Posted by Michael Morrongiello on June 28, 2005 at 18:49:54:
GP:
One of the biggest mistakes you can make is to take back essentially what is called a “throw away” 2nd lien in order to accomodate your buyer for your home.
This type of “paper” is considered HIGH RISK and will typically be discounted severely. The 2nd lien is in a VERY tenuous position in the event of a default for either the 1st lien or the 2nd lien and thus offers little appeal for “paper” investors.
Unless you are willing to guarantee the performance of the high risk 2nd lien, or can somehow get additional collateral to shore up its position, or are willing to season and collect payments on it for quite some time, etc. - this type of “paper” has limited market appeal and a very fragmented investor marketplace for it.
It will be far better for you to finance the buyer by carrying back only ONE (1) - 1st lien seller financed Mortgage & Note which you can later on sell
OR
To take back both a 1st lien Mortgage & Note (which can be sold off) and then also a 2nd lien mortgage & Note , which you will retain. (in other words (2) TWO Notes)
Often a Note funder can advance more NET cash to you at the time of closing for the purchase of a deal structured in one of the above ways than the buyer / borrowers 1st lien lender is even willing to lend as a 1st lien originated loan. While the suggestion above may not eliminate your need to still carry some of the sales price back in the form of a smaller 2nd lien Mortgage & Note, at least you will have been advance more NET cash upfront than the lender is willing is lend, thus the 2nd lien you might carry is a smaller 2nd lien Mortgage & Note.
My advice regarding these types of 2nd liens is to avoid taking them back at all if you can.
Best to your success;
Michael Morrongiello