How to negotiate with lien holders?

Question

Hello, I'm wondering if anyone could explain on how to negotiate with lien holders.  Let say I want to buy the third so I can buy out the second and first.  Then I would call the third lien holder by tracking them down correct?  Then how do I sound professional enough to have them sell me the lien on a discount and how does the process work after that?  Thank you very much.

Mike C · Answer

Greg,

This is a more complicated question than it first seems. Assuming you have authorization to speak, you need to first sit down and look at the numbers, from the point of view of the LIENHOLDERS (all of them). Where is this home in the process? Has foreclosure proceedings started (as this is a foreclosure area thread I assume it is somewhere in the foreclosure process)? Are they just delinquent? And so on. All these things matter as to what is realistically going to happen to the lienholders. Who is the investor on the liens (FREDDIE, FANNIE, VA, HUD) or are they held by the lien holder and/or servicer directly? It matters because all the investors must follow their guidelines and to net a certain amount while if a small regional bank or local credit union owns the loan or paper, then they can do whatever they want to get out from under this. Sure you can make an offer but if it doesnâ€™t meet their minimum, you are wasting your time.

What is the value of the property? What are the repairs? Etc. The reason this is important as you need to present a realistic view of what will probably happen from the view point of the lien holder in third position. For example, if the first is foreclosing and it is HUD, they will only pay 2k to a second and I am not sure about the third (at least it used to be). So you need to show the third if the 1st forecloses, they will get very little (and the more exact you know the number, the more likely they are to deal). So if they wonâ€™t get any more than 2k (if lucky in this example), they could sell theyâ€™re 45k third lien for 2k or risk getting nothing. What is the property worth? So while you may be able to get that 3rd lien for 2k with a face value of 45k, they may or may not be a good thing. Why? It depends on the property condition and what it is worth that determines how safe your investment is. Remember, the first and second are not going to sit idly by while you foreclose on the third lien without protecting their money invested (most of the time and certainly if the loan is owned by one of the investors mentioned above). Say the first lien is 250k and the second is 100k. say the property is worth 400k. The first is ok because they are owed 250k on a property worth 400k. The second lien position has some equity cushion as well. But the third is going to be lucky to be made whole unless the property is really worth 400k AND more importantly, they can find someone willing to pay that. This is unlikely in this market. Say the property is worth 270k instead of 400k. Now the third lien is SOL. The second may or may not be made whole, again depending on if this value is real or imagined (not easy to tell the difference for many these days or if any lien holder still believes to property is worth much more than it really is).

So pretend you have the third you bought for 2k. Great. But know you have to make the 1st lien holder whole or very close or they will tell you to go pound sand. The second would also need to be paid off because if there is equity, as they too will defend themselves if it makes financial sense. Do you also have the cash or the availability of cash to cash out the first and second lien holder? Cause if you donâ€™t or canâ€™t work out something with them, holding the third may or may not be a good thing.

My point is this type of question is much harder to answer than it may seem at first. This is just the tip of the iceberg but I think you can see from above that this is much more involved than it may seem on the surface. So buying the 3rd lien may or may not be a good idea (probably not these days in general) but if you have a handle on the numbers, it could be a good idea.

Just some things to consider before bidding on liens in any position. Sorry as I have probably created more questions than answers here but I hope you understand a bit more about the process. Good investing.

Mike C

Brian Haskins · Answer

You have to start by getting authorization from the homeowner. They will not speak with you without it. Get the number from the homeowners statements and then call them and they will want a net sheet or hud.

Brian Haskins