How does a lender in second position recoup in a fire sale?

Question

I'm talking to a lender who is concerned that if he seller finances and if I bring in some hard money for the rest that the hard money lender will be in first position and he will be in second position. If he is in second position and the deal goes belly up for some reason, how does he get his money back or does he get his money back?

Who sells the property? Who determines the selling price of the property?

Thank you!

Who sells the property? Who determines the selling price of the property?

Thank you!

Brian Sorensen · Answer

Thanks for the responses!

I appreciate it even if it's not what I wanted to hear.

Brian Tremaine · Answer

In 2nd place you can lose your total  investment. Happened to me in 2008. I thought 80% LTV was sufficient but prices dropped 40%, ouch! Lesson learned the hard way. Even the person in 1st position lost $.

Craig Smith · Answer

If it goes into foreclosure, the property will be sold at the sheriff's sale, the sale's price is set via bidding. Who ever is first debt position gets paid first from the proceeds of the sale. Left overs go to the second lien holder ( if anything is left), then third lien holder ect. till the money is gone. All other lien holders are SOL. Any one not paid loses all rights (providing the foreclosure was done correctly). If he holds the second lien and you are foreclosed on, at the sale, if the bidding doesn't go high enough to cover the first and second lien, he will need to bid up to the the first lien holders position plus his. Thus he will be paying off the first lien holder, then he owns the home.

You could designate him the primary lien holder, but the hard money lender who is provide way more $ would have to agree to that.

Jay Hinrichs · Answer

@Brian Sorensen

your post is almost un intelligible but I will try to decipher.

1. you have a seller who is willing to sell it to you on contract ?

2. you need a HML to give you a loan for rehab  but they want to be in first and the seller needs to subordinate ?

Your question is if the sellers subordinates to the HML so you can get rehab funds and said lender wants to be in first ( demands) and your seller is in second ( subordinated) if it goes TU what happens to the Seller's subordinated interest.

I think that is what your trying to say.

Well the seller ( who has a subordinated interest) is in second position if the first forecloses the second ( seller ) needs to cure.. either pay it off or pay the payments. this would mean you defaulted as the buyer .. they keep first current and foreclose on second they end up owning the property subject to the first.. and you are out in the cold.

Very dangerous position for a seller. one I would never personally do or recommend unless seller is very cashed up and can easily take project from you and pay HML off in cash.

the most dangerous lending position is subordinated loan to FTD construction loan does not get much riskier and if they go to an attorney for advice I highly doubt they will do the deal.

Darren Eady · Answer

He's right.  He shouldn't seller finance or he will have to foreclose by paying off the first mortgage, interest, penalties and attorney's fees if you don't make payments.  Plus, with no skin-in-the-game from you on this deal, why wouldn't you walk away the first time stuff hits the fan (it's real estate, stuff happens).  The more money you put down, the better your options will be and you won't be asking a seller to put themselves in an uncomfortable situation.