CA Flip Foreclosing by 1st, we're 2nd. Pay 1st & still foreclose?

Question

Would like some feedback from lenders for a tough situation here in California.

Background:

1) Flipper borrowed $ from HML (1st position)

2) We provided gap funding (2nd position), terms are to be paid upon sale

3) Flipper fell behind and put four (yes 4!) liens after us to finish project (one owner is deceased, which complicates things)

4) Flipper stopped paying HML, so HML initiated foreclosure

5) Auction date estimate ~early October. We are prepared and can fund to buy at foreclosure and then sell ourselves.

Goal:

Ideally - move junior liens over to Flipper's new projects, sell property to pay 1st & portion of our 2nd (we get paid delta from another property in escrow)

If unable to sell, go to foreclosure and buy at auction.

To have more control of the situation, I would LOVE to pay off the 1st and still continue the current foreclosure. This will ensure the other liens get wiped and we can immediately begin selling it ourselves. I spoke to the Trustee company handling the foreclosure and they stated once I pay off the first, we would have to file a foreclosure and the clock restarts.

What I would like to know: Is there a way to circumvent this, pay 1st and still foreclose with the same timeline?

Scenario in my mind:

1) Draft TBD agreement to pay 1st debt after auction if our mutually agreed upon reserve is not met.

2) If at auction, someone pays enough to pay us both, great! (unlikely)

3) If reserve not met, foreclose, then based on our TBD agreement, the 1st deeds property to us after payment of their balance. There is really not much of an incentive for 1st. More so a favor for us.

Let me know your thoughts.

Jay Hinrichs · Answer

I would double check on what the trustee told you.  I have bought many notes that were in foreclosure . simply an assignment and the foreclosure kept going.. many I bought 10 to 14 days prior to the sale. ( now this was OR.. so could be something specific to CA.. but CA and OR and WA pretty much mirror each other in these regards.

Gap funding is simply the new guru term for being a second lender. and of course those are highly risky.

if your going to take the risk like this you may as well just be a capital partner and sign on the 1st so you can control it and have something in your agreement where you can boot the sponsor.

think about it the person your working with could not get this loan without your equity.. and now you have to rescue it any way and you have all these issues.

If you simply took on the debt your self and hired this person to execute.. you would save a bunch and be in much better control.. this is how I structure my deals.  GAP is soup de Jour and has worked because the market has been kind.

Wayne Brooks · Answer

Instead of paying off the first, what about buying their note, at full value? I assume they would be open to this.  Either way, buying the first and foreclosing, or simply bidding at their foreclosure, you'll be bidding up to your 2nd and the first combined.  I wouldn't be counting getting the other junior liens "transferred" or borrower making you whole thru another deal.

Rick H. · Answer

FCI services four (4) of my own portfolios however we do own own mitigation, workouts, foreclosure, title curative and litigation.

The are a number of tactics that can be employed.

I will probably hear from legal counsel repping the decedent's estate (and I may already have this one).

What do you desire to accomplish? Protect your principal?

Send me a PM. I'll give you a website to go to, send me the info and I'll see if it's already in the system. If I can help you, I will. If not, I'll tell you that, as well.

Vilson Nikollaj · Answer

California TD Specialists is the firm name who has some affiliation with FCI.

Account Closed · Answer

@Vilson Nikollaj

I've done exactly as Jay suggested, in CA ... buy the note and continue the foreclosure.  You need to deal with the note holder, not the servicing company or the trustee.  From the note holder, get a assignment of deed of trust, allonge transferring the note to you, then give note holder full payoff.  Give the assignment of deed of trust to the trustee (servicing is out of the picture at this point, other than providing a payoff demand), ask them to record the DOT if you haven't already done so ... you are now the foreclosing lender continuing the foreclosure at the same point as previous note holder.  Understand, the note holder doesn't have to sell, even if you give them full payoff, it's their choice.  Maybe they don't want to sell, maybe they want to wipe off you and all those other junior liens, finish the rehab and make a great profit.

I see you are an Engineer, me too, view it simply as another problem to be solved, you'll enjoy it, great satisfaction in seeing all the parts work together ... assuming you don't lose money of course.

This is simply my experience, not advice.

Vilson Nikollaj · Answer

Anyone on BP buying properties at auction in San Diego? What %ARV are investors buying the properties for (assuming ~85%)? In other markets, we're seeing newer investors or owner-occupied paying much higher. Given the low inventory / high demand in SD, I would think this is also an issue here in SD.

Appreciate any insight.

Vilson Nikollaj · Answer

Thanks for all the helpful info everyone. I'll let you know what happens.

Brian Erlich · Answer

@Jay Hinrichs, Thank you for explaining.

Jay Hinrichs · Answer

@Brian Erlich  short answer you don't  in context of this thread.. you will see the first lender is a HML .not a bank... you can negotiate with small commercial banks but the big boys and loans sold in the secondary market is pretty tough if not impossible.  In the day I bought from credit unions and thrifts and of course small banks.. HML situations were rarely deals..

Brian Erlich · Answer

@Jay Hinrichs, How do I arrange to buy the note from the bank?  My wife and I had discussed this as a way to acquire properties, but didn't know where to start.

CA Flip Foreclosing by 1st, we're 2nd. Pay 1st & still foreclose?

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