2nd position exit strategy

[Tim S.]

Hi Note People,

I'm trying to learn more about NPN 2nds, and wondering about this scenario: (assume 1st is performing)

If I have a 2nd position Non-performing note, without enough equity to even cover the first, or just barely cover the first, is there any way to make a profit?  Has anyone here made a profit in this situation? 

 I understand that you can still foreclose from 2nd position, but it seems like a bluff at that point. If the borrower calls your bluff and refuses to pay anything, then there is really nowhere to go with it is there? You can still foreclose, but how do you make any money if the sale of the property won't even pay off the 1st?

Are you banking on the fact that the borrower doesn't want to take the chance that you may foreclose on them, and will agree to some payments? I could see this could work sometimes if they are ignorant of how this process works, and they are just scared, and pay up. But if they figure out you really don't have any leverage without equity, why would they pay up?  I expect that most people probably are ignorant of the process, but I wouldn't want to count on that as my only way to profit.

Seems like a longshot to make this work, am I wrong?

[Joshua Andrews]

I have had excellent success with underwater assets. There are probably 5-7 or so viable exit strategies even when no equity is present. Despite what it may seem on the surface, a well selected 2nd mortgage with a performing first is a wonderful asset. I buy these almost weekly.

The key is the up-front due diligence. Simply picking notes at random will get you into trouble. The due diligence process is 80% of the game, and also where the heavy lifting is. Also, recognize not all of them work out. This is why you pay a heavy discount both for the risk and the fact they are non-performing. Our company enters into the process with the goal of creating a win/win loan modification for the borrower. However, it is the borrower who ultimately decides what course of action to take. You cannot force someone to do something or take a specific action.

A few ideas on exit strategies.

• reinstate loan in full and have the borrower make payments according to original promissory note
• payment plan (forbearance)
• loan modification (my favorite)
• discounted payoff
• sales assistance (sell the home)
• short sale
• foreclosure
• deed in lieu of foreclosure
• foreclose, then rent the property

There is much, much more to be discussed on this topic, as this only scratches the surface.

Josh