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Old 10-25-2008, 01:35 PM   #21
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calmloki, my concern with that method would be diversification. Just a few loans, and all dependent on many of the same fundamentals. If those people can't get renters to pay, they can't pay you, etc...

It could very well work out for you, but the diversification thing makes *me* uneasy. If you are fine with it, then it's fine.

-ERD50
Quite right - and we tried to diversify, really we did - we have a chunk of Wellesley, big bites of TSM and Emerging markets, a chunk of gold mining stock fund, some Bank of America, some Costco, some HP and a bunch of Johnson and Johnson - overall total is less than the amount of this loan, but still, overall down 18.4% since purchase, over $25k less than we have put in the market. And that's the stocks we still have - we've sold some winners and losers along the way.
While we aren't finding a horde of buyers for the places we would like to sell right now, which probably means we are too proud of them, they continue to rent. A major flood or tornado could zig-zag around and wipe them all out, or all the renters could lose their jobs and be unable to pay, but right now at this moment i like the idea that even if the renters all move out or the borrowers all go belly up and we have to foreclose - there is something left! I'm just too simple and like to be able to visit and touch my investment. Not giving up on the market, not selling and will probably buy some more as the near time goes by, but 10% looks realll pretty right now... For sure not for everyone though.
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Old 10-25-2008, 02:21 PM   #22
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... Basically bundle a bunch of debt obligations back with collateral, or a security backed by mortgages. They'd need a catchy name, can anybody think of one?
While I'm waiting for someone to come up with a catchy name ... umm, I'd be willing to buy up some of these. Not sure how I'd get a good measure of the risk of a bundle of loans, but what the heck - good interest rate, I'll probably do fine on average. What could go wrong?


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I'm just too simple and like to be able to visit and touch my investment.
Definitely something to be said for that.

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Old 10-25-2008, 03:52 PM   #23
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While I'm waiting for someone to come up with a catchy name ... umm, I'd be willing to buy up some of these. Not sure how I'd get a good measure of the risk of a bundle of loans, but what the heck - good interest rate, I'll probably do fine on average. What could go wrong?




Definitely something to be said for that.

-ERD50
I do think there is a lesson to be learned from your experience on the limits of diversification for reducing risk. In all seriousness, I would have been very comfortable purchasing a $120,000 worth of mortgage back securities. My due diligence would have been limited to checking out the credit rating of the securities perhaps looking at the past payment history of similar security. However, I would have uncomfortable with committing the same amount amount to a single loan. I would have done a similar thing as Calmoki, get an another appraisal of the property, insist on a large amount down, and double check the credit rating of the borrower.

Clearly in hindsight your approach worked out because you did much of your own work rather than relying on the assurance of others. (Actually to be fair the only MBS I own is the Vanguard GNMA which has held up well, but then it only pays 5% interest.)

It is a pity I am complete out of cash, but I think it worth a serious consideration as an asset class. I'm very encouraged that people are willing to pay 8-10% while maintaining a LTV less than 80%. I am not sure why a banker would not jump at these loans.
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Old 10-26-2008, 06:55 PM   #24
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Did a drive by on the property and what little weekend digging into the background i could - turns out the original portion - over 1/2 - was built in 1952 and whole thing was a nursing home up until early this year. One possible wrinkle is that last year a variance was granted to the nursing home allowing it to have 9 rather than 29 parking spaces, said variance to be void if the use changed. Need to dig a bit and see what boarding houses are allowed for minimum parking spaces. OTH, it may not matter a whole bunch - the borrower has far more to lose than i if the loan is 20% of RMV and the property is free and clear.

Found one of the current owner's ads:

"I have a 11000 Sq ft house that I rent the rooms in. The house has 29 bedrooms, 6 full baths and 6 1/2 baths. there a very large shared kitchen with two Gas stoves, dishwasher,two micro waves and two fridges. large formal living room with gas fireplace and direct TV. formal dinning room, a family room w with direct Tv. We have two washers and two dryers. This is a gay friendly home, couples welcome for a extra 100.00 a month to cover utilities. We also wheel chair accessable...
Apartment Features: Air Conditioning, Balcony, Dishwasher, Fireplace
Community Features: Laundry Room"

Looks like if fully rented his gross is $9735/month and he provides all utilities.
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Old 10-29-2008, 02:41 PM   #25
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In keeping with reporting bad as well as good news on funding what are called hard money loans as a retire early income source: seems like the parking issue i found on the web for the above property may be a deal breaker. I sent the little loan company this: "..did a drive by this weekend and talked w/ Sally (she's down south and arriving at PDX at noon today) - looks real good - it's a block and a half from some units we own on the corner of 5th and Locust. Did find one little thing - a parking variance granted to the nursing home last year that goes away if the use changes: http://www.cityofsalem.net/export/de...7/4.3m_001.pdf ".

