Possible to buy a non performing 2nd to stop 1st foreclosure?

Question

I'm working with a seller to stop his foreclosure; the 1st (Wells Fargo) has been in default for over two years, foreclosure is scheduled April 1st, they are still interested in being reinstated.  A 2nd (US Bank) is a HELOC w/ an $86,800 credit line, maxed and in default for just as long, currently a $97K balance.  There are additional state and fed tax liens affecting the property.

My Q isn't should I do this deal (I've left out critical numbers for that question)... there's not much risk of a huge loss, more likely a little to modest gain, from taking the property sub2 (everything), reinstating the 1st, do an extremely light fixup (basically wholetail) and sell within 2-3 months.

My question is "Do you see a way to acquire the 2nd Note from US Bank, at a discount, rather than have US Bank take $0 on their $100K balance at foreclosure?"  I'm dealing with a very cooperative seller.  If I could drop the balance on the 2nd, even marginally, then the deal becomes much sweeter rather than something I'll probably do for the learning experience, with a little profit on the side.

I own and run a title company, I'm not new to real estate and how liens work, but no, I am not a Note investor, and have read in the forums that purchasing a specific note from a large bank is nigh impossible. Just wanted to explain I'm doing this to make the house a good investment, not the note itself.

Chris Seveney · Answer

@Scott T Brady

So few things:

1. Buying the note from us bank is not gonna happen. It is nearly impossible to buy a loan from a large institution on a single investment.

2. You mention reinstating the first - which if you do the 2nd would still be valid.

3. You mention the 2nd would be wiped ina. Foreclosure - so is it safe to assume the house is vastly underwater (and if so why take this subject too)

I don’t see how you make $ in this deal honestly. Best bet I see would be for the borrower to file BK possibly...

Andy Mirza · Answer

@Scott T Brady Your numbers are a little confusing but it looks like there might be some equity. (I'm making some assumptions based on your numbers.)

You really need to have payoffs for the 1st and 2nd to understand what the debt is on the property and then throw the liens on top of that. If there's equity, even a little bit, the 2nd won't be inclined to do a short payoff so they'll recover most, if not all of what's owed to them.

If the property was significantly underwater and the 2nd loan was delinquent, your seller could contact that lender directly and might have luck asking for a short payoff.

Scott T Brady · Answer

Thanks @Chris Seveney, #1 confirmed what I'm seeing.

Yes, the plan now is to reinstate the 1st, leaving the 2nd and all other encumbrances in place, brushing up the place with $5K-$10K, and selling as is.  Inventory is low enough and there are enough house hungry people here that it will sale, but it obviously won't be full ARV.

1st Principal: $270K1st Reinstatement: $75K2nd total balance: $97KOther taxes/liens total: $25K

ARV is $550K - again we won't update it to that level, but $510K-$530K is likely.

We won't have significant money costs for the small amount put in (reinstatement + minor repairs/cleanup), and my partner who does hard money loans is a licensed broker so we'll be able to work out the listing commission.

So it's not upside down, but margin is too small for most professional rehabbers.  There's better room for profit to get it at foreclosure sale, but in our market that bid would go higher than I'd want to be involved in at this stage.