How to Incorporate Junior Liens into Your Investment Strategy
While we don’t generally recommend investing in short sales, in some circumstances there may be a deal that would be profitable using my Paying Off Junior Lien (PJL) method.
A ‘junior’ lien is when someone has a second mortgage or loan on a property. If there is equity in the first mortgage, you can then attempt a short sale on the second mortgage (or ‘junior lien’), reinstating the original loan.
Many homeowners in distress have second mortgages that are also in default. If you find a situation where a property has these additional loans on it you may be able to utilize this method of discounting the second mortgage with a short sale (and any other junior liens) taking overpayments on the original mortgage.
So, you can see how it would help the seller, but it also benefits you because you can buy the property using financing that is already in place. You don’t have to apply for a new loan or risk your own credit.
As we discussed above, the PLJ method relies on getting a discounted short sale for loans beyond the first mortgage. This does not work for first mortgages because to short sale a mortgage the lender requires payment in full. For a first mortgage, this would be a hefty amount. For mortgages beyond the first, you may only end up having to pay a few thousand dollars once the loan is discounted.
Why are lenders more likely to let second (or third or fourth) mortgages go for a discount? In a foreclosure the amount offered for the home will likely only cover the first mortgage, leaving the additional mortgages with the potential to get paid nothing. Can you see why they may be more likely to be okay with a discount?
For this method there are a few things to keep in mind:
- The first mortgage should be at 80 percent fair market value (FMV) or less. There is no exact formula to calculate FMV, but I have several criteria that help make a realistic estimate.
- The house should be in great condition in a good neighborhood. This method works best if the house is one that will be easy to resell. It can be done with properties that don’t fit these criteria, but generally the less time you have to take to sell a property the better.
If a property is in poor condition, the first loan exceeds 80 percent of the FMV or there is only one loan and the property is over-leveraged, the PLJ strategy would not be the right way to handle the deal.
I wouldn’t actively seek out PLJ opportunities, but it is important to recognize the potential.
PLJ is a powerful technique, and there is no way to give you enough information in one article. For in-depth training on bringing in profits using this method, I recommend taking my Foreclosure Investing Mastery course or attend one of my live training.