The loan broker called the city and unfortunately got them all stirred up - turns out the variance did go away and the borrower was doing an unpermitted use running it as a boarding house. He can get a variance to run a boarding house, but only for 6-8 units. Don't think that will cut it as far as generating enough income to support the loan we were thinking of doing. Sort of sorry the broker called the city - probably better to know now, but i sure had no intention of breaking the borrower's rice bowl - the info was on the web and handy to anyone who plugged in the address of the property.

Guess the take away is to do a bit of research before dropping the money. Just like any other money making venture. Still like doing local property loans - just need to do the right ones.
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Old 12-16-2008, 01:51 PM   #26
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Yesterday we funded another property loan - a 4 plex built in 1970. Tax man says it's True Cash Value is $288k, which is pretty optomistic IMO. Still, 4 840' 2Br/1ba units should easily rent for $550+ each, so $220k looks like an easy value. $64.60/sq.ft.. Borrower is putting up $38k, we are loaning $130k, a lawyer is taking a $22k second position, and the seller is carrying back a $27k third position. Total sale price with closing costs folded in: $217k. We pulled money we had sitting in a Capitol One Costco savings account to fund the loan - it was earning about 3.5%. For grins we asked for a 0.5% up front loan fee and 11% with a 5 year balloon payment and a one year minimum with a 3% prepayment penalty.

Result is that we are looking at maybe 7.5% better interest than CapOne after figuring in the inevitable non-earning transmission days and niggling fees. Another way of looking at it is that we stand to make about $812/month more than the savings account was paying - which is almost the $815 we were charging for the rental house in Monmouth we are trying to sell!

On the down side, as the fed prints dollars the real value of our loan will diminish, and we don't have that cash in the bank to invest or otherwise use, plus there is the risk of having to foreclose. Talked with another local landlord while at the bank yesterday and he was saying that he's bought 2 houses in the last week - cheap! Good for him, but i hope to move out of rentals - loaning money so others can buy cheap is kinda easy compared to fixing frozen pipes and squeezing rent a bit at a time.
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Old 12-16-2008, 08:32 PM   #27
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Yesterday we funded another property loan - a 4 plex built in 1970. Tax man says it's True Cash Value is $288k, which is pretty optomistic IMO. Still, 4 840' 2Br/1ba units should easily rent for $550+ each, so $220k looks like an easy value. $64.60/sq.ft.. Borrower is putting up $38k, we are loaning $130k, a lawyer is taking a $22k second position, and the seller is carrying back a $27k third position. Total sale price with closing costs folded in: $217k. We pulled money we had sitting in a Capitol One Costco savings account to fund the loan - it was earning about 3.5%. For grins we asked for a 0.5% up front loan fee and 11% with a 5 year balloon payment and a one year minimum with a 3% prepayment penalty.

Result is that we are looking at maybe 7.5% better interest than CapOne after figuring in the inevitable non-earning transmission days and niggling fees. Another way of looking at it is that we stand to make about $812/month more than the savings account was paying - which is almost the $815 we were charging for the rental house in Monmouth we are trying to sell!

On the down side, as the fed prints dollars the real value of our loan will diminish, and we don't have that cash in the bank to invest or otherwise use, plus there is the risk of having to foreclose. Talked with another local landlord while at the bank yesterday and he was saying that he's bought 2 houses in the last week - cheap! Good for him, but i hope to move out of rentals - loaning money so others can buy cheap is kinda easy compared to fixing frozen pipes and squeezing rent a bit at a time.
Out of curiosity, what actually happens (and what is the timing of those actions) if they don't pay you back?
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Old 12-16-2008, 08:45 PM   #28
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Out of curiosity, what actually happens (and what is the timing of those actions) if they don't pay you back?
Worst case scenario they get to keep whatever money was paid back and get to keep the apartment complex, though it may be a year before they can actually take the deed. Though if they turn it into a meth lab all bets are off and you'll have to sell at a discount or likely lose all your profits getting the house cleaned and certified.
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Old 12-16-2008, 08:54 PM   #29
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Out of curiosity, what actually happens (and what is the timing of those actions) if they don't pay you back?
Haven't found out yet. Kinda hope not too. The lawyer i spoke with a few months ago said i would be looking at $3-5k for the foreclosure process and 3-6 months. Think the deal is that it is put up for auction, we put in a bid for what we are owed + foreclosure/legal expenses and, absent a higher bid, we end up with the property. Any amount over that and the holder of the second gets paid, after the second is paid any excess goes to the third...

