1st vs 2nd NPN

[Eric Lawson]

Hi all,

I see a lot of people who focus on either 1st or 2nd NPNs, but rarely both. What are the big differences between 1st and 2nd NPNs (other than lien position)? Do 2nd NPN investors just not want to deal with the property if it forecloses? Or is it cause it's cheaper? Or something else that I'm missing? Thanks for any help.

[Patrick Desjardins]

Hey Eric,

I've been buying both, though I buy more 2nds than 1sts. You could write entire articles on it and I think Dave Van Horn has some on BP. But here's a few pros and cons:

1st mortgages:

- Always has equity so you can't get wiped in BK. Main risk is taxes / HOA.

- Much higher price point (~25-70 cents on the dollar)

- More likely to get house back (from DIL / FC)

- "Easier" to process since it's basically a "pay or move out" investment

- Lower expected return due to the relative safety

2nd mortgages:

- Most still have little or no equity so you can get wiped in BK.

- Much lower price point (~2-35 cents on the dollar) so you can buy a lot more of them and diversify

- You typically really don't want house back, so your main tool is workout agreements with the borrower. Issue is when they don't want to work with you and the house is underwater.

- "Difficult" to process since the lack of equity means the resolution mostly comes from negotiating with the borrower. It's more labor intensive since it's not just about letting the FC run its course.

- Higher expected return due to the higher risk.

There's really a lot more to it but I think those bullet points cover the main arguments for each. I don't own a fund but 1st mortgages have the reputation to be easier to raise money for due to the relative safety.