Purchase second mortgage?

Question

There is a house in pre-foreclosure in FL I am interested in buying for rehab and to live in.

The first mortgage is around $200k and there is a second mortgage for around $100k.

House is in very poor condition and needs to be gutted.  In current condition the property is probably worth $270k.

The house is scheduled for a foreclosure auction in a few months.

Is there anything I can do to get a leg up on purchasing it?  I am a cash buyer.  I've heard about people buying up the second mortgage at a discount to get an advantage in an auction.  Is this a viable strategy and how could I approach the lender to maximize my chances of success?

Ron S. · Answer

Which lender is foreclosing? Both? Junior? Senior? Yes, it's a viable strategy if the junior lienholder will play ball with you. It's called a note sale. You don't buy the house, you buy the note. You become the junior lien holder. That's the only chance you have working with the junior lienholder. You aren't a party to the loan so, they aren't going to talk to you about anything related to the loan but they might talk to you about buying the note. That's difficult to say the least though unless you get a hold of a half decent default associate at the lender. If it's a big bank, I'd say you are wasting your time. If it's a small institution (Say under $4 billion in assets) you might be able to make some sense to a decision maker. So...then you buy the note and you own the note. You bypass dealing with the property owner and just foreclose on them and then deal with the senior lienholder by paying them off. No, the senior isn't going to discount anything.

You are NOT going to be able to deal with the junior lienholder by working with the borrower unless you are planning on doing a short sale and if that is the case, you also have to deal with the senior lien holder in the sense that you are going to have to stroke a check for their full payoff to get clear title.

There are hundreds of posts on this forum with a multitude of "Tricks" that quite frankly, don't work or if they do, its a needle in a haystack. Your scenario is very very typical and you have many things working against you, the biggest of which is time. Do you have the time to facilitate the transaction before the foreclosure sale. The time to get a payoff from the senior lienholder on the first mortgage and either a note sale on the second or a short sale on the second (Which WILL require cooperation from the property owner). If you are going the short sale route, do you have the time to get it listed (The borrower I mean, not you) with an agent and on the MLS system for fair market value and if you do, what's to say someone doesn't propose to purchase above your price, effectively removing you from the transaction? That is a requirement to have it listed in all short sales and that is the very reason they want it listed, to attract the best offers available from an open market and that is the very reason you DON'T want it listed so you can keep it all for yourself which is fine, as long as you have the ability to negotiate a note sale with the junior and keep it off the market.

So...after all of my rambling (Sorry), yes, it's a viable strategy that might pay off if you have the stomach for it and do it the right way.

Just my two cents.

Ron S. · Answer

As a follow up, after reading your other posts on the same subject, my suggestion is to just bid at sale. That gets rid of the issues. the senior will bid at total debt more than likely, bring enough funds up to what you are willing to buy it for. Again, good luck.

Ron S. · Answer

They haven't foreclosed if it's schedule for auction in 2 months. If they already foreclosed and they are just putting it up on an auction site, there is no junior lien holder or property owner to deal with as the lienholder was wiped out and the owner lost it already. I'm guessing you meant they are GOING to foreclose in two months, not that they actually FORECLOSED.

Also, you don't "BID" on a property unless it is at auction for sale. You offer to purchase. Is that what you meant? You made a purchase offer and it was accepted? If so, I'm sorry to say, you had an idiot as a real estate agent on both sides of the transaction as a half stupid agent would make that one of the first questions they would ask of a seller, and even if they were too stupid to ask, a prelim would have shown both lienholders.

Sounds like you are halfway done with a short sale, the only part left is to get the short sale package to the junior lien holder for review and approval/rejection. I'd get another agent if what you are saying is accurate. One that deals with short sales as a part of their profession. This is not rocket science. They are pretty basic and again, sounds like you were already almost there. The seller must cooperate and you must be on them (or agent) to ensure they get the paperwork to the lender.

The note sale won't work if the lender if BofA. Short sale is your only option.

Good luck.

Fred Kite · Answer

That's great info, thanks!  The senior mortgage has foreclosed on the property scheduled for auction in 2 months.  Additionally, the property was already listed in MLS and my bid was accepted prior to me and both agents being aware of the existence of the 2nd mortgage.  The 2nd mortgage holder is BOA.  So pretty much short sale or bid at county foreclosure auction?

Thanks again.

Purchase second mortgage?

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