Why jr. Liens can be problematic when in 1st position

Tax Liens & Mortgage Notes
1yFollow

Why jr. Liens can be problematic when in 1st position

Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

This was a great question. Somebody asked me yesterday. They asked, “why do you care about junior lies when you are in first position?“

There are several reasons why this is important:

1. It typically takes away your exit strategy of a deed in lieu of foreclosure

2. If there is little to no equity, the borrower may not be able to sell the property on the open market because it would require cash at closing.

3. Second position lienholder have done some shady stuff in order to delay a loss, including filing suit against all parties or trying to obtain a temporary restraining order.

I have had every one of the above come into play, which has caused the timing of exiting the asset to take longer than anticipated. As you know, time is money in this business.

So if someone tells you, it does not matter about liens behind you - it does.

7e investments53 Reviews
WebsiteView Page
7Reply
20 views

Most Popular Reply

Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
1y
Quote from @Don Konipol:
Quote from @Chris Seveney:

This was a great question. Somebody asked me yesterday. They asked, “why do you care about junior lies when you are in first position?“

There are several reasons why this is important:

1. It typically takes away your exit strategy of a deed in lieu of foreclosure

2. If there is little to no equity, the borrower may not be able to sell the property on the open market because it would require cash at closing.

3. Second position lienholder have done some shady stuff in order to delay a loss, including filing suit against all parties or trying to obtain a temporary restraining order.

I have had every one of the above come into play, which has caused the timing of exiting the asset to take longer than anticipated. As you know, time is money in this business.

So if someone tells you, it does not matter about liens behind you - it does.

There’s one more ; the borrower has increased debt service and when it either turns negative or leaves nothing “in their pocket” they may lose interest in the property, decide to stop paying all mortgages, and put whatever income they can into their pocket until they lose the property to foreclosure or one of the lenders obtains a court order prohibiting such. 

Don, one little tidbit,  when I was very active buying courthouse steps, and pre foreclosures I would find that borrowers would pay on the second but not the first .. So some 2nd were blind sided by the default or foreclosure since they were getting paid all along. And of course the vast majority if not all got wiped out when I bought at the steps.. However when I would do work outs it could be a challenge for private second holders to understand the pickle they were in.
Podcast Guest on Show #222
JLH Capital Partners51 Review
WebsiteView Page
3Reply
See this reply in the discussion

15 Replies

Jump to latestLatest
  • Jonathan GreeneBusiness Member
    Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
    1y

    This is super helpful. It's the type of thing that I don't think about much because of the way I have invested, but this clears it up nicely for me, so I don't have to be ignorant anymore.

    [email protected]Podcast Guest on Show BiggerPockets Daily 667: 5 Amazing Benefits Multifamily Investments Offer (That Single Family Homes Don’t) by Gino Barbaro
    Zen and the Art of Real Estate Investing59 Reviews
    WebsiteView Page
    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    OP
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    1y

    @Jonathan Greene

    We have recently seen an uptick in wholesalers getting properties “under agreement“ that are upside down thinking that the lienholder will take a haircut.

    We were in first position on one and they want us to take a $40,000 haircut so they could satisfy the second because the second would not budge.

    They called me every day for a week, asking if I would change my mind. They finally got the hint.

    7e investments53 Reviews
    WebsiteView Page
    2Reply
  • Jonathan GreeneBusiness Member
    Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
    1y
    Quote from @Chris Seveney:

    @Jonathan Greene

    We have recently seen an uptick in wholesalers getting properties “under agreement“ that are upside down thinking that the lienholder will take a haircut.

    We were in first position on one and they want us to take a $40,000 haircut so they could satisfy the second because the second would not budge.

    They called me every day for a week, asking if I would change my mind. They finally got the hint.


    That sounds very wholesalerish.

    [email protected]Podcast Guest on Show BiggerPockets Daily 667: 5 Amazing Benefits Multifamily Investments Offer (That Single Family Homes Don’t) by Gino Barbaro
    Zen and the Art of Real Estate Investing59 Reviews
    WebsiteView Page
    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    1y
    Quote from @Chris Seveney:

    @Jonathan Greene

    We have recently seen an uptick in wholesalers getting properties “under agreement“ that are upside down thinking that the lienholder will take a haircut.

    We were in first position on one and they want us to take a $40,000 haircut so they could satisfy the second because the second would not budge.

    They called me every day for a week, asking if I would change my mind. They finally got the hint.


