How much equity before the 2nd will bid?

Question

I have tried to search so if I missed this somewhere, sorry.

In the experience of the group, how much equity does it take for a second to bid at a foreclosure sale? I typically will only bid on firsts, but a few of them I am contemplating have a bit of equity in them if the second is wiped out. Is it normal then for a 2nd to bid up to the FMV in order to maximize their recovery or do they typically hesitate throwing additional money after a property.

Example

Estimated Retail Price 700k

1st Loan 700k published, 500k opening

2nd Loan 250k

I am making these numbers up but they are similar to what I am seeing. In this case, it would seem the 2nd should bid up to maybe 600 with the hopes of getting half its 250 back and leave room for error. However since banks don't like to own real estate, I wondered if they really would bother. It has been a few years since I was in the game and, as far as I know, didn't see a 2nd bid on a property. I ma now an re-entering and wondered what is being seen.

Happy to read up and get current again if there are some great posts, books, etc. that people want to link to. I saw that there is a great tax book on here, but that it is not as useful with tax reform so waiting for that to be reissued. Thanks again for everyones help. Hoping the holiday keeps folks away as well.

Ron S. · Answer

There are a lot of variables to consider but in your scenario, it the first lien opening bid is $500M, but the "published" amount is $700M (Total Debt?), there is nothing for me to bid, if the "retail" (Appraised?) value is $700M. If the opening bid, and the amount with which the senior lien holder is willing to let it go for is in fact $500M, i would bid. In your scenario, the junior lien holder has a total debt of $250M. Assuming the $700M is a good value figure, and assuming the senior stops at $500M, that leaves $200M of meat on the bone. Assuming I have to pay 6% selling costs, and assuming i have to pay 2% carrying costs, and assuming i don't have to winterize the property, and assuming i don't have any property taxes i have to pay, and assuming i don't have any utilities and/or other liens, and assuming i don't have any material deferred maintenance, i have an effective net realizable potential recovery of $144M. I want to recover 87.5% of my current loss before i bid and in this case i wouldn't but, there is enough of a return on the $500M that would more than likely cause me to bid and if i did bid, i'd bid up to about $610M. If there is a net potential of $144M, i'd have to cut a check for $500M. $500,000 spent to recover $144,000 maximum. Again, that doesn't meet my 87.5% (Just an internal number on my end) recovery amount but, it is a significant recovery amount. I could defend the expenditure and risk to my bosses. I would only try to defend it if i could vet every assumption i listed above. I only get to make that mistake once before i'm looking for another career.Then again, depending on the status of the homeowner, i might let it go to sale without bidding and just sue the borrower later as a sold our junior. That has a lot of variables and assumptions as well. Do i risk them filing bankruptcy with my suit? Do they have income and assets for me to go after?

Alan Nelson · Answer

@RonS5 Ron, would you please post a simple example to illustrate your 87.5% recovery calculation (i.e., to determine whether you would bid as a junior lien holder in a senior sale)? Thanks.

Ron S. · Answer

Each property/loan is calculated on its own for a predetermined return/recovery. If we don't hit our number in our calcs, we don't bid. You can't pin down some national formula. For me, if i don't hit 87.5% recovery, i won't bid as a junior lien holder in a senior sale. I've bid as a junior lien holder countless times to protect my position. I've also foreclosed as a junior lienholder knowing i will pay the first off. I've found fewer people bid when i'm the junior foreclosing than they do if i'm just a bidder on the senior sale where i am junior. I do occasionally get the idiot that doesn't do their research and bids on my junior sale without realizing there is a senior in front of me.

Kevin Sobilo · Answer

@Eric Petersen, I have been to a few sheriff's sales (foreclosure auctions) and I don't think I have ever seen anyone bid on behalf of a 2nd position lien holder. Most times if someone has been foreclosed on, there isn't enough equity to even hope to pay of the first lien otherwise the borrower would have tried to sell or at least short sale the property.Also, since (at lest in my state) nobody has access to the property prior to the auction, bidders do not know the condition of the property. So bidders are very conservative with their value estimates. I'm sure these conditions vary a lot across different states, but that is what I have observed in my area.