Creative Dealmaking: Sexy, Sloppy Second...

kids Jack Sternberg – the man who brings us The Noteworthy Newsletter – has been kind enough to rip back the veil shrouding the note business, helping Mogul readers get a full-on immersion into one of the hottest, least-known profit centers in real estate today.

During the last few months, Jack has told us about a variety of his favorite creative dealmaking strategies (each with its own creative name), including:

In today’s main event, Jack introduces a creative process he likes to call “Sexy, Sloppy Seconds.”

If you need a refresher course on any of Jack’s previously-discussed strategies, then this is the perfect time to pause and revisit his last few lessons. And if you share our fascination with clever tricks-of-the-trade, then today’s lesson will be perfect for you!

Sexy, Sloppy Seconds

Mogul: “Sexy, Sloppy Seconds” is quite a name. I’m almost afraid to ask… What exactly is “Sexy, Sloppy Seconds”? And how does this apply to notes?

Jack Sternberg: First, it’s not what you might think. “Sexy, Sloppy Seconds” is really simple. In its most basic form, you simply buy bad second mortgages that can be purchased for $0.05 or $0.10 on the dollar. And there’s so much money in this strategy that I personally know investors who don’t bother with first mortgages at all – they only buy seconds.

farley For instance, a man does exactly what I’m talking about here. He invests no more than $0.05-$0.10 on the dollar. Here’s how he profits: He knows he can do one of two things. First, he can foreclose on the note if the borrower doesn’t get current. The second choice is to work it out and rehab the note for a payment. Or there’s a third option I’ll get into in a minute.

If you buy a $25,000 second mortgage for $0.05 on the dollar, you’re into the deal for $1,250. If you know that the seller is working it out or they're trying to get a short sale on the first, you know they'll only pay $2,500 to a second mortgage holder. This is just fine, because this is a fast way to double your money. You’ve invested $1,250. When the short sale completes, you get $2,500.

Mogul: Is this standard procedure for a second mortgage in a short sale?

Jack Sternberg: Lot's of times, they pay out $2,500, so yes. They’ll just pay $2,500 to clear out the second.

Mogul: Isn’t there risk that you’ll get wiped out in a foreclosure or short sale? When you buy a second, you can get wiped out, right?

Jack Sternberg: You have to be prepared. You don't win on all of them. The real secret to this is buying seconds and working them out.

Mogul: Is it common to get wiped out on a “Sexy, Sloppy Seconds” deal? Does it happen?

retro Jack Sternberg: It does happen. It can happen. The guy I was telling you about loses on a bunch of them, but he earns huge profits on the vast majority of them. The reason is because he'll take back the house and resell because he's only in the deal for a nickel on the dollar on each deal. Or he’ll let the deal go bad. Or he'll settle the second with them by saying something like, “Give me $2,000 and I'll forgive the second.”

Mogul: How do you handle a “Sexy, Sloppy Seconds” deal if the owner is current on their primary mortgage and it’s just the second mortgage they’re delinquent on? And how can you tell?

Jack Sternberg: You can tell if they’re current on their primary mortgage by taking a look at their credit report. And there’s almost only just one reason for this: The payer thinks they’re over-financed. So he decides he’s just not going to pay the second. There’s an easy, profitable solution to this: You go to the homeowner and you say, "Look, you owe $25,000 plus two years in missed payments. That’s $50,000 (you can give them the exact amount). I'll settle it for $10,000 cash, then this won’t hurt you on your credit report. So settle it for $10,000 and we'll make it go away." Once they pay $10,000, you've just earned a 700% profit. Remember, you were only in it for $1,250, so you would have made $8,750.

Are you looking for a hot, steamy way to rake in big bucks quickly and easily? As you can see, “Sexy, Sloppy Seconds” might be the way to do it.

Here’s a quick recap:

Locate second mortgages that aren’t being paid
Pay $0.05-$0.10 on the dollar for these mortgages (a second mortgage of $25,000 would could cost you as little as $1,250)
Contact the borrower and give them three choices on making you whole:
- Offer the borrower the chance to settle the note for a fraction of what they owe, which will be many times what you paid for the note
- Work it out with the borrower and rehab the note for a monthly payment
- Double your money from a short sale ($2,500 paid to make the note go away)
Remember that not every “Sexy, Sloppy Seconds” will be a winner. While there are things you can do to mitigate the risk of loss, you will lose on some of these deals.
The winners will rise from the ashes and will more than make up for the dud deals. With “Sexy, Sloppy Seconds”, you can rise to the occasion again and again, doing as many of these deals as you like!