Unique Hard Money Question ?

The idea behind the second mortgage paying off the first (again there are some different rules in different states):

As part of the forclosure process, the second mortgage holder holds certain rights as to what they can and cannot do. A “high level” explaination, which is what this sort of a forum should explain, is that throught the forclosure process a Junior Creditor (one owning a second mortgage, or say a mechanics lien) have the right to pay off the first mortgage holder to obtain the property once the property owners rights or time has expired. (again each state has a different process on this but the concept is the same)

An important principle however, and the root of what Paul seems to be pointing out, is that you are never going to make the “first” lien go away, your second lien would always be subordinated, or second in order of needing to be paid off, to a first including all of thier principle and earned interest and fees.

Note, that if you get this far, and as I pointed out forclosure is commen in hard money deals, you have a professional, such as a seasoned forclosure attorney handleing the process and advising you of your rights/options.

Also note, that your loan documentation will allow you to recouperate any collections fees and interest throughout the loan forclosure. An attorney will have you advance this out of pocket, and assuming the loan you originated had enough equity, you will obtain possession of the house and have adiquate equity to liquidate and recouperate your money.

Even with what one may perceive as these “downsides” or risks, keeping a conservative loan to value can often create a profitable deal. And dont forget the quote, “never lend more money on a property than you would be willing to pay for the property”.