is satisfied and then to the next lein holder and finally to the owner being forclosed.
If the bidding goes high enough the owner could recoup all of his equity!
If you bought the 2nd at a large discount, you can keep bidding up the price til you reach the profit you are willing to settle for or you win the property.
If you decide to let some one out bid you, your profit is the difference between the final bid and the sum of the 1st and what you payed for the 2nd.
If you win the property, your actual cost is the 1st and the amount you paid for the 2nd.
You need a lot of $$ to play this game.[ Edited by pmatheson1 on Date 07/30/2003 ]
In answer to your original question, if the property is WORTH 150K and you hold the second that you paid 5K for, any price at the sheriff's sale over 105K gets you a profit. You control 50K of potential equity. If you were willing to pay up to, say..120K for the property, then you can bid up to 165K. You, as the holder of the second, will get 50K of the distributed funds after the close of the auction, leaving you with a net price of 120.
If FMV is 150K, obviously these numbers are unrealistic (nobody should bid it up to 165) but hopefully you get the point.
Just be wary of any other liens that might be in line before your second mortgage.
This talk about the second getting wiped... Sure, if the bidding isn't high enough to pay the holder of the second anything. But if the property is really worth 150, probably the bidding will go well over 100 (at least around here, these days). Any incremental funds from the sale go to the next lienholder, and the next, and the next.... At the end, the original property owner gets money if there is still money on the table. You don't think the sheriff takes it home, do you?
Hi! I am new to all this. Reading your question and answers leaves me scratching my head. What would be a good book/reference to read in order to understand what you are talking about? Thanks.
Hi again all,
PM, This is only true in an "overbid" scenario in my state. I'm not going to bid over market value, are you? Isn't the whole idea to get the property UNDER Fair Market Value (FMV)?
Juniors get wiped where I come from. If there's an overbid, then there's a satisfying of a junior. I wouldn't overbid. I'm STILL waiting to hear what state some of you are in. Once again, I clarify that I'm talking CALIFORNIA here. It's WAAAY different in AZ and CO and other states.
Cheers. -MakoShark
jllaco,
In your SPECIFIC example, you OWN the 2nd b/c you bought it at a Trustee's Sale and the 1st is just starting the Foreclosure process. Decent position to be in. The house WAS FORECLOSED ON during th trustee's sale of the 2nd, even though the 1st didn't foreclose yet. Good position...
You can contact the 1st directly, and offer to take over payments. In fact, I'd just find out what's owed, payoff what they're behind, and make the payments. I'd do the same with the insurance. Complete an eviction. The Bene of the 1st has the right to "Call the Loan" if he wants, meaning demand you pay 100% of the amount due and all back payments, but 99% of the time if they get your check for all back payments and the latest Mtg payment, they just keep on truckin. You take title "Subject To".
If you die tomorrow, the 1st comes after the previous owner, not your family, your name is on the TITLE of the property, NOT the 1st Loan.
My mentor puts a memo on the check, and by cashing it the Bene of the 1st agrees that you're taking over the payments. If the Bene "calls the loan" you could argue that by cashing your check he agreed to take payments from you, not the former "owner". As long as you keep it current it isn't a problem in 99% of all cases...BUT you'd want to Refi the 1st since you can get a better rate. The difference in your 2nd is the "hidden equity" of the property.
I'm sure tons of people are going to attack me for this post, it was loose and quick, sorry. That's just one BASIC strategy and it is SPECIFIC to jllaco's example and my state's rules.
Buy the 2nd, fix (pay current) the first, boot the former owner, refi, throw a renter in it -or- sell it off for top value to "earn" that hidden equity gained by getting the 2nd. The benefit is that you didn't have to bid up the property at auction. You got it for what the owner owed, assuming it's a worthwile deal with equity in the 1st.
Remember, by buying the 2nd, the home WAS FORECLOSED ON, and you will record title to the property wether its occupied or not, the 1st can call the loan, foreclose, or leave it alone. It's up to you to get after the Bene on the 1st and make arrangements, and to evict the former owner.
