Question:

Why buy second mortgages, what is the trick?

Answer:

Buying second mortgages enables you to make money, if you know for sure the property can be sold at full price or close, if foreclosed.

For example, if you have researched a house worth $300,000 and found that it has a first lien with balance of $190,000 and a second mortgage of $50,000 you could approach the second lien holder and buy the second mortgage for $8,000. Since there is no guarantee the house will be sold for enough cash to satisfy the second mortgage after satisfying the first, the second lien holder may be happy to take the money.

Now, if you foreclose, and at the foreclosure auction the highest bid is $270,000 you have to pay the first lien that is $190,000 plus $12,000 late payments and interest. So, you paid $202,000 to the first mortgage lender, $8,000 to the second and you have to pay property taxes of, say, $6,000. In other words you got a house for $216,000 and sold it for $270,000. Thus, buying a second mortgage just made you a profit of $54,000.

If you buy the second mortgage, foreclose and no one bids, you still can make the first mortgage payments, and no one will know you foreclosed.

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