Owner carry in 2nd position? Need advice

[Account Closed]

After listing my property (a 4-plex in San Diego) too high in a declining market, receiving no offers after a month even after a 9% price cut, I asked my broker: at what price could he guarantee an offer within a week or two. He brought in a local investor (dual agency) and he gave me an offer that looked ok at first -- close enough on price, with no contingencies. This was very attractive to me because it's a very old property (1914), in good shape but with deferred maintenance, a past electrical fire, and some other issues that are relatively minor.

I had stated I could offer an owner carry. I clarified (to my broker) that I meant a wrap loan. The offer I got was not a wrap but an owner carry in 2nd position. To put some numbers on this for clarity, the property was listed for $1.75M in late August, lowered to $1.645M after 2 weeks, with no offers after 4 weeks, and the offer is at $1.45M. The 2nd position owner carry is $450k. In part, this was attractive to me because of tax efficiency and diversification (roughly half my equity would be split into DSTs and this mortgage paper). My existing loan is roughly $465k. I made the mistake of focusing on the terms of the carry -- rates and duration -- rather than thinking through the risk of being in 2nd position in a declining market. Buyer had offered a 5 year carry at 3%, after I balked he made a minor adjustment to annually adjusted rates peaking at 5%, and then I countered with a 3 year term at annually adjusted rates of 3%, 6%, 9%. The broker said it would be "important" for me to formally counter and put the revised terms in writing. Then I was informed the buyer was accepting... and noticed the purchase is assignable. I had some denial going on and I didn't stop things from proceeding. Now we've just opened escrow and I'm having seller's remorse. The buyer's EMD ($35k) is due by Monday and I don't know yet if it has been received by escrow.

Today I asked the broker to lower the price on the listing to $1.5M and accept backup offers in case the escrow fails. There was robust interest and a lot of people attended the showings at the higher prices. So I have some confidence that I could get another offer at the lower price... but I don't really want to risk going through a tough escrow with a novice buyer trying to shave me down with contingencies and unreasonable demands related to inspections... especially in a softening buyer's market. (But I also don't want to take a bath on my return.) Assuming I am ultimately made whole, the inflation-adjusted sales price ends up being around $1.3M. If I'm not made whole it's closer to $1M.

I have no info yet on the terms of the buyer's 1st. If his 1st LTV is 80% I could be underwater on day 1. If it's 60% that's obviously better. If the buyer plans to fix it up, that would help too but obviously can't be guaranteed. I'll proceed to interrogate my broker.

Other than that, what would you do? I'm considering canceling the escrow. What leverage do I have on the broker? (He gets 4.5% instead of 2% with this deal.)

What terms might you offer to sweeten the pot for another buyer without putting me in such a compromised situation? I do plan to do a 1031 exchange.

Thanks for listening.

Full disclosure, this was also posted in Tax Liens, Notes, Paper, and Cash Flow Discussions -- Please LMK if that's not ok.