Posted by Kevin Abbey on May 28, 1999 at 22:54:42:
If your buyer obtains a new 1st Mortgage/Trust Deed, and you carry back a 2nd behind the first, what is most relevant is the CLTV…the Combined Loan To Value. You must decide what level of risk you can tolerate…assuming the CLTV you are comfortable with is also disclosed and acceptable to the new lender in the 1st position. There are Subprime Investors willing to do these deals today in the US.
But here are two views on this…you might be comfortable with holding a 25% 2nd behind a 75% 1st , for a CLTV of 100%. You might prefer your buyer keep their money (not used as a downpayment) in reserve to supplement payments on the 1st & your 2nd if they get in a jam. That’s if they will do that!
However, a buyer with nothing invested also knows they have little to lose by walking away if they get into financial trouble. Ticor Mortgage Insurance Corp was the third largest PMI company in the US until it took on and insured a great number of these investor/low down deals in the early 1980’s. By 1985 they were out of business…and in Receivership in California.
If your buyer mails you the key to the home instead of a check for your 2nd, are you in a position to keep their payments current on the first to protect your 2nd? Once, on a sale to an investor, I carried back a $16,000 2nd that made the deal a 100% CLTV. I knew it put me in a risky position, so when another investor approached me with $10,000 cash for my $16,000 2nd note…well I just had to take the cash. Good thing too, because the investor who bought that property decided to walk from the deal after about 6 months.
The note buyer had resold my former 2nd to another party, with full rights of recourse…bottom line, the note buyer had to pay up. I guess I was the only one to make out alright, because I got out from under the high CLTV 2nd. And I wouldn’t carry back another one…Learn from my near mistake, and that of a former national PMI company. A downpayment lessens the risk you assume with a high CLTV situation.
Good fortune to you,
Kevin Abbey (OK)