Disadvantages of acceptin to take 2nd position mortgage as seller

[Blake Hynes]

I have an offer from a buyer to buy my commercial mixed use property I paid $330k for a year ago which I put down 25% on and owe about $240k on.   The buyer is offering $410k which is probably right at what it would appraise for and what I am asking. The offer is also contingent on my holding a $80k 2nd position mortgage at 5%.  I havent asked many questions yet but my biggest concern is that it is the entire down payment. Most banks require at lease 10-15% down in cash from the buyer unless this buyer has a bunch of collateral.   My biggest question is what are the biggest downfalls for me?  I understand the risk of the person not paying me back.  Do I have to pay capital gains on the full profit from the seller or is the portion paid back taxed as an installment sale.  Is there anything else I should be weary about by taking the 2nd position?

[Jonathan Twombly]

Originally posted by @Blake Hynes:

I have an offer from a buyer to buy my commercial mixed use property I paid $330k for a year ago which I put down 25% on and owe about $240k on.   The buyer is offering $410k which is probably right at what it would appraise for and what I am asking. The offer is also contingent on my holding a $80k 2nd position mortgage at 5%.  I havent asked many questions yet but my biggest concern is that it is the entire down payment. Most banks require at lease 10-15% down in cash from the buyer unless this buyer has a bunch of collateral.   My biggest question is what are the biggest downfalls for me?  I understand the risk of the person not paying me back.  Do I have to pay capital gains on the full profit from the seller or is the portion paid back taxed as an installment sale.  Is there anything else I should be weary about by taking the 2nd position?

Is the buyer taking out a new mortgage on the property?  If so, and you are in second position, if the buyer defaults on the primary mortgage and the lender forecloses, your second position will be wiped out and you will be left with nothing.

The fact that the buyer has no actual skin in this game at all, because you are financing the downpayment, seems risky to me.  You are taking all the risk of a default, because all the equity is yours.  The buyer is taking no risk at all, so he can just walk away if things don't go well.