Realistic smallest check to buy one non-performing second, or is that a bad idea entirely

Question

Someone in another room mentioned you can pick up non-performing second liens for a couple thousand dollars each, which sounds like an amount I could actually risk while I learn. But then I read that seconds get wiped out in foreclosure and I'm not sure why anyone buys them at all.

So two things. What's the honest minimum to buy one whole non-performing note by yourself, and are cheap seconds a way in or a way to lose money slowly?

Rena Guide · Accepted Answer

Taking the second-lien question first, since it's the one with a real mechanism behind it. A second lien sits behind a first mortgage. If the first forecloses, the second gets paid only from whatever is left after the first is satisfied, and often there's nothing left, so the lien is wiped from the property. That's why non-performing seconds trade so cheap. Buyers of them are betting on equity above the first, or on the borrower wanting to clear the lien to refinance or sell, or on negotiating a settlement. It's a collection business more than a real estate business, and recovery depends heavily on state law about deficiency and on whether the borrower has anything to collect from.

On the minimum: whole non-performing firsts in low-cost markets can list in the 15k to 40k range, and it's easy to find them cheaper on rough collateral. The purchase price isn't the real floor though. Budget separately for a title search (roughly 100 to 400), a broker price opinion or drive-by valuation (100 to 250), servicing setup and monthly fees, and legal. Foreclosure legal and court costs commonly run a few thousand up to five figures depending on the state and whether the borrower contests. Property taxes keep coming due while you wait.

So a 20k note can need 10k of reserve behind it. People get hurt by spending their whole budget on the note and having nothing left to finish the resolution. If the whole amount you can risk is a couple thousand, a fund or a joint venture with an experienced operator is a more honest fit than a note you can't afford to foreclose on.

aliyah_b · Answer

That reserve point is the whole thing. I priced out the same question and the note was the cheap part. Taxes alone on a 60k house in the county I was looking at were about 1,400 a year, and if the resolution runs 18 months you're paying that twice before you see a dollar.

raj_mehta14 · Answer

I got confused in the same place on seconds. What finally made sense to me: you're not buying a claim on the house, you're buying a claim on the borrower plus a lien that may or may not survive. Whether it survives depends on the first lien's balance and the value. Still fuzzy on how you find out what the first actually owes if the borrower won't tell you.

marcus_hale41 · Answer

@vellum you order a title report and it shows the recorded first and its original amount, but the current balance is not on there. You're estimating from origination date, rate and term, and you can be off by a lot if there were modifications or advances. Some buyers just call the servicer and get nowhere. That uncertainty is priced into what seconds cost, which is another way of saying you're buying a guess.

Realistic smallest check to buy one non-performing second, or is that a bad idea entirely

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