Second Position Loan by Seller
Real Estate Agent · Hagerstown, MD · Member since 2019 · 161 posts · 121 votes
Second Position Loan by Seller
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votesQuote from @Brandon Allenczy:
Hey BP!
I haven't been able to find this answer anywhere. I'm trying to buy this 6 unit, and split the financing between the seller (willing to hold the note) and my bank. My plan is to finance some from the bank and get the seller to hold the rest.
My question is this: My bank said they have to be all in collectively at 75% LTV, but I can negotiate the rest with the seller (meaning he can take a second position). I'm assuming they mean if they took a second position. Does his loan amount have to be smaller in order for it to be a 'second position'?
Example: Could I borrow $100K from my bank, and have the seller's note be $350K but is still a second position? Or would someone look at that and say the bank loan is actually in a second position, and I couldn't do it because I exceed the LTV?
Thanks!
The exception to this is when a lien holder agrees to subordinate a superior lien to an inferior lien, this “subordination” agreement is recorded and the mortgages flip positions.
To record a lien is merely filing the mortgage or deed of trust document with the county real estate recorder or county clerk.
Few lending institutions will allow a second lien on a purchase. Those that will still will want the borrower to have a significant amount of their own capital invested. The exception is when a borrower is financially strong to the extreme, or has a large amount of funds on deposit with the lending institution.
Lending institutions have been burned in the past by seller “throw away” seconds, which were used to jack up the recorded sales price way above the “real” price in order to lower the buyers down payment by fooling the lender into thinking the buyer was paying a higher price than he really was. Lenders eliminate that problem by disallowing a second lien.
7 Replies
- MD · Member since 2019 · 66 posts · 37 votes4y
Quote from @Brandon Allenczy:
Hey BP!
I haven't been able to find this answer anywhere. I'm trying to buy this 6 unit, and split the financing between the seller (willing to hold the note) and my bank. My plan is to finance some from the bank and get the seller to hold the rest.
My question is this: My bank said they have to be all in collectively at 75% LTV, but I can negotiate the rest with the seller (meaning he can take a second position). I'm assuming they mean if they took a second position. Does his loan amount have to be smaller in order for it to be a 'second position'?
Example: Could I borrow $100K from my bank, and have the seller's note be $350K but is still a second position? Or would someone look at that and say the bank loan is actually in a second position, and I couldn't do it because I exceed the LTV?
Thanks!
What is the value of the property? Sale price?
- Real Estate Agent · Hagerstown, MD · Member since 2019 · 161 posts · 121 votes4y
ARV as it sits is probably around $460K. Could be $500K since it's a 6 cap in a good area, but needs some repairs. I would like to get it for $400K.
I know this is way above 75% of the ARV, but I plan on improving the property and increasing NOI over the next few years - Investor · Member since 2021 · 24 posts · 14 votes4y
While I didn't go through with the transaction, I did enquire with a local credit union about this. Based on that discussion, I learned that:
Typically, the bank will want to ensure that you have skin in the game. So an LTV limit may apply to the combined seller financing + bank loan regardless of the position. For example, the bank might say 75% LTV for the bank loan, but they may also limit the seller financing to say 15% LTV, that way, you have to come up with 10% (i.e., your skin in the game).
In terms of the amount and the position, those are two completely separate things. Regardless of who is providing most of the funds, it's typical for the lender to be in the first position and the seller's note to be in the second position.
I hope this is helpful!
- 4yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votesPosition of the loan is not according to loan size; it’s dependent on when the lien is recorded. So the first mortgage recorded is in first position, the mortgage recorded one minute or one year later is a second position lien.
Quote from @Brandon Allenczy:
Hey BP!
I haven't been able to find this answer anywhere. I'm trying to buy this 6 unit, and split the financing between the seller (willing to hold the note) and my bank. My plan is to finance some from the bank and get the seller to hold the rest.
My question is this: My bank said they have to be all in collectively at 75% LTV, but I can negotiate the rest with the seller (meaning he can take a second position). I'm assuming they mean if they took a second position. Does his loan amount have to be smaller in order for it to be a 'second position'?
Example: Could I borrow $100K from my bank, and have the seller's note be $350K but is still a second position? Or would someone look at that and say the bank loan is actually in a second position, and I couldn't do it because I exceed the LTV?
Thanks!
The exception to this is when a lien holder agrees to subordinate a superior lien to an inferior lien, this “subordination” agreement is recorded and the mortgages flip positions.
To record a lien is merely filing the mortgage or deed of trust document with the county real estate recorder or county clerk.
Few lending institutions will allow a second lien on a purchase. Those that will still will want the borrower to have a significant amount of their own capital invested. The exception is when a borrower is financially strong to the extreme, or has a large amount of funds on deposit with the lending institution.
Lending institutions have been burned in the past by seller “throw away” seconds, which were used to jack up the recorded sales price way above the “real” price in order to lower the buyers down payment by fooling the lender into thinking the buyer was paying a higher price than he really was. Lenders eliminate that problem by disallowing a second lien. You say: "My bank said they have to be all..." Who is "they" is the crux of the matter to evaluate the statement...
Anyway, the position of the lien is a matter of which Note/lien was recorded first. With multiple loan situations, it would be worked out who lender take the first position since each position would be priced and underwritten differently.
Since this is a 6 unit property, residential financing concepts dont' apply. But, I'm guessing your bank is saying the total loan amount, from the bank and the seller financing, is 75% lTV. Somehow you need 25% cash. I doubt the bank would accept being in the 2nd position.
Does that help?
@Brandon Allenczy Hey Brandon - I've been able to do this successfully but had to have the 25% down with my own funds, closed the deal, and then executed the seller financed 2nd that essentially reimbursed me my downpayment. Also had to have strong financials (income, reserves, excellent credit) with the lending bank. So it can be done.
- Rental Property Investor · IL · Member since 2015 · 165 posts · 107 votes4y
As others have noted, it depends on when the liens are recorded. In theory, the second position loan value (seller) could be higher than the first position loan value (bank). For example, the bank might lend 40% LTV, the seller 50% LTV and yourself the final 10%. In that scenario the seller would be putting themselves at considerable risk by taking a second position. In the event you default and the bank has to foreclose, the seller risks losing their investment if the sale of the property only produces enough for the bank to recoup their money, and nothing remaining for the other lien holder.
These are extreme examples given that a bank would be unlikely to lend on such a low LTV in the first place, and even if they did in the event of a foreclosure sale the price would most likely be able to cover the 40% LTV and more.
More likely it would be a bank at 70-75% LTV, the seller in a second position anywhere from 1-25% LTV and yourself making up the balance.
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