2nd Mortgage
I would like to know how this is structured.
If a homeowner in foreclosure sells, then has the house sold back to them on a CFD, can they issue a 2nd mortgage on the property to maintain some rights to equity? If so how is that done? And, how would you structure the deal if the house is worth $100000 and they owe $60000, leaving $40,000 in equity.?
Toobizee,
I think most investors would agree with ChrisSanDiego in saying NOT to do it.
However, I’ve done it before, but certainly wouldn’t make a habit of it. And while I’m sure there are a lot of ways to structure something like this, here’s how I did mine.
First, there was a lot of equity to work with, and it was in a fast appreciating market. It was over 5 months in arrears, had a fairly substantial judgment as a 2nd, and was a subsidized loan program -- which meant there were deferred payments and interest that also got added to the payoff.
The costs were too high to reinstate. So, I worked out a short on the 2nd, took a new loan out, and did a regular purchase. I then put the seller back in on a L/O. But I probably should have done it as a CFD.
I did the new loan amount high enough to cover all the associated payoff costs, my out of pocket costs, plus their Option Consideration, plus some cash to the seller. I added all of these costs to the Option price, but to be credited back when the Option gets exercized.
I also gave the seller a second, so that they have additional cash guaranteed no matter what happens. But also as an incentive not to trash the place if all goes wrong, as they still have a vested interest.
The Option Consideration was high enough to cover all my costs, plus an additional $10K cash to me. I did the L/O through a separate escrow and also have their payments going through an escrow account.
This one is still going, but if they exercise I will make an additional $20k on the deal. If not, I’ll make around $60k-$70k additional.
However, if they default, I serioudly doubt I would evict or foreclose. Rather, I would sit down with them show them how much equity is in the property and tell them I have to sell – and give them the lion’s share.
Obviously, this structure wouldn’t work without equity going in. But I just thought I would give you one example.
The first thing I do is start my file by going to my County Assessor’s site and cut/paste the info provided; I can also check the chain of title and property taxes at the same time. Next I will check online the various comp sites to see if the property is worth further action. If yes, then I will check for any additional liens, judgments or encumbrances.
All in all takes about 10 minutes on line. If I need an actual document from the recorder’s office, it only takes a few minutes to pull it up since I already have the book and page (recording) info.
John (LV)