Posted by Bill K.- FL on December 30, 1999 at 17:02:08:
Also try to structure the deal so that you have received your acceptable profit before the second is factored in… This way the second becomes the gravy of the deal. I much would rather hold a small second than no second with a higher LTV first discounted to end up with the same cash at closing.
holding 2nd ? - Posted by mark
Posted by mark on December 29, 1999 at 10:55:48:
I just had an offer for full price, but the buyer’s want me to hold back 25%. Even holding the second, I would still clear about 8,000, plus be holding a 12,500 note.
My question is what happens if the buyer’s go bankrupt or are foreclosed upon. If the lender forecloses or they go bankrupt, does my second get wiped out? Also, what are my chances at selling my second at a discount, and I do understand the factors of credit, payment history, etc.
The terms of the second would be 12,500 at 12% for 20 years.
Any advice would be greatly appreciated! I hope everyone had an excellent holiday season!
holding 2nd the right way - Posted by Bud Branstetter
Posted by Bud Branstetter on December 30, 1999 at 10:06:47:
Mike gives you the dangers correctly. However, there are several ways to control the process. First, break the second down into a second and a third. The second up to no more than 90% of sales price/value. If this is aged it can be sold. You can use the third to trade for equity in some other deal. Second, on closing send a letter to the party that buys the note requesting notification of default. They don’t have to but may. Next, record an affidavit requesting notification in case of default. Have your attorney draft and check your state laws on requirements.
Another approach that is more proactive is to control the situation. If you put clauses in your second or third that 1) default in the 1st is a default in the 2nd 2)they must send the payment on the first through you. This can be the full amount of mortgages owed or it can be a check to the first that you remail. Coordinate the due dates so there is time to get the second and remail the first.
Now you take all these measures and they still get into trouble. It does happen that people get divorces or lose their job. Some can be screened out first. The question on risk depends on your state. In Texas you can foreclose in 2 months. Other states in is much longer. How long you have to make payments in case they default determines your risk. Low down and lenghty foreclosure procedures increases your risk. You can look at it as buying a subject to or preforeclosure deal. Would you put out the money to catch it up and get it resold. Personally, I think few would file bankruptcy if they have very little equity.
Re: how much are buyers putting down? - Posted by JD
Posted by JD on December 29, 1999 at 21:19:54:
If they are putting 10% down then there is a good chance it would be worth the risk (if you do not mind holding the paper). If they are not putting any money down, then tell the no money dead beats to take a hike.
Give this some serious thought… - Posted by Michael Morrongiello American Note
Posted by Michael Morrongiello American Note on December 29, 1999 at 18:10:02:
Mark:
Options, Decisons, Choices, etc. Isn’t it fun?
From the sound of your deal and the large 25% 2nd lien that your are being asked to hold, I would suspect that the proposed buyer does not have the strongest credit in the world. That is something that you MUST take into consideration when being asked to hold a subordinate and very tenuous 2nd lien position note.
Your fears over a default taking place are REAL; if the payor does default on the 1st lien or on your 2nd lien, you then will either have to step in and start making payments on the underlying 1st lien while you are paying court costs and attorneys fees to intiate legal action on your 2nd lien. And as you pointed out the payor can always file a bankruptcy which will stop everyone. Having been involved in this type of scenario , I would suggest you either find another buyer who is more qualified and perhaps with better credit or IF you decide to still play with this buyer see what a note funder will consider advancing for a well structured 1st lien note. Depending on HOW MUCH cash the buyer is putting down (it was not clear if any was being put down), the proposed buyers credit & employment backgrounds, etc. most note funders are willing to advance MORE net cash to you up front at the time of closing than a B/C sub prime lender is willing to orginate as a loan. While this still may not solve you dilemma over holding some of your profit back in the form of a 2nd lien mortgage, it does get you MORE NET cash up front.
As for the marketability for the 2nd lien under either scenario… They don’t call these 2nd liens “Throw Away 2nd’s” for fun. The merchantibility of that 2nd lien would be extremely limited unless you are prepared to take 30% or less on the dollar for it in cash.
Michael Morrongiello
Operations Manager