Trying to find out how likely it is to buy a second and still have equity


#1

Hello,
I am attempting to find all the properties that had a 2nd lien that was sold to a third party in my target areas of Los Angeles County (I used the date range of the last 3 years to get a good sample size). I think I am doing something wrong because I am not getting results I expected. I thought I would be seeing many cases where the second liens are bought for a fraction of the market value because there still a first on a property; however, what I see are sold prices of seconds that are very near current market value. I’ve tried both putting the search criteria as “2” for loan position, and “2” for number of loans, but I get similar results. Any idea what I’m doing wrong.
Also, I read on another topic of buying a second with equity and letting the first foreclose and making sure you attend the auction to bid up to cover your 2nd and the profit you want to make. I am attempting to find out how many deals could be done this way. That’s why I want to research this data, but also any advice on this strategy is greatly appreciated. It seems it would be a difficult strategy to find in this market because it is hard enough finding firsts with enough equity in them, let alone seconds.


#2

HI Alan,
You want to search for “Loan Position second, third or unknown”. This would give you a list of the loans that are foreclosing that we have determined are not a 1st Deed of Trust. Keep in mind that we use a computer model to determine the lien position and you will always want to verify this information.
In today’s market in CA we do not see many 2nds foreclosing to protect their interest since the first mortgage is typically larger than the current value and the 2nd has nothing to protect. In a case where there is enough equity to cover a portion of the 2nd then the 2nd lender may foreclosure in order to protect their interest. Keep in mind that there could be past due interest on a first mortgage that you would need to consider when purchasing a 2nd.


#3

Hi Michelle,
I did search by “Loan Position” but I still didn’t get results I was expecting. With my search of 2nds in LA county for the past 3 years, all the results showed purchase prices near the current market value of the home. That doesn’t make any sense to me because I would think the price of the 2nd would be small and then when adding that purchase price to the 1st loan balance you would get a number near market value. The only explanation I could think of is what you said, that the 2nd didn’t actually foreclose because they had no equity. However, I would think a search of entire LA county in the last 3 years would show at least some 2nds being sold for a reasonable price considering the 1st loan balance.


#4

HI Alan, We do not see many 2nds going to trustee sale because there is just no equity in most properties. I just ran a search in LA county and found a few. Also keep in mind that we use a computer model to determine the lien position so you will also want to look at the transaction history. Finding a 2nd that is foreclosing behind a first where there is equity will be extremely rare in the current market. Especially when you consider the potential unpaid interest on the first and the property taxes. I just saw one example where the 90k second went back to the bank (actually a private beneficiary) for 20k. There was a 498k first and the home showed a value based on our AVM of $530k. The past due interest on the 1st could easily eat up any equity. In this case the 2nd wanted to protect their interest and foreclose which may end up costing them in the long run. A 2nd (especially on a non-purchase money loan) is usually better off trying to collect from a borrower after trustee sale. If they foreclose they have taken their “one action” and could not pursue collection.


#5

Hi Michelle,
Thank you for your response. Its understandable that it’s currently rare, but I thought I would find at least some results of 2nds being sold. Nothing for my search actually. I was interesting in researching this opportunity because of one of the posts by Sean that said one of the options if you hold a second is to let the 1st foreclose if there is equity. Seems like that is a great strategy to invest with little money, but unfortunately it doesn’t seem very possible currently, at least in LA county for the last 3 years. It’s still interesting to know that strategy though.


#6

In this example posed above, how would one research the past due interest on a first mortgage for which there is no Notice Of Default (NOD)? If there is no “official” way, are there unofficial ways? For example, what’s the likelihood the 1st mortgage lender would be willing to share information about the loan type (e.g. 30yr fixed at 4.25%) and arrears?


#7

Hi Michelle, In California, are all second and third mortgages recourse (i.e. the lender can pursue the borrower for a deficiency judgement)? If some are and some aren’t is there a way to tell (e.g. is this visible via a title search)?


#8

Hi Rocky, The delinquency of the loan is not made public until the Notice of Default is filed and you see the defaulted amount. This is a credit account and the lender is not going to give you any information on the loan unless you have the express written permission from the borrower. The credit reporting agencies do sell delinquent loan data but you have to be VERY careful how you use that data since it is NOT a matter of public record. This means that you must be in compliance with the fair credit reporting acts when using that data and contacting the homeowner. If you are wondering what that means just look at the fine print on a credit card solicitation.


#9

Hi Rocky, Loans used to purchase the property are considered purchase money loans and these would be non-recourse loans. Although I have seen 2nds used to purchase properties (80/20 combo loans) I cannot say that I have ever seen a 3rd mortgage although not technically impossible. You can usually tell if a loan is a purchase money loan because it is recorded the same date as the grant deed and the recorders numbers are sequential.