All Forum Posts by: Marco Bario

I've never pursued junior liens where the combined investment-to-value of what I'm purchasing plus all senior liens is greater than the value of the underlying asset. Note, however, that some investors do and rely on the borrower's motivation to prioritize a roof over their head as justification. Many refer to this as emotional equity. The greatest risk is being wiped out in bankruptcy.

I view junior lien investing as similar to holding an option - where a small investment creates leverage against a larger asset. 

The potential outcomes are many:

1. Pursue a loan modification. Once performing, the whole note can be sold at a higher price, a partial sold, or the note held for cash flow.
2. Receive a payoff resulting from the foreclosure auction.
3. Take title to the property resulting from the foreclosure auction subject to senior financing. Think of your front-end investment as the down payment and ongoing debt service like any other real estate financing. 
4. Park the non-performing asset in your portfolio until the borrower eventually surfaces wishing to sell or refinance their property. Some states have statute of limitation laws, but not all.

@Patricia Steiner, @Zoie Holley

Ironically, two of the best real estate investing educators in the country live and invest in the Tampa/St Pete area. 

John Schaub
Peter Fortunato

For both of them, it's been decades since they went to a bank for a loan (I'm actually not sure if Pete ever has). They use seller financing, private money, and exchanging to acquire property. 

Zoie - John has an excellent book called "Building Wealth One House At A Time." I recommend his book without reservation. Pete is teaching a class in Tampa next month. He's not good at online marketing, but if you contact me directly, I will share his contact information. Both teach ways to acquire property using seller financing and other creative techniques and remain active in today's market (although John is slowing down with acquisitions).

Other educators I recommend:

Vena Jones-Cox (She runs two real estate clubs in OH - where I believe you are located)
Bill Cook
Bill Tan
Andy Teasley

I assure you there are investors all over the country using seller-financing and other creative techniques to acquire property. 

As for Scott Arpan's data, who owns Advanced Seller Data Services, you can download a more detailed report in the article I linked to. He's pulling directly from county records. I market every day to seller-financed noteholders, and I rely in part on Scott's lists to do so. His father started the business back when the only way to pull records was by sending people directly to individual courthouses. Scott took the business over many years ago. Obviously, there are some digital tools available to him now, but the sources are the same. He's as legit as they come, and I want to say that publically because there was doubt cast in a previous post. 

In any case - I recommend learning as much as you can from those I mentioned above. 

@Joe S., @Jay Hinrichs -

Similar to Joe, I have foreclosed subject to an institutional 1st and continued payments to hold the loan current without mortgagor authorization. 

How? Prior to foreclosure, I wrote a letter to the first lien servicer explaining I was a junior lienholder and wished to obtain information in order to bring their loan current. With the letter, I included documentation showing my LLC was the current junior lienholder... copies of the note, mortgage, endorsements, and recorded assignments.

Commonly used institutional notes and security agreements allow for a junior lienholder to protect their security interest. I quoted that language as well. 

I didn't exactly receive an all-access pass, but in my case, I received enough to know what was needed to reinstate, and the monthly payment amount going forward. 

I'm not sure it will work every time, but in the particular instance I'm citing, it did work for me. 

@Zoie Holley, @Patricia Steiner -

2021 saw a 7% increase in the number of seller-financed loans originated. There were almost 90,000 seller-financed loans with a combined total balance of $27.3 billion. That was in a seller's market. Now interest rates are rising, inflation is high, and sellers in high-priced markets may face capital gains taxes when selling a property because of the sharp increase in property values. I remain bullish on all aspects of seller financing. 

You can read more about the 2021 stats here: https://noteinvestor.com/notes...

My advice to you, Zoie, is to ask the sellers what they plan to do with the money and if they expect to pay taxes (know the probable answer to the tax question in advance) on the lump sum proceeds. 

Older people, in particular, appreciate a monthly income. Walk them down the road of showing how their money will last longer if you were to pay them a yield around 5% vs. what happens to money sitting in the bank or a money market account earning 1% if they're lucky. 

Tired landlords also appreciate a monthly income that comes without tenants, toilets, and trash-outs.  

On the topic of taxes - an installment sale (IRS term for seller-financing) can defer and possibly reduce capital gains taxes when selling a property. Read IRS Publication 537 to learn more. Understanding the tax code (don't give specific tax advice) is very powerful in real estate.

Hang in there! 

Maybe they're bringing the deal, and maybe they provide property management. The down payment could also come in the form of debt secured by another asset rather than equity. 

To fend off foreclosure and to continue to control the underlying asset from a junior position. I would never bother paying a lien that's junior to mine, but I would, and I have advanced loans and taxes senior in position to my lien. In some states, HOA's receive super-lien treatment and move into 1st position ahead of debt liens.

@James Free 

Keep in mind most experienced junior lien investors will advance funds to any senior lien holders in order to bring the accounts current, and this is within their rights to do so. Controlling a large asset with a small investment via a junior lien creates a great deal of leverage. 

  1. If you receive a lump sum, what do you plan to do with the money?

  2. Is buyer #1 unable to bring 3rd party financing, or is it possible they only offered amazing terms for themselves to see if you'd bite?  

If you don't have an immediate need for the cash, #1 may be worth another look, but I'd ask for a rate of 8% or higher, a shorter amortization, a personal guarantee, and no balloon. If you need cash later, you can sell all or a portion of the remaining note payments.

@Beary Bowles -

I'm not a fan of balloons. If the property doesn't perform, the credit markets tighten, the property can't afford a refinance at higher rates, or the buyer doesn't execute - you won't be a fan of balloons either. 

The wrap is fine, although remember who's on the hook if the buyer's payments stop (you). 

A 4% rate in seller financing is low - especially for commercial property. Also, if there's a higher rate, your buyer will be motivated to improve the property to refinance with better terms. 

Another scenario would be a master lease where you'd still own the property but be relieved from managing it. There can be an option added as well. There are dozens of ways to structure depending on who wants what from the property. Who takes depreciation, amortization, appreciation, income, etc. are all negotiable. 

@Todd Ashley, @Allan Smith -

Believe it or not, the IRS website is a great place to find information. I didn't know the answer regarding combining the section 121 exemption and an installment sale, so I looked it up (https://www.irs.gov/taxtopics/...):

"If you sold your home under a contract that provides for all or part of the selling price to be paid in a later year, you made an installment sale. If you have an installment sale, report the sale under the installment method unless you elect out. Even if you use the installment method to defer some of the gain, the exclusion of gain under Section 121 remains available. Refer to Publication 537, Installment Sales, Form 6252, Installment Sale Income, and Topic No. 705, Installment Sales, for more information on installment sales."