    YUp wholesaler wants to take your short pay and put it in their pocket they are so not transparent in how they do bizz.  its going to get wild  with all the sub to and then gap lenders jumping in ala Morby playbook.. going to be some tears shed.
    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    1Reply
  • Jamie Bateman
    Investor · Baltimore County, MD · Member since 2014 · 466 posts · 439 votes
    1y

    @Chris Seveney the reason I don't pay too much attention to junior liens when buying a first is that the borrower could always add a junior lien after I buy the 1st. I can't control that. 

    2Reply
  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    1y
    Quote from @Jamie Bateman:

    @Chris Seveney the reason I don't pay too much attention to junior liens when buying a first is that the borrower could always add a junior lien after I buy the 1st. I can't control that. 


    You can include in the definition of default the creation of an additional lien (either voluntarily or involuntarily).

    Gimer Law516 Reviews
    WebsiteView Page
    1Reply
  • Jamie Bateman
    Investor · Baltimore County, MD · Member since 2014 · 466 posts · 439 votes
    1y

    @Tom Gimer interesting. I suppose you are referring to origination, right? We typically buy existing debt but still good to know. 

    0Reply
  • Shafi Noss
    Lender · Nationwide · Member since 2018 · 571 posts · 310 votes
    1y

    #2 also applies for refinances

    0Reply
  • Alan Nelson
    Lender · Indianapolis, IN · Member since 2019 · 53 posts · 19 votes
    1y
    Quote from @Tom Gimer:
    Quote from @Jamie Bateman:

    @Chris Seveney the reason I don't pay too much attention to junior liens when buying a first is that the borrower could always add a junior lien after I buy the 1st. I can't control that. 


    You can include in the definition of default the creation of an additional lien (either voluntarily or involuntarily).

     @Tom Gimer - You are correct, and many loan docs provide that an additional encumbrance constitutes an event of default.  However, such a provision doesn't actually prevent that additional/junior lien from attaching to the property, leaving the 1st lien lender stuck with the issues @Chris Seveney mentioned.  The one good thing about such a provision is that it allows the senior lender to start foreclosure (or notice of default/cure period) immediately.      

    2Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    1y
    Quote from @Chris Seveney:

    This was a great question. Somebody asked me yesterday. They asked, “why do you care about junior lies when you are in first position?“

    There are several reasons why this is important:

    1. It typically takes away your exit strategy of a deed in lieu of foreclosure

    2. If there is little to no equity, the borrower may not be able to sell the property on the open market because it would require cash at closing.

    3. Second position lienholder have done some shady stuff in order to delay a loss, including filing suit against all parties or trying to obtain a temporary restraining order.

    I have had every one of the above come into play, which has caused the timing of exiting the asset to take longer than anticipated. As you know, time is money in this business.

    So if someone tells you, it does not matter about liens behind you - it does.

    There’s one more ; the borrower has increased debt service and when it either turns negative or leaves nothing “in their pocket” they may lose interest in the property, decide to stop paying all mortgages, and put whatever income they can into their pocket until they lose the property to foreclosure or one of the lenders obtains a court order prohibiting such. 
    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    1y
    Quote from @Don Konipol:
    Quote from @Chris Seveney:

    This was a great question. Somebody asked me yesterday. They asked, “why do you care about junior lies when you are in first position?“

    There are several reasons why this is important:

    1. It typically takes away your exit strategy of a deed in lieu of foreclosure

    2. If there is little to no equity, the borrower may not be able to sell the property on the open market because it would require cash at closing.

    3. Second position lienholder have done some shady stuff in order to delay a loss, including filing suit against all parties or trying to obtain a temporary restraining order.

    I have had every one of the above come into play, which has caused the timing of exiting the asset to take longer than anticipated. As you know, time is money in this business.

    So if someone tells you, it does not matter about liens behind you - it does.

    There’s one more ; the borrower has increased debt service and when it either turns negative or leaves nothing “in their pocket” they may lose interest in the property, decide to stop paying all mortgages, and put whatever income they can into their pocket until they lose the property to foreclosure or one of the lenders obtains a court order prohibiting such. 

    Don, one little tidbit,  when I was very active buying courthouse steps, and pre foreclosures I would find that borrowers would pay on the second but not the first .. So some 2nd were blind sided by the default or foreclosure since they were getting paid all along. And of course the vast majority if not all got wiped out when I bought at the steps.. However when I would do work outs it could be a challenge for private second holders to understand the pickle they were in.
    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    3Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    1y
    Quote from @Jay Hinrichs:
    Quote from @Don Konipol:
    Quote from @Chris Seveney:

    This was a great question. Somebody asked me yesterday. They asked, “why do you care about junior lies when you are in first position?“

    There are several reasons why this is important:

    1. It typically takes away your exit strategy of a deed in lieu of foreclosure

    2. If there is little to no equity, the borrower may not be able to sell the property on the open market because it would require cash at closing.

