Quote from Bill on September 9, 2024, 2:09 pmInvesting in Non-Performing 1st Mortgage Notes:
Also known as the Senior Lien. As a more priority debt, senior liens are typically priced higher. Loan sellers base pricing on the value of the underlying collateral – the property value. There's a lot more due diligence involved with the actual property. The due diligence is more involved and expensive when analyzing senior liens, ordering a title report is necessary to confirm that the lien is indeed in priority position. You need to do research on the property taxes, and know was is owed on those property taxes. Those owed property taxes will need to be paid, and brought current to protect the senior lien's interest. Dealing with property insurance is also more common when investing in senior liens. Most senior lien investors, get what's called forced placed insurance put on the property, to protect the senior lien's interest. The value of the property is really important, along with knowing the condition of the property and what repairs maybe needed to exit the deal. A bad BPO (Broker's Price Opinion) can quickly change the outlook. Senior lien investors need to have all this information, because the majority of the exits are through the property. Senior lien investing is usually more cash intensive for those reasons.
Investing in Non-Performing 2nd Mortgage Notes:
Also known as the Junior Lien. They are priced based on a percentage of the principal balance not including interest and late fees. Paying for title reports, BPOs and tax information isn’t as often necessary in due diligence. When investing in junior liens, the most critical factor is the status and balance of any senior liens, which is found on the borrower’s credit report. In other words, if the senior is current, chances are good that the property is insured with no delinquent taxes. Even if the senior is unknown or delinquent the senior lien lender will usually keep the property insured and pay the taxes to protect their interest. The credit report is more important with junior lien investing, because it's more about the borrower than the property. With junior lien investing the majority of the exits are through the borrower, not the property. Junior lien investing is usually less cash intensive for those reasons.
A note buyer with the same amount of invested capital can diversify into many more assets when choosing 2nd mortgages (junior liens) over 1st mortgages (senior liens). There's opportunity in both, you just need to do the proper due diligence and be prepared for your investment cost.
Investing in Non-Performing 1st Mortgage Notes:
Also known as the Senior Lien. As a more priority debt, senior liens are typically priced higher. Loan sellers base pricing on the value of the underlying collateral – the property value. There's a lot more due diligence involved with the actual property. The due diligence is more involved and expensive when analyzing senior liens, ordering a title report is necessary to confirm that the lien is indeed in priority position. You need to do research on the property taxes, and know was is owed on those property taxes. Those owed property taxes will need to be paid, and brought current to protect the senior lien's interest. Dealing with property insurance is also more common when investing in senior liens. Most senior lien investors, get what's called forced placed insurance put on the property, to protect the senior lien's interest. The value of the property is really important, along with knowing the condition of the property and what repairs maybe needed to exit the deal. A bad BPO (Broker's Price Opinion) can quickly change the outlook. Senior lien investors need to have all this information, because the majority of the exits are through the property. Senior lien investing is usually more cash intensive for those reasons.
Investing in Non-Performing 2nd Mortgage Notes:
Also known as the Junior Lien. They are priced based on a percentage of the principal balance not including interest and late fees. Paying for title reports, BPOs and tax information isn’t as often necessary in due diligence. When investing in junior liens, the most critical factor is the status and balance of any senior liens, which is found on the borrower’s credit report. In other words, if the senior is current, chances are good that the property is insured with no delinquent taxes. Even if the senior is unknown or delinquent the senior lien lender will usually keep the property insured and pay the taxes to protect their interest. The credit report is more important with junior lien investing, because it's more about the borrower than the property. With junior lien investing the majority of the exits are through the borrower, not the property. Junior lien investing is usually less cash intensive for those reasons.
A note buyer with the same amount of invested capital can diversify into many more assets when choosing 2nd mortgages (junior liens) over 1st mortgages (senior liens). There's opportunity in both, you just need to do the proper due diligence and be prepared for your investment cost.