How can a 2nd mortgage holder foreclose without losing money?

Question

I sold some property that I inherited and hold a 2nd mortgage for the buyer. I did not know when this closed that they had terrible credit, never seen a credit report. Attorneys and real estate agent took care of that and I was assured everything was ok until it was too late and I found it on public record about judgements against my buyer. Now the buyer is refusing to pay. I know that I can foreclose and even the 1st mortgage holder has suggested to foreclose. This is also a private mortgage holder. I want to know how I can foreclose without losing the property or the money still owed to me.

Answer 1

If you foreclose, the 1st mortgage gets paid 1st.  You would get any money that's left over if the property was sold.  If you foreclose, you could also take over payments on the 1st until the market rebounded and get more money to pay off the 1st.

Answer 2

It you foreclose there will be some costs to do that (and you can kiss that money good-bye) but at the end of the foreclosure process the house will be sold on the courthouse steps.  If nobody steps in to buy the place it will go back to you.  You will still have to pay off the 1st mortgage but then you get the place free and clear.

So, if the house is worth 100K, and has a 1st mortgage for 80K and your 2nd mortgage is for 20K.  You foreclose and pay off the 80K first (presumably by getting a new loan) then you own the place (worth 100K having put 80K out of pocket) so you keep your money as the extra equity in the place.  Go resell the place and presumably you will get 100K for it and after paying off the new 1st loan you can keep the 20K thats left.

There are lots of problems with foreclosing.  First off you will have to pay off the first loan to protect your 2nd, also if the value of the place is less than the 1st and 2nd combined it may not even be worth foreclosing (suppose the house is worth 100K but the 1st is for 100K - why foreclose you pay 100K to get a 100K property).  Also, there are lots of costs both to foreclose, get new financing, and closing costs if you then sell the place.

Really there are lots of problems foreclosing on a 2nd, but if the equity is there go ahead.  If the equity is not there, or its just marginal you may just have to wait it out and hope that some day the value goes up (where you could then foreclose) or he sells the place (where you would get paid off by the new buyer).

Answer 3

bull_rooster_aardvark provides a pretty good summary of the pros and cons of foreclosing and protecting your interest.

Bottom line is: If there's sufficient equity, it makes sense to foreclose. Otherwise, you'd end up trying to squeeze out money when there isn't any there.

One other thing you might consider: Gather up all your papers and documents and take them to a lawyer and ask the lawyer's opinion as to whether you were sufficiently protected and represented by the attorneys and real estate agent who assured you that everything was OK. It might be argued (I'm not a lawyer, so I'm not making the argument) that if the buyer "had terrible credit" but you were assured "everything was ok," then one or more people didn't do their jobs or live up to their fiduciary responsibilities.

Good luck.