There's money in this if you REALLY know how to do it.
One more note...
This is a good way for a newbie to get going with a lot less money. Foreclose on the property by buying the 2nd, and make the payments on the 1st. Get a loan on the property asap and kill (payoff)that 1st, maybe even take out some cash equity to use on other deals.
You could get burned if the 1st calls the loan and demands payment. You have to be prepared to pay them off (bigger bucks). But I haven't seen or even heard of it happening to any of my fellow investors lately (twice in 13 years, I'll take those odds). Plus you have TIME. If the first calls the loan and won't deal with you, he starts foreclosure on the 1st. NOD is 3 months, NTS is 3 weeks. If it's already in the NOD stage you still have 3 weeks in the NTS stage.
Have your loan ready before you buy the 2nd. Be ready to take out a loan on the property as soon as you evict the former owner, and payoff the 1st. Just some tips.
Once again, I admonish the crowd, I'm talking CA here, no word on Georgia.
Quote:
On 2003-07-30 13:47, MakoInvestments wrote:
Hi again all,
PM, This is only true in an "overbid" scenario in my state. I'm not going to bid over market value, are you? Isn't the whole idea to get the property UNDER Fair Market Value (FMV)?
Juniors get wiped where I come from. If there's an overbid, then there's a satisfying of a junior. I wouldn't overbid. I'm STILL waiting to hear what state some of you are in. Once again, I clarify that I'm talking CALIFORNIA here. It's WAAAY different in AZ and CO and other states.
Cheers. -MakoShark
Mako
I'm from CCCounty, CA. We have had many pptys with equity above the 1st and 2nd go on the Block. Getting the 2nd at a discount and then bidding at the Sale is Kinda like 'Sandbagging' the Sharks when you bid up past the 1st. and they follow you up. It either gets you fast cash or the ppty, even if you take the bidding up past the face value of the 2nd, you still get the ppty at the final bid less your discount.
It goes without saying, You need to know the FMV, any other leins and what your limit is prior to Bidding[ Edited by pmatheson1 on Date 07/30/2003 ]
I am in GA.
True. Junior Liens get wiped out during a foreclosure sale.
ALSO, since all the foreclosure sales for that month happen on the SAME DAY (the first Tuesday of the month) sometimes BOTH the SENIOR and the JUNIOR mortgages foreclose on the same day.
When that happens, there can be problems.
Purchasing a Junior Lien is beneficial because you can invest less money in the property.
If you purchase the Junior Lien PRIOR to the foreclosure sale, you will not own the property. You will have to make the back payments on the Senior Loan to protect your junior position and then you can foreclose on the property.
If you purchase the Junior Lien AT the foreclosure sale, you will own the property. You will have to make the back payments on the Senior loan to protect your ownership of the property and continue to keep the payments current. The First may call in the full amount of the loan at any time. Though, as long as they get their payment every month, the mortgage company usually doesn't care.
I hope this helps.
Good Luck!
MM and PM, Very good explanations, especially of the GA area, which is where the question came from in the first place. Good Job.
Here's a link for everyone to share, it goes to Ward Hannigan's ForeClosure Forum dotcom and it spells out the "rules" for each state. This will hopefully help others who are following this thread and wondering how it works in their home town.
With this, I'm backing out of this thread, it's been done to death, but everyone involved had great points to make. That's what this board is here for, spreading the knowledge.
So since I don't have enough brownie points to post a URL, you guys will have to figure this one out, make sure you slash the right direction...Here's the full 50-state "rules" sheet for the foreclosure process...Kudos to Ward Hannigan of San Diego, a true guru of the biz.
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Thank you Mako and MRSMeltzer, that makes it all pretty clear and understanding how the states vary(or Not understanding) can be confusing.
Good Luck Investing!
Augusta?!?!?! Ok now I'm Jealous!
You're Welcome. -MakoShark