    3. Second position lienholder have done some shady stuff in order to delay a loss, including filing suit against all parties or trying to obtain a temporary restraining order.

    I have had every one of the above come into play, which has caused the timing of exiting the asset to take longer than anticipated. As you know, time is money in this business.

    So if someone tells you, it does not matter about liens behind you - it does.

    There’s one more ; the borrower has increased debt service and when it either turns negative or leaves nothing “in their pocket” they may lose interest in the property, decide to stop paying all mortgages, and put whatever income they can into their pocket until they lose the property to foreclosure or one of the lenders obtains a court order prohibiting such. 

    Don, one little tidbit,  when I was very active buying courthouse steps, and pre foreclosures I would find that borrowers would pay on the second but not the first .. So some 2nd were blind sided by the default or foreclosure since they were getting paid all along. And of course the vast majority if not all got wiped out when I bought at the steps.. However when I would do work outs it could be a challenge for private second holders to understand the pickle they were in.
    All the more reason every investor should obtain qualified legal consultation before investing directly into notes
    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    1y
    Quote from @Don Konipol:
    Quote from @Jay Hinrichs:
    Quote from @Don Konipol:
    Quote from @Chris Seveney:

    This was a great question. Somebody asked me yesterday. They asked, “why do you care about junior lies when you are in first position?“

    There are several reasons why this is important:

    1. It typically takes away your exit strategy of a deed in lieu of foreclosure

    2. If there is little to no equity, the borrower may not be able to sell the property on the open market because it would require cash at closing.

    3. Second position lienholder have done some shady stuff in order to delay a loss, including filing suit against all parties or trying to obtain a temporary restraining order.

    I have had every one of the above come into play, which has caused the timing of exiting the asset to take longer than anticipated. As you know, time is money in this business.

    So if someone tells you, it does not matter about liens behind you - it does.

    There’s one more ; the borrower has increased debt service and when it either turns negative or leaves nothing “in their pocket” they may lose interest in the property, decide to stop paying all mortgages, and put whatever income they can into their pocket until they lose the property to foreclosure or one of the lenders obtains a court order prohibiting such. 

    Don, one little tidbit,  when I was very active buying courthouse steps, and pre foreclosures I would find that borrowers would pay on the second but not the first .. So some 2nd were blind sided by the default or foreclosure since they were getting paid all along. And of course the vast majority if not all got wiped out when I bought at the steps.. However when I would do work outs it could be a challenge for private second holders to understand the pickle they were in.
    All the more reason every investor should obtain qualified legal consultation before investing directly into notes

    Don I should have added the reason these folks were paying on the second and not the first is the payment was much smaller..  At least thats the logic they gave me.. I remember sitting with one couple that had a 100k RV in the driveway and were losing their house I said whats up with that..  They said well the payment is only 250.0 aa month and we dont want to lose the RV.. they ended up walking from the house and their equity in that and well I guess livign in the RV.
    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    1Reply
  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    1y
    Quote from @Alan Nelson:
    Quote from @Tom Gimer:
    Quote from @Jamie Bateman:

    @Chris Seveney the reason I don't pay too much attention to junior liens when buying a first is that the borrower could always add a junior lien after I buy the 1st. I can't control that. 


    You can include in the definition of default the creation of an additional lien (either voluntarily or involuntarily).

     @Tom Gimer - You are correct, and many loan docs provide that an additional encumbrance constitutes an event of default.  However, such a provision doesn't actually prevent that additional/junior lien from attaching to the property, leaving the 1st lien lender stuck with the issues @Chris Seveney mentioned.  The one good thing about such a provision is that it allows the senior lender to start foreclosure (or notice of default/cure period) immediately.      


    Of course and I never suggested otherwise. But if the docs give you the right to start charging default interest, force release of the lien etc that is at least some leverage, control. 

    Gimer Law516 Reviews
    WebsiteView Page
    1Reply
  • Don McAlpine
    Member since 2023 · 51 posts · 47 votes
    1y
    Quote from @Jay Hinrichs:
    Quote from @Chris Seveney:

    @Jonathan Greene

    We have recently seen an uptick in wholesalers getting properties “under agreement“ that are upside down thinking that the lienholder will take a haircut.

    We were in first position on one and they want us to take a $40,000 haircut so they could satisfy the second because the second would not budge.

    They called me every day for a week, asking if I would change my mind. They finally got the hint.


    YUp wholesaler wants to take your short pay and put it in their pocket they are so not transparent in how they do bizz.  its going to get wild  with all the sub to and then gap lenders jumping in ala Morby playbook.. going to be some tears shed.

     There will be tears, but they can be comforted by the cool "Sub To" hat.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free