When We Take A Second
We have a potential buyer for our investment property appraised at $152,000.
He has been prequalified for an 80% loan. He asks if we will carry the remaining 20% as a second.
If he defaults on his 1st or has tax liens against the property, how do we protect our interest in the property with our second? Is there language that can be used in the contract to step in and take over payments and ownership if he fails in payments to the first or to us?
What do you do in a case like this to protect yourself as a second lien holder?
Hopefully some of the Texas folks will chime in with specifics for TX. Here in CA you fie a request for notification of default. Since we are a trust deed state rather than a mortgage state this is likely to be filed with the trustee on the first note. In the event the first files a notice of default, as second holder you will be notified of the default and can cure the default on the first and file a notice of default on your second. Notice of Default is the first step leading to foreclosure and if at the sale you are not made whole, then you get ownership of the property subject to the first note.
On the tax issue you may be able to check county records to be sure that taxes are paid.
I hope this is of some help.
Regards,
Ed
Another way to go would be to use a balloon payment for his 20%. Take a look:
152k value
20% down would be 34k
Take it in the form of a balloon payment, structured this way:
5 year note, no payments due for the 5 years, acrruing 7% a year. At the end of those 5 years, the nore has increased in value to over 47k!
Since he has 20k in equity from the start combined with 60 payments off the principle, he has more than enough equity to pay off the debt to you.
Sure, it's a long wait, but if you do 5 deals like that this year, you're looking at a quarter million payday in 5 years. Of course, if you don't want to wait, you can delay the payments for only a year, or three, whichever suits you. Or you can sell the note for a decent instant return (80-90% face value given the short length and security).
Thinking creatively is what earns you money. The most important thing though, is that you solved your buyer's problem, made him happy and got him into his dream home. Word of mouth will spread... so will your wealth.
Good luck.
Great information. I appreciate your feedback. I love finding solutions for all involved!
Insofar as making sure your buyer pays the real estate taxes...
Don't know if practices are different in your area, but here, mortgage companies on an 80% LTV loan would probably require a real estate tax escrow. This means that the buyer would be paying real estate taxes to the mortgage company along with the principal and interest payment each month. Mortgage company in turn would pay off the RE tax money to the taxing authorities.
HOLLERatG,
No offense, but that's some pretty poor advice, if you put any kind of reality to it.
First, assuming no apreciation on the property, the buyer's $20K in equity would be around $25K or so in 5 years as the first few years of a 30 year note is pretty much interest only payments. Be a little short of a $47K payoff, not to mention the cost of refinancing to do so.
Second, no payments at all in 5 years. Good for the buyer, not the seller. You're money is in limbo for 5 years. A 1st foreclosure, tax lien, BK, etc. and you've lost it all since no payments are being made. Bad idea, IMO.
Third, This would be a hard note to sell, and practically impossible at 80-90% of face value. Why? There is no seasoning on it because there is no payments. The risk is high, again, no payments being made. You might get 80-90% if it has less than a year before the balloon, but at that point, why bother selling?
Creative ideas are good only if they actually work in the real world.
jtmhomebuyers,
In taking 2nds, possible tax liens and 1st foreclosures is simply part of the risk/reward. As someone stated, you can get info from the 1st on a default notice. To limit tax liens, if the 1st doesn't do/require an escrow, you could. That way, you would collect the taxes/insurance monies and pay them yourself.
Personally, I'd only risk taking a 2nd when you are already making money on the initial closing. Using your deal as an example, your buyer is getting an 80% 1st for about $121K. I'd have to have less than that in the property to take the 2nd. So if you only had $115K in total in the property, you'd get a $6K check at closing and a $31K 2nd lien pulling in a monthly cashflow. Now if they don't pay, you have options; call the note (foreclose), sell the note (steep discount), write the note off as "bad debt" (big tax-off).
Roger
As the seller the deal is not a great one. The buyer has nothing invested in the property. The lender in 1st position has more to lose.
Second notes are pretty standard. Do not get too complicated as you might be hurting your chances of selling the note later.
The note will be recorded and you can register to be notified if there is a default on the taxes. You want a similar sort of notice if the borrower fails to keep up on the payments on the first.
Re-consider why you think it is a good idea to accept zero down payment if you are concerned about the borrower not keeping up their end of the deal.
John