At my last real estate meeting the speaker talked about going after Junior liens and trying to short them to make money. An example he gave was…
200k ARV
100k 1st
60k 2nd
if you can short the second and get it for 10k, you can then purchase the first and be in for only 110k. Sounds good to me, but I’m sure there are some risks to this method.
Risks I can think of
other liens on the house (mechanical, tax, etc…)
if the 1st lien holder forecloses you can get skunked with nothing
Questions
What are the thoughts of everyone else on this strategy?
What are some other things you can do if you hold the 2nd lien position?
If you chose to foreclose while having the 2nd position, what does that entail?
1) What are the thoughts of everyone else on this strategy?
2) What are some other things you can do if you hold the 2nd lien position?
3) If you chose to foreclose while having the 2nd position, what does that entail?
It’s a real good strategy in many cases
Assuming you have the deed, which you should before paying the 2nd, pay the 1st payments and rent out, lease option, owner finance etc. There’s lots of exit strategies if the numbers are right.
You have to pay off the 1st and possibly any other liens depending on position
An interesting strategy with a few challenges. First, there must be a compelling reason the 2nd would be willing to short their loan. If the fist isn’t in default and the property value below the total debt why would I as the 2nd position holder short sell my loan? Assuming you are successful in shorting the 2nd this still leaves you with a first mortgage to deal with; you either make the payments keeping it current, refinance or purchase the 1st as you suggest. Purchasing the 1st is easier said than done, most banks don’t sell small individual loans to private investors. Also, be aware that if you have acquired the deed then the 1st lienholder could exercise their due on sale clause.