Early in my note career, I bought a few re-performing second liens in my Roth IRA and was just going to keep for cash flow. I did not really look into whether it was truly a second lien since my mortgage loan sale agreement had reps and warrants that stated that this was a second lien and if I discovered otherwise the sell would buy back the note less any payments received. So I was content. P.S. Never be content or complacent.
A few months later I was asked by the borrowers refinance company to subordinate my position for them to get a new loan with lower interest rate, lower payment, etc. Of course I said yes since this would allow the borrower more money to pay my loan since the underlying first payment was going to be smaller. However, it was during this process is when I discovered that what I thought was a second mortgage was really a third mortgage. I was somewhat upset initially but remembered I had the right to sell it back to the company that sold me the note....so I was not too worried... just a hassle.
However, I started to think about it and whether I should really sell it back. It was paying on time in full each month and had several months track record and when looking at my equity position above the 3rd it was pretty substantial. Yes being in second position would be better but the actual second was not a large amount and I still had equity of about 15% above my third position note. So I decided to keep that note for the following reasons:
The person was paying on the first, second and third all on time in full each month.
There was equity above my position to protect me if things went south.
The homeowner had emotional equity in the house and had been there awhile.
The homeowner was spending time and energy on refinancing in order to reduce her payments which would in turn leave more money for her to pay me each month.
Well that turned out to be a great decision since a few years later she paid off the note in full which I had bought at a significant discount.
RETURN: 142% in 4.75 years or about 30% per year!
I can't claim to be a genius on this one since you never know when someone will payoff but I did review the facts which pointed me in the right direction instead of a knee jerk reaction to sell the note back.
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