Give this some serious thought… - Posted by Michael Morrongiello American Note
Posted by Michael Morrongiello American Note on December 29, 1999 at 18:10:02:
Options, Decisons, Choices, etc. Isn’t it fun?
From the sound of your deal and the large 25% 2nd lien that your are being asked to hold, I would suspect that the proposed buyer does not have the strongest credit in the world. That is something that you MUST take into consideration when being asked to hold a subordinate and very tenuous 2nd lien position note.
Your fears over a default taking place are REAL; if the payor does default on the 1st lien or on your 2nd lien, you then will either have to step in and start making payments on the underlying 1st lien while you are paying court costs and attorneys fees to intiate legal action on your 2nd lien. And as you pointed out the payor can always file a bankruptcy which will stop everyone. Having been involved in this type of scenario , I would suggest you either find another buyer who is more qualified and perhaps with better credit or IF you decide to still play with this buyer see what a note funder will consider advancing for a well structured 1st lien note. Depending on HOW MUCH cash the buyer is putting down (it was not clear if any was being put down), the proposed buyers credit & employment backgrounds, etc. most note funders are willing to advance MORE net cash to you up front at the time of closing than a B/C sub prime lender is willing to orginate as a loan. While this still may not solve you dilemma over holding some of your profit back in the form of a 2nd lien mortgage, it does get you MORE NET cash up front.
As for the marketability for the 2nd lien under either scenario… They don’t call these 2nd liens “Throw Away 2nd’s” for fun. The merchantibility of that 2nd lien would be extremely limited unless you are prepared to take 30% or less on the dollar for it in cash.