All Forum Posts by: Joshua Andrews

Yes that is correct. Legal fees and costs within reason. So all foreclosure fees, attorney's fees, lender advances to protect the collateral, etc. Remember as mentioned you need to do your homework on a deal like this. It can be profitable but you need to do your due diligence and know as much as possible about what is happening in the transaction.

Josh

Hi Han,

There is nothing wrong with buying a loan in this condition. A few things you need to be clear on prior to purchasing. I am sure there are others but these immediately come to mind.

1. Find out the 1st mortgage payment amount and if it's current or in default.

2. Determine how much equity is really in the property. Be conservative and account for resale fees, legal, and other expenses. These can add up fast.

3. Find out what type of bankruptcy are they in.

4. Get the borrowers first and last name, and last four digits of their social. Go to pacer . gov and look up their BK filing. Learn everything you can about that situation and what has been filed. It is all available virtually for free at pacer.

5. I would also ask for a hefty discount in a situation like this. I realize the property has equity and is in California, which is a non judicial foreclosure state, but you should still be buying with a hefty discount, not a slight one. Regardless of the outcome you will be laying out money or waiting months before a resolution is realized. I am not saying this is a bad deal, just something to be aware of.

Since all you stand to gain is what is owed on the 2nd lien, you should be buying at much less than what it's worth. That difference between what you paid and what they owe on the 2nd lien is your profit. Your risk or exposure is having to extend legal fees and possibly carrying the 1st mortgage until you can sell the property once you have taken legal ownership through a foreclosure via the 2nd lien.

Here are my responses to your questions below in ITALICS.

QUESTION: Being this my first note purchase experience, what are the risks and potential complications that could arise from this? 

ANSWER: Many things could arise. It could still be a good deal if you have all the information up front. I would suggest getting a title report to start with.

QUESTION: If the bankruptcy was filed just one month ago by the owner, why would the court grant the release so soon especially if there is a payment plan in place, and can the 2nd position lender request for the release?

ANSWER: A payment plan for debts will only be in place on a Chapter 13 bankruptcy. A chapter 7 will have no payment plans to many creditors. I don't have all the information to comment on why the stay would be lifted quickly. You need to find more information on the filings via pacer.

QUESTION: Can the court order the 2nd lien to be reduced or even relinquished due to the owner being in bankruptcy?

ANSWER: No. 2nd liens cannot be stripped or "wiped" in California. The bankruptcy could potentially stall your being able to foreclose or recover your investment for a good deal of time though.

QUESTION: Do I run any risk of losing part or all of my investment?

ANSWER: In almost all situations, the answer is yes. If you cannot afford to lose the money I would not suggest purchasing. However, this could be a solid deal. We don't have the actual figures here in order to make an informed decision. There are a great deal of nuances here. I would suggest having someone with more experience guide you on a purchase like this and not trying to do it yourself. Or, simply start with a more vanilla note purchase with a defaulted 2nd lien.

Hope that helps.

Josh

Run title search. Best way to go if you are serious about laying out money on an investment.

I am all in for that. It's a good suggestion Bob.

Sounds great I will see everyone at the reception. Probably the bar really. Lets be real about this.

Josh

Christopher,

I would avoid purchasing an asset like this. The primary indicator we look for as investors in NPN 2nd's is the first lien performing. I am sure there is some "angle" to make money when 1st is in foreclosure, but it's not worth the hassle or the risk. Buy 2nds when 1st is performing and you are ahead of the game.

If the 1st mortgage has already initiated foreclosure they are now in the drivers seat. Meaning, they only need to recoup THEIR investment which is what the borrower owes them. They do not need to include enough to pay the 2nd off, i.e. you.

If the property has substantial equity, this could be a different story as they need to sell at a relatively agreeable FMV. Little bit of nuance here, but short story is just pass it up and do not buy it. No need to get real creative. Plenty of other 100% legitimate deals out there.

Josh

I will be attending as well. I believe @Bob Malecki had a recent post asking the same thing and getting folks together for a few drinks or dinner. Might be a nice idea.

Josh

Hi Tim,

Typically the seller will provide a copy of the credit report during your due diligence period. It is an important piece of the decision making process when buying 2nds. When you are buying a NPN 1st mortgage it is not really a factor.

Sellers should be vetting you prior to turning over this information. Meaning they should be having you sign an NDA, sometimes doing a background check and having you fill out a contract stating you will not share this information with others. Keep in mind this is sensitive information concerning someones financial history and should be guarded as such. It is not information to be given out unless appropriate security measures are taken.

Josh

Sandy,

Reading back over your post again, I want to give you some thoughts on how I approach looking at a tape. I do the following things basically in this order.

1. Look for the states I am absolutely not interested in, really at any price. States like NY. I then delete these.

2. I delete anything that does not have a performing 1st mortgage.

3. I look for loans in states I like, or with equity. I highlight these to review first.

4. Typically at this point, I am left with just a handful of loans to sift through. I then pull up the addresses online to get a "general" idea of FMV for the home. I am looking at CLTV and equity here. I also like to see the general condition of the home. If it's a beater or a nice house in an upscale neighborhood.

5. On the loans that make the cut, I look at the credit reports. Here again a few will be tossed aside as I see things I don't like in credit.

6. At this point I have just a few loans I may be interested in, depending on how large the tape was. Then I look at pacer, check occupancy, start calling the 1st mortgage to confirm it's current, confirm the balance, payment, rate, etc. I also look to get a payoff quote from the 1st if possible to determine if there is a hidden arrears or balloon on the loan. Many times this will not be listed on the automated system.

7. Then I sleep on it. Next day I review my notes again and if all looks good I put in a bid. Never let a seller rush you. If they are in a rush it's a red flag. There are plenty of deals.

That is a super basic but fairly accurate description of how I process a tape. Is there a more efficient way to do this? Most definitely. I am still learning so this will evolve over time.

Josh

One thing I failed to mention, everything I mentioned above applies to non performing 2nd liens. Nothing to do with 1st liens.

Josh