Have never gone through a foreclosure process, have only bid , never won, on a couple foreclosure sales, lawyers and those who have better experience know more than i on this matter.
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Old 03-13-2009, 08:38 PM   #30
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Friday night entertainment: got a call from the small loan broker we have been making property loans through. Seems that he got a notice "to occupant" that his office building (which we loaned money on) is being foreclosed on. Pretty interesting given that we've been the first mortgage holders on the building since 2/2007, have been getting our 10% interest payments on a real regular basis, haven't filed foreclosure papers and have had no notice that any other loans were taken out on it. Got in touch with the county clerk and find that a deed was filed with them back in 10/2008 showing our borrower sold the property at that time. Oh really?! We have a due on sale clause and haven't been paid off....

Gathered our documents together and will be meeting with a lawyer tomorrow - he's indicated it may be to our interest to foreclose & maybe bid to buy the property. Sort of thing that perks up a dozy afternoon.

Must be property time is in the stars for us: this possible foreclosure; have an accepted offer on our rental that was for sale (inspections to be done on Tuesday); and we are off to 29 Palms Ca on Wednesday to spend a week with the gal's Mom and look at some little rental houses to buy and put under management - property values are pretty down in the desert but the rental market is strong. Could be we could buy two places for the same money as the Monmouth rental house and get => return even if someone else manages them. Can't have TheFed having all the fun.
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Old 03-13-2009, 08:48 PM   #31
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How can the property be sold without you being paid off as the first mortgage holder? I would have your attorney contact the Title Insurance Company that handled the closing. Why go the foreclosure route. That's what title insurance is for--to insure clear title in the sale of property. Apparently this didn't happen.
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Old 03-13-2009, 09:09 PM   #32
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How can the property be sold without you being paid off as the first mortgage holder? I would have your attorney contact the Title Insurance Company that handled the closing. Why go the foreclosure route. That's what title insurance is for--to insure clear title in the sale of property. Apparently this didn't happen.

Very good question, and one that leapt to my gals lip's right off the bat! Our borrower had bought another place and i think had pledged our property as security. My fantasy is that our borrower sold our property to a friend or relative sans title company with the intent of paying off the other place and continuing to make payments on our loan. Would have gotten him down the road a few more years till our loan balloon came up. But that's a few years from now, and if things turned around all would be well and no one the wiser.

I don't know though, as a foreclosure action has been started - feel pretty secure though, which is more than i can say about my Bank of America stock adventures.....
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Old 03-13-2009, 10:42 PM   #33
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Gathered our documents together and will be meeting with a lawyer tomorrow - he's indicated it may be to our interest to foreclose & maybe bid to buy the property.
Why would you bid to buy the property that you own? I'm no lawyer, but that would appear to me to be an admission that you don't own it.

I can't recall ever bidding to buy something that I already held the title to. What am I missing?


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Old 03-14-2009, 12:15 AM   #34
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Why would you bid to buy the property that you own? I'm no lawyer, but that would appear to me to be an admission that you don't own it.

I can't recall ever bidding to buy something that I already held the title to. What am I missing?


-ERD50
I don't speak fluent legalese, but my current understanding is that the deed of trust only secures my interest, so I say, through the lawyer; "hey - you've violated the terms of the contract - i call all sums due right now, including legal fees". If the borrower pays up he gets the deed of trust and i walk away, contract paid in full. If he doesn't, I have the right, with the deed of trust, to sell the property to recover what is due me and make myself whole. The first bid on the property is mine, in the amount due me including all legal fees. If no one bids a higher amount i own the property.

If someone bids a higher amount i can bid against them if i chose, if i don't chose to outbid them they pay me my due and the remainder goes to the holders of the second, then third position loan holders, if there are any, then remainder to the borrower.

Another option is for the borrower to avoid foreclosure by signing over any interest he might have in the property - think that's called a deed in lieu of foreclosure.

Lawyer types feel free to correct me - figure i'll know more tomorrow after we meet with a lawyer.
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Old 03-14-2009, 09:45 AM   #35
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Interesting thread that I just came upon.

This sort of investing has occured in Canada for many years & I am only familiar with the canadian version of legalese regarding mortgage holdings etc.

