Foreclosing from the 2nd Position?

Question

I'm new to notes, have read/listened a bunch and attended Martin Saenz's workshop. I'm still not clear what's required of the investor in the event you have to foreclose (though that is not what my goal in this business is). Let's use this scenario:

• Ohio property - $90K FMV/appraisal (for sake of this example)
• Senior/1st Lien - $50K
• Junior/2nd Lien - $25K (this is what I'm buying)
• Total Equity - $15K ($100K - $50K - $25K)

The borrower isn't willing to work out a loan modification so I foreclose. The property goes to auction and bids start at $60K (Ohio law is 2/3 of appraisal). I don't want the property and I don't want to be on the hook for $60K. I just want to be made whole on the $25K value of my 2nd position note.

How does this work? Thank you in advance.

Jay Hinrichs · Answer

Chad that much I know  as a first you never get overages you only get what your owed including your principal interest and costs.

any thing over that goes to the second or to the owner if there is no other liens.

So if the second goes to sale and they full credit bid and the bidder pays more than full credit. then overages to the third or next in line and or the owner.. you as the first are still intact and now the party who bought the second either has to make a deal with you to pay you off or make payments.. which from what I gather from you guys is really what you want the payments.. myself I am only interested in the asset..  and the one I bought for 5k was a sherrif sale on a first.. not a note that I bought..

Jay Hinrichs · Answer

I would double check that opening amount..  but if first is current then you foreclose on the second.. if no one bids you won it subject to the first..  then you sell and recoup.

if opening bid is really that high and someone bids then i believe they pay out the first and  property tax's foreclosure fees ( i could be wrong on Property tax though.. and i seem to recall on some of them i have bought in Ohio the utls stick to it as well.

@Chad Urbshott   might have ohio second position experience

opening bid may be based on assessed value not full market value i just bought first last month for 5k.. and i know the house is worth 45k as it sits.

Chad U. · Answer

@Wayne Brooks

Yes, I have a 1st in OH with a 2nd (HOA) foreclosing on it when I purchased it.  It went to auction and some uninformed bidder paid the opening bid  (2/3 of appraisal which is correct for Sheriff sales in OH).  Unfortunately the overage does not go to the 1st, but next in line or the owner.  In this case, the bidder realized his mistake, tried to backout and the court charged him with contempt so therefore lost his deposit.  Because of this screw up by the bidder, now I am starting from scratch and foreclosing from the 1st position.

Edward B. · Answer

@Chris Serger, foreclosure laws are very state specific, but in general if you foreclose from second position you are seeking the amounts you are owed at auction and the buyer at auction needs to realize that what they are purchasing will be subject to all liens senior to you. Everything behind you will get wiped.

In your scenario you can set the auction price at anything up to what you are owed, UPB + arrears + costs to foreclose. What you can include differs by state. I do not deal in OH and have never heard of the 2/3 rule. Might be that things are totally different there.

I'm sure someone with more experience in OH, 2nds, or notes in general will chime in. @Dave Van Horn, @Chris Seveney, @Bob Malecki, @Scott Carson

Jay Hinrichs · Answer

Well I would think this is pretty basic stuff for Martin to cover but maybe you missed it.

your talking about keeping the first current and you foreclosing on the second correct.

if the first forecloses unless there is overage above what they are due at the sale your wiped out.

As a wiped out junior you always have the right to sue for a judgement and chase the people ( rarely works out in low value assets like this.)

also in that example your equity spread is not very good unless you are buying the second for 10 cents on the dollar.

but lets say the first is owed 50k by the time it goes to sale they maybe owed 65k and if opening bid is 60k they may show up and bid up to the 65k in hopes of competitive bidding.. once 65k is met anything over 65k goes to the second in line which would be your second.. so lets say it bid to 70k you would receive 5k.. the delta.

as a foreclosure buyer in Ohio its not common to see things bid up to far like it is in west coast sales.

this is why seconds trade at such a low purchase price there its very common for them to get wiped out.

now you can always bring the first current foreclose on your second and maybe some newb will bid on it no realizing its a second.. but then you become the owner and maybe as the owner you can sell and recoup what you paid or even make a profit.

Wayne Brooks · Answer

@Chris Serger Assuming what you say is true about the opening bid.....

I don’t know the laws in that jurisdiction about who gets the overage from the sale....in your case you’re owed say $30k, if the bid is $78k, with say $3k in fees, then there will be $45k in surplus funds.

Assuming informed bidders,

If the surplus goes to the owner, then no one will bid since they’re paying $78k and also become responsible for the $50k first.

If the surplus goes to the first mtg, then maybe people will bid, since they’d be all in for about $78k plus $5k  (the balance still remaining on the first), or $83k, if the property is worth $117k, as is.

Chris Serger · Answer

Thanks for the reply, Jay. We did discuss foreclosure in Martin's class, but there was so much to cover we didn't get into it in depth or specific scenarios.

In my sample above, I should have stated, the borrower is current on everything on his credit report except this 2nd lien. The price of the note is a fraction of the $25K UPB, so I'm just trying to figure how I get my $25K UPB paid out -- I'm not worried about ROI in this scenario--just understanding the foreclosure auction process.

Let's amend the numbers like this:

Appraisal

$ 117,250

1st Balance

$ 50,000

2nd Balance

$ 25,000

Equity

$ 42,250

Bid Price (2/3 of Appraisal)

$ 78,558

Payoff: 1st+Court+Attorney

$ 53,500

Payoff: 2nd

$ 25,058

2nd Coverage

100%

I draw 2 conclusions from this.

• If my goal is to simply get paid the UPB on the note and not have to deal with the property at all, then I need to ensure that 2/3 of the appraisal price (i.e. the minimum auction bid) will cover the 1st & 2nd. In this case, the property must be valued @ $117,250.
• If I don't mind dealing with the property, I could bid at auction to secure the property over and above the 1st ($50K+court/attorney fees = $53500). Then I simply sell the property for--let's say for $100K--and collect the difference.

Please tell me if I'm going wrong.

Foreclosing from the 2nd Position?

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