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Updated over 5 years ago on . Most recent reply

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Joseph Leguenec
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Inter-creditor Agreement for Property Sale. Bad Idea?

Joseph Leguenec
Posted

Hey there, 

Long time lurker, first time poster! I have been consulting with various attorneys, and have been getting some mixed messages. Heres the scenario.

I have two adjoining properties for sale. They are two separate addresses, but together make up 40 acres, and are used together. One is worth much less without the other and vice versa. I found a buyer who would buy Lot A for 1.1MM and Lot B for 300k, for a total sale price of 1.4m I owe about 480 on Lot A, and own Lot B free and clear.

The way I set up the sale, was for the buyers to purchase  Lot B cash for 300k, (So they would essentially own Lot B outright, but I would have a first position lien securing Lot A) and Owner Finance Lot A with 180k down, leaving a balance of 920k on the loan. Sale was supposed to close in 1-2 week, no contingencies, financing was in place etc... Well here we are a month and a half later LOL!

I set up the trust deed and promissory note so that in case of default on Lot A, I would be the first lien holder on Lot B and it would be held as collateral for the loan balance of Lot A. That way if for whatever reason we had to foreclose, we would be able to get back both of the properties since they are used in conjunction. 

The problem is, the buyers didn't have the immediate funds that they thought they did. We have had to push back the closing dates twice now while they're trying to secure the funding. Now they have a family member who is willing to give them the money they need for purchase, but initially wanted to have a first position lien on Lot B to secure their loan to the buyers. I said this would not be possible, as my position is required to protect the property in case of default, and give myself the ability to take back both properties. 

They then wanted to have a first position on Lot A, which I sad was a hard no for me for obvious reasons.

The third option they have thrown out is the possibility of a second position lien behind me on Lot B for the full 480k down with an inter-creditor agreement in place to give them more security in their position. 

My question is, what kind of implications does this have for me as the one carrying the note, and rights that they have in case of default. The last thing I want to do is end up having to foreclose on the property, and end up having to pay someone a bunch of money to get my own property back because of some obscure lending contract... Also from what my attorney has told me, it gives them the right to force a foreclosure if the family member is not getting paid... Which would not be an ideal situation if I have a cash flowing note that is performing well..

Has anyone had much experience with this type of agreement in a RE transaction? Is it something you would be willing to accept to get a deal done? Thanks for any insight.

J

Most Popular Reply

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Mike Hartzog
  • Lender
  • Redmond, WA
490
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553
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Mike Hartzog
  • Lender
  • Redmond, WA
Replied

Unless you were to subordinate your 1st lien to the 2nd your foreclosure on the 1st would wipe out the junior liens.  You would either get a full payoff or get the property back free of liens with the exception of any tax and/or municipal liens that might have been attached.  From my perspective, your two risks are the two separate loans which could potentially leave you in possession of just one of the properties in the event of default and foreclosure, and ICA language which reduces your rights as a 1st position lender to protect your financial position in the property.   

If a the 2nd position lender wants an ICA, the motivation is typically to help them protect their investment.  2nd position lenders can protect their interest by foreclosing and, if they are not paid off, either paying off the 1st lien themselves or bringing it current and making the scheduled payments.  If the 1st forecloses, they can bid at the sheriff's sale up to the combined amounts due on both 1st and 2nd to ensure they either retain the property or get a full payoff.  They can also buy the loan from the 1st lien holder, giving them more control and ability to work something out with the borrower.  An ICA which gives them the right to buy the loan with predefined terms within a certain time frame after default and avoid the foreclosure path would not be unreasonable.  Again, it boils down to ICA language.

  • Mike Hartzog
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