how do i buy second position debt from bank

Question

Hi.. I'm  interested in buying this property at a trustee auction. I have read people  buying second position debts to use for credit bidding. I am actually interested in winning the property but if i don't  and it goes above the auctioning banks debt i should be able to collect the debt just purchased.. am i correct? ?.. so i don't  know how i go about possibly getting to buying this.. do i call the bank in  question and ask to speak to someone that can  do this or is there  another protocol or department ?. . Also when I'm credit bidding and auction ends at say 10k over auctioning lender debt amt  and my second position debt  i purchased is 10k   am i only to pay full amt of winning bid minus the 10k?

Ron S. · Answer

...The "2nd position debt"? Do you mean the junior lien? Why would you do that if the senior lien is foreclosing? You get wiped out...and you don't get to "Credit Bid" unless you are the foreclosing entity.

Blair Poelman · Answer

Before you do ANYTHING, find a local real estate attorney that has a lot of experience with trustee sales, lending, foreclosures, title, collections, judgements - basically every legal aspect of, well, everything related to RE.  The logistics of what you're going after are extensive - not impossible - but very extensive and very risky, way beyond what I'm comfortable with.

It's not common that a 1st and 2nd position are auctioned on the same day - so you might buy the 2nd today, and then the foreclosure on the 1st is scheduled for auction in 1 week, or 4 weeks, but then gets postponed, or gets sold for 10k less than the debt, or it gets rectified and the homeowner saves it through bankruptcy, or they somehow save it, and now you have to deal with collecting or getting a judgement, and then collecting on the judgement.

I don't think I've ever paid more than the original debt at the trustee sale.  Usually it's drastically less because the original loan was totally overinflated to begin with.  Something like a $100k property got mortgaged for $199k, and I win the bid at $75k.  But who knows- guys at the trustee sale in vegas are paying retail right now - sometimes more than retail, that's just dumb money.

Steve Babiak · Answer

As

Ron S. pointed out, acquiring junior lien debt when senior lien is foreclosing is not a wise way to make a profit.

Bill Gulley · Answer

Totally mystified, what is "credit bidding"???

Buying a note, from an institution, you won't unless they offer it along with other to be sold, that is not a trustee sale, a trustee sale is a foreclosure on the collateral, the property.

If you want to buy a note, a single note prior to or in lieu of foreclosure, you will need the borrower's consent. Banks have liabilities. What if I didn't like you and just bought your mortgage, then tossed your payments in the trash and accelerated your note moving you to a foreclosure......? That's why banks don't sell just any note to anyone off the street.

State laws generally allow junior positions to buy out, not purchase the date but pay off senior liens. When a non-institutional lender is involved in a junior lien, senior institutional lenders can make various provisions from assumptions to joining with a junior lien holder in foreclosure or opportunity to pay the senior obligation.

Buying a lien is not buying the property, you will become a lender, not a property owner. If you foreclose the borrower can be entitled to any excess over the amounts due, it's not just a profit, get a deed in lieu of foreclosure and it's your property. Get less from a sale and seek a deficiency judgment is allowed for that type of loan.

Sounds like we have apples and oranges in this fruit salad.....are we buying real estate or notes? :)

Steve Babiak · Answer

Since Richard Dunlop is from MI it makes sense that he brought up redemption, since MI is one of the states where there are redemption rights post foreclosure auction. But in a state that does not have redemption rights post foreclosure auction, buying the junior lien debt before the senior lien forecloses just isn't ... what I would consider doing if I were interested in getting the property.

Rachel Kim · Answer

From my understanding.. anything over the senior lien debt is to be paid to the junior liens.. to use as an example for this trustee auction.. say the senor lien debt amt is 100k and i believe the property would close at around 150k and i purchased the second junior lien debt of 10k wouldn't i be given the 10k from this sale ? .. and i read any lien holder can credit bid.. so can't i use my 10k debt to credit  bid assuming it goes over the senior lien debt amount ?.. please correct me if I'm mistaken... i do know that if the auction ends below or at senior lien debt my debt would be wiped out.. so  i know that risk.

Blair Poelman · Answer

@Richard Dunlop  I haven't seen a first right clause between the 2nd and 1st - doesn't mean it's not there, but I just haven't seen it.  It does make sense to have something like that, but wouldn't surprise me if it never happens.

Usually the 2 loans are usually issued by different lenders - even if both were issued by the same lender, they may have been sold off to different investors.  The right hands usually don't speak to the lefts very well, even when they are connected to the same body.

Richard Dunlop · Answer

Not a lawyer but I do play one in my REI hobby

Second gets no credit to bid on first but has a right

to redeem First to protect Second's interest.

Within limits

Richard Dunlop · Answer

Interesting scenario Could the second have any right to

buy the First position at the Short sale price?

Blair Poelman · Answer

I would never purchase a 2nd position lien. Discounted or not.

Many of the shortsales I've dealt with have had 2nd mortgages - the first usually gets discounted to the fair market range, but often times the 2nd gets almost completely wiped out.  The worst I've seen is a twin I bought in Vegas for $52,000 in 2013.  The 1st was $194k and got shorted to $51,500, the 2nd was 55k shorted to $500.  This is on my top 5 favorite deals of my life.

I'm sure there's a strategy to make something work on it, but I wouldn't spend the time or money to try and figure it out.

how do i buy second position debt from bank

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