Posted by John Behle on April 05, 1999 at 23:33:07:
Subordination is the process of letting someone else have priority over you. Picture a checkout line at a grocery store. Subordination is the same as letting someone in line in front of you.
In real estate, subordination has to do with the priority of loans, liens or other interests. Loans and liens are put in line as they are recorded. Therefore a first mortgage is the first one recorded. A second is the second one recorded. It isn’t a type of loan, it is the status and position in line.
If I had a second loan (in a second position) and wanted to “subordinate” my interest to the third loan, I do that through signing and recording a “subordination agreement”. The third then becomes the second and my second becomes a third.
Rather than a checkout line, with real estate it’s more of a cafeteria line - with limited food (equity) at the end of the line. In case of foreclosure, the first is satisfied, then the second, the third and so on. The decision to subordinate has to take into account the amount of equity at the end of the line and the safety of letting someone else have priority.
Subordination is helpful when someone needs to bring new financing into a transaction. Lenders prefer a first or second position. In the case of a “wraparound” loan and refinancing underlying loans, the wrap may be in a second position. If you pay off the first, the second (wrap) automatically falls down into the first position. The only way to “refinance” a first when there is a second, third or other “junior” lien without paying the junior liens off is to have them subordinate.
OWNER FINANCED REHAB QUESTION - Posted by SCOTT BINKLEY
Posted by SCOTT BINKLEY on March 30, 1999 at 19:14:59:
I would like to advertise in my area for an owner of a handyman special to hold paper for roughly a year. In this time I would make interest only payments while doing repairs myself. I have a construction background. Next, house would go for sale. Fix up money would be credit cards. Is this crazy, or a good idea? I know the house still has to sell.
“Don’t Wanter Itis” - can be contagious - Posted by John Behle
Posted by John Behle on March 31, 1999 at 13:38:31:
You can do it the way you described, but first off, be cautious. In theory and practice, it can work great, but I do not advocate people go into credit cards or high rate loans to do deals if they don’t totally have the exist strategy sewn up.
So, you fix it on credit cards and there is no buyer. Many months or even a year goes by - where do stand? Did the profit get eaten up? Can you make payments? etc.
Second - Why do it that way? It’s a rehab. Get the seller to take a payment moratorium. No payments for 6-12 months. It can’t hurt to ask and can make a large difference.
Also, if you need money to fix it up, get the seller to subordinate to a second position - or third as the case may be - so you can take out a cheaper loan from an institution to fix up the property. Cheap loan instead of high rate cards. If the seller needs monthly payments, pull money out of the new first loan for his/her payments.
You can do this zero down with much less risk to both you and the seller. What people don’t understand is that zero down deals - STRUCTURED PROPERLY and with the right intent - can actually be less risky for both buyer and seller.
Negotiate strongly and more creatively with a seller when you are coming in to solve a problem - of theirs. One of the biggest problems I have seen with creative finanancing and the “nothing down” movement is that sometimes people do not realize that “Don’t Wanteritis” can be contagious. Don’t assume their problem or set yourself up for one in the future.
That’s the problem with balloon payments, negative cash flows and property management. Those are the things that drove me towards paper investment. I buy the positive cash flows, balloons are to me and management consists of a sharp letter opener and a lot of deposit slips for your bank account.