I know that many, many years ago realtors and agents were the first to become involved in mortgage lending (and today also). In bad times it occured as follows (in order to make the sale & commission):

Agent would sell a house for $100,000

(Back then) Purchaser would need 25% down (lending practices were different "in the dark ages") if the purchaser did not quite have the $25,000 to put down on the house then the agent would "leave in" his commission.

Agents commissions were $6,000.00. Agent would leave his commission in as a 2nd mortgage & receive monthly payments.

If default occured agent would own a home under "Power of Sale" valued at $100,000 of which $75,000.00 was owing. As long as he/she was able to carry the 1st mortgage until it was sold (thereby earing commission again) everything was OK

If the home remained unsold the property could be rented out until market recovery and a profit (hopefully) made.

Many fortunes in our city were made in that very manner.

Market familiarity is key in this type of investing. Principal may be lost but we have seen this occur in the stock market. At least some semblance of control is maintained in this type of investing.

Again it is risk vs reward. You must always mentally be prepared to take over the property and either sell or rent it as the market dictates. 1st mortgages yield a lower rate of return, but the risk is lower.

Commercial and rental properties are always a higher risk for various reasons. If you were to lend on such a property blanket securities lower the risk (ie - a mortgage is placed on the commercial property - a blanket security is taken on another property (preferably primary residence) if funds are not fully recovered on the 1st property then the second is sold.

Mortgage vehicle are often available thru mortgage brokers, realtors and lawyers in Canada.

Long winded post, it's just something I am familiar with
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Old 03-14-2009, 05:32 PM   #36
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Ok, information for those who might end up in our situation. We loaned money on a place, had a title search and filed the Trust Deed that secured our interest. We are in first position on the subject property. Borrower took out a second (at least) and/or sold the property without informing us and in violation of our due on sale clause. Company X holds the second for a large amount (think our property was a "blanket security" as in Canadianteddy's post above: "If you were to lend on such a property blanket securities lower the risk (ie - a mortgage is placed on the commercial property - a blanket security is taken on another property ... if funds are not fully recovered on the 1st property then the second is sold"). Company X has filed foreclosure papers. So.

The lawyer we spoke with today says we could foreclose, but Compay X's foreclosure will take place first as they filed first and there is a court mandated 180 day proceedure - when they foreclose we can insist on being paid off, and foreclose to enforce that, or we can let the new buyer continue making the loan payments and complete the contract (balloon payment in full due 2/2010). The fact that the borrower took out loans on the property without our consent doesn't seem to be very exciting as our interest in the property remains in first position regardless. Am having the lawyer call Company X's lawyer to find out their interest in the other property and the order of sale of the foreclosed property (ies). Going to see if they might want to bump up our interest rate for the remaining year to keep me from filing foreclosure papers - also see if we are in a good position to buy the secured property with our loan amount plus a small amount.

Takeaway from experience so far: title insurance & search is good. Filing ASAP is very good. Statements on a contract don't mean all one might think they mean. Kinda like 24 hour notice for you landlords in the group who have filed eviction papers based on a 24 hour notice. and weeks later your tenant is still happily living in the apartment.
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Old 03-14-2009, 07:00 PM   #37
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Ok, information for those who might end up in our situation. We loaned money on a place, had a title search and filed the Trust Deed that secured our interest. We are in first position on the subject property. Borrower took out a second (at least) and/or sold the property without informing us and in violation of our due on sale clause. Company X holds the second for a large amount (think our property was a "blanket security" as in Canadianteddy's post above: "If you were to lend on such a property blanket securities lower the risk (ie - a mortgage is placed on the commercial property - a blanket security is taken on another property ... if funds are not fully recovered on the 1st property then the second is sold"). Company X has filed foreclosure papers. So.

The lawyer we spoke with today says we could foreclose, but Compay X's foreclosure will take place first as they filed first and there is a court mandated 180 day proceedure - when they foreclose we can insist on being paid off, and foreclose to enforce that, or we can let the new buyer continue making the loan payments and complete the contract (balloon payment in full due 2/2010). The fact that the borrower took out loans on the property without our consent doesn't seem to be very exciting as our interest in the property remains in first position regardless. Am having the lawyer call Company X's lawyer to find out their interest in the other property and the order of sale of the foreclosed property (ies). Going to see if they might want to bump up our interest rate for the remaining year to keep me from filing foreclosure papers - also see if we are in a good position to buy the secured property with our loan amount plus a small amount.

