A Real Estate secured creditor is still a SECURED creditor whether it was under the prior bankruptcy laws or current law.
While the changes to the bankruptcy laws may make is far more difficult for debtors to seek refuge in bankrupcty in an attempt to try and get unsecured installment and revolving debts discharged, it does not affect the rights of a real estate secured creditor.
I know that the ideal note is a first mortgage, s/f, 75% or less LTV in a good neighborhood with a payor with a-c++ credit. But what is the criteria that investors look to when considering a second trust deed? I read somewhere that the ratio from the first to the second had to be something or other…I don’t remember but the truth is that it takes me a while to look at numbers before they start making sense to me(right side of the brain vs. left I guess…) so if you could give me an example{such as, the LTV should be_?__; If the first mortgage is for 150k the second sould be_?__etc.,} of a valid second that an investor MIGHT consider I would greatly appreciate it. Thanks for your help and this NOTE forum.
Posted by John Merchant on April 10, 2006 at 22:55:52:
No,no, not that kind! While I occasionally buy one of those too, I sure don’t advertise it
My 5th was for about $50k on a multi-million dollar apt complex, and the total debt in front of me was only about $300,000, the credit of the borrowers impeccable and my discounted price got me a calculated yield of 35%.
I spent the whole note term hoping the notes ahead of me would go bad…which of course didn’t come close to happening…in fact it was paid early for an even better yield.
My little note was just for some odds and ends that needed to be covered when the owners were doing some rehabbing and realized they were a mite short on their calculations. In fact they were in such a hurry that I funded it then & there at my desk, as the guy presenting it to me was the owner of a local title company and I had his written assurance of the title situation and whole picture.
In short a rather unusual and unique situation that one doesn’t often find.
Dario:
2nd liens or juinor liens by nature put the Note holder in a far more tenous position than the 1st lien Note holder in the event of a default. Having faced with the prospect of having to make payments on the juinor 2nd lien, pay legal fees, court costs, while foreclosing (and having that go on through a bankrupcty filing by the debtor like a Chapter 13 type filing) BEEN THREE DONE THAT… you will see that 2nd liens carry with them a tremendous amount of additional risk.
So what factors make for a “decent” 2nd lien… here are a few pointers to consider IF you are going to invest in a 2nd lien Note:
The underlying 1st lien debt in front of the 2nd lien is attractive financing - long term low interest, FIXED rate financing (Not some negatively amortizing 1% option ARM Voodoo loan type program)
The buyer/ payor put down a LARGE cash down payment when they initially bought the property - thus they have committed significant funds to the property.
The underlying 1st lien balance is SMALLER than the subordinate 2nd lien that sits behind it. A $100K 2nd lien sitting behind a $50K 1st lien on a $200K house looks OK. Whereas a $20K 2nd lien sitting behind a $180K 1st lien on a $200K house is a “Throw away” type 2nd lien…
The ratio of the underlying 1st lien to the 2nd lien does not exceed a 3 to 1 ratio. EG. A $50K 2nd lien sitting behind a $150K lien would represent a 3 to 1 ratio. However $50K 2nd lien sitting behind a $200K Lien would be a 4 to 1 ratio carrying more risk.
The uhderlying 1st lien is an institutional 1st lien that reports to a credit reporting agency so that one can get a “rating” or trade reference on the 1st lien that is superior to the 2nd lien. - While its OK to also buy a 2nd lien behind a privately held 1st lien - its tougher to monitor such a loan.
The payor credit is strong and well establshed - lets face it folks with better, strong credit profiles tend to pay their bills in a far more timely fashion than those with blemished credit backgrounds.
Make sure you understand the actual TERMS of the underlying 1st lien - it would be foolish to buy a 2nd lien Note behind a 1st lien where the 1st lien had a “Future advance clause” in it…
These are just a few factors to look for - others may post some additional pointers to consider.
Best to your success,
Michael Morrongiello www.sunvestinc.com
Author of the Unity of Real Estate & “paper” study course
Has anyone looked at the effect the new bankruptcy laws will have on investing? In the past, it was too easy to discharge debt under bankruptcy which puts the investor in a precarious position. Wouldn’t the investor be a more secure now under the new laws?
