Posted by Gary O on February 19, 2002 at 17:27:07:
Hi yall,
Could someone please explain to me what is meant by having the owner take back a 2nd mortgage and describe a situation in which you would do that. I have the Carelton Sheets course and he mentions that a few times and I just can grasp the concept. Thanks a bunch
Posted by Brent_IL on February 19, 2002 at 23:43:23:
Brian gave a good example. Don’t let the place numbers mess with your mind. Any mortgage after the first is a junior mortgage. The difference between a second and a third is simply the order in which they were recorded at the county office.
You find a property in which the seller is asking $100,000 for. You go to the bank and they tell you they will loan you 80% of the LTV or Purchase price. You negotiate with the seller for him/her to carry a second mortgage/note for the other $20,000.
You will typically pay higher interest on the 2nd because it is junior in position and less secure.
Posted by Gary O on February 20, 2002 at 08:35:49:
Thanks for the response. Let me see If I understood you. In your example I would get a loan (a first mortgage) from the bank. This loan is used to pay the 80% to the seller. I ask the seller to take a second for the remaining $20,000. The seller would get that $20,000 in cash and I, the buyer, would be responsible for paying the first and the second? If this is correct, wouldn’t it make more sense for me to put down the $20,000 out of my own pocket so I avoid the high interest rates and then just take a loan for the remaining $80,000? Also if the seller were to agree to your example deal, does this happen all at once at closing so the seller would recieve a check for $100,000 minus any existing mortgages he had before?
Thanks for your advice, as you can tell I’m in the very beginning stage of this, but desperately want to get started. Just for the record, yes, I have been reading ALL the post and also have been studying the CS course. There’s just some things that are going over my head. Thanks again.
Posted by Phil (CO) on February 20, 2002 at 13:46:41:
Actually, if the seller “takes back a second mortgage” they don’t actually get the $20,000 you talk about. You are actually agreeing to make payments on that $20,000 loan to the seller. In this scenario the seller gets the $80,000 from your bank, plus a promise from you (secured by the second mortgage) to pay them the other $20,000 under agreed terms.
The way you described it, you would be getting a second mortgage from a third party (bank, private lender, etc) for the $20,000, and the seller would receive the full$100,000 at close.
The advantage of having the seller rather than a third party give you the morgage is that it’s probably a lot easier to get, and you can probably get better terms.
Now, why would you want to get a second mortgage instead of using cash? First answer is that Sheets and others are assuming you don’t have the $20k, in which case this may be your only option. Second, if the payments that you receive from your tenant can cover the “high interest” payment, you’re probably better off using your $20k to buy more properties.
Posted by Okie John on February 22, 2002 at 12:46:55:
My curiousness here is “What does it really look like at the title company when you have this deal accepted by the seller?” Don’t you still have to give a check at close for your part of the down payment? (Part of the 20% seller second?)