Takeaway from experience so far: title insurance & search is good. Filing ASAP is very good. Statements on a contract don't mean all one might think they mean. Kinda like 24 hour notice for you landlords in the group who have filed eviction papers based on a 24 hour notice. and weeks later your tenant is still happily living in the apartment.
As I said in my first post, you are in the drivers seat. Has to be! You can just about make any demands within reason. Like you mentioned, a higher interest rate. Might also demand more security (little bit of cash up front).
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Old 03-15-2009, 09:46 AM   #38
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Within the canadian system, if a second mortgagee files a "Power of Sale" action (which is different from foreclosure in that it is accomplished within a shorter time frame, usually 45 days, and title is not transfered), then often the 1st mortgagee (which is you) sits back and waits for a reasonable amount of time for the property to be sold to collect money on their first mortgage.

All the "fuss" and legalese is accomplished on your behalf by the second mortgagee.

Property taxes are always paid first,

Condo fees always paid second (if their are any)

1st mortgagee paid next

2nd mortgagee etc then paid.

The first mortgagee is entitled to be paid their interest due from when default occurs until the funds are repaid (which is added on to the amount collected when the property is sold.)

Further, all expenses incurred by the first mortgagee are also due. Often, within the first mortgage documents it is stipulated that the 1st mortgagee is entitled to things as follows:

$500.00 for attendance of any default proceedings (which can even mean picking up the phone to deal with stuff)

$1000 for attempting to take possession after default etc. etc.

Depending upon the familiarity of the lawyer to such private mortgage contracts, these additional stipulations may or may not have been included. It should be your right to request these and other stipulations.

As a first mortgagee, we can also state in the first mortgage document that a second mortgage may not be placed on the property without written permission from the 1st mortgagee.

If you think the property is worth it, I certainly would consider extending the mortgage to the new purchasers.

Further, I believe that you may or may not have understood the concept of a blanket security. It is as follows:

I place $100,000 first mtg on 123 Main Street

I also place a blanket security on 234 Jones street which is the owner's principal residence.

Default occurs on 123 Main Street. My expenses and mortgage due are $125,000 after the sale of 123 Main Street.

I am $25,000 short. I then recover the balance of funds by selling 234 Jones Street

Hope this info may be helpful and transferable.
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Old 03-15-2009, 10:25 AM   #39
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Also - Title searches are a must - We also have something called Title Insurance - u may want to explore that

Requesting that searches for outstanding work orders is a good idea and should be satisfied prior to advancing fuds.
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Old 03-15-2009, 10:51 AM   #40
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... the 1st mortgagee (which is you) sits back and waits for a reasonable amount of time for the property to be sold to collect money on their first mortgage.

All the "fuss" and legalese is accomplished on your behalf by the second mortgagee.
...
Further, all expenses incurred by the first mortgagee are also due. Often, within the first mortgage documents it is stipulated that the 1st mortgagee is entitled to things as follows:

$500.00 for attendance of any default proceedings (which can even mean picking up the phone to deal with stuff)

$1000 for attempting to take possession after default etc. etc.

Depending upon the familiarity of the lawyer to such private mortgage contracts, these additional stipulations may or may not have been included. It should be your right to request these and other stipulations.

As a first mortgagee, we can also state in the first mortgage document that a second mortgage may not be placed on the property without written permission from the 1st mortgagee.

If you think the property is worth it, I certainly would consider extending the mortgage to the new purchasers.

Further, I believe that you may or may not have understood the concept of a blanket security. It is as follows:

I place $100,000 first mtg on 123 Main Street

I also place a blanket security on 234 Jones street which is the owner's principal residence.

Default occurs on 123 Main Street. My expenses and mortgage due are $125,000 after the sale of 123 Main Street.

I am $25,000 short. I then recover the balance of funds by selling 234 Jones Street

Hope this info may be helpful and transferable.
Thanks - assuming you actually meant $25,000 in the bolded area above i think i have it and think that is just what's happening - It's not clear to me that there is a required order of sale in my case - my borrower may have borrowed on 123 Main and 234 Jones. Guess i'll find out more in the coming week. My lawyer, by the way, has his law degree from Alberta - was telling me that only Canada and Australia have their particular property laws, different in some respects, perhaps better, than the rest of the world.

As far as sitting back, lettting the holder of the second do the foreclosure work and then extending the loan offer to a new buyer or get paid off, yup, sounds like what my lawyer said. I will ask about the US analogue to the Canadian stipulations you mentioned - just as soon have someone else pick up the cost of the lawyer visit yesterday and our time - lawyer said there wasn't a direct way of passing the bill along if i let someone else do the foreclosure, but if i can get (over)paid for performing some other act.... Default interest on the second for the last 3 months is charged at 21%! Sharks in the water and I smell blood!


Yes, we also have title insurance as well as the title search and i agree - quite necessary.
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