Risky 2nds - Why a Paying 2nd can also completely wipe you out.

[Chris Seveney]

We are seeing a big uptick in second loans on the market, including those who own investment properties look to take equity out of an existing property by getting a second loan. Getting a 2nd is extremely difficult and for those who buy seconds or are considering them here is an example of "what the guru does not teach you"

In Georgia, a non-judicial state, a foreclosure is not done through the courts. Georgial Law does not require the first lender to notify the subordinate lender of the foreclosure. So lets say you own a second position loan on a property in Georgia that is performing, but the first was non-performing. There is the possibility that the property could go to foreclosure without you knowing it.

Lets say it does go to foreclosure and you thought you still had equity coverage but realize it sells out auction for $1,000 above the first lender. Guess what, you are now wiped out.

Lets say you find out before the foreclosure sale, what can you do? Well you better have a large wad of cash sitting around to either pay off the first mortgage to not get wiped out or reinstate the loan. Would you risk it going to foreclosure?

Just some food for thought for those who invest in mortgage notes and think buying seconds cheap gets you in the business at a low barrier to entry  - it is cheap until you have to reinstate or payoff a first lien.