You carried a note that sits behind another loan on the property. We tell you whether buyers will bid on a second, and show how position and equity shaped each offer.
What cuts the price on a second before the payer is considered.
The same worksheet comes with every offer.
| Remaining balance | $129,400 |
|---|---|
| Payments left | 168 |
| Buyer’s target yield | 8.0% |
| Purchase price | $115,000 |
| Discount from balance | 11.1% |
| Our fee | shown on every offer |
| Sell the whole note | Sell 60 payments | Keep it | |
|---|---|---|---|
| Cash today | $115,000 | $56,200 | $0 |
| Payments still coming to you | None | 108 payments of $1,140 | 168 payments of $1,140 |
| Total you receive | $115,000 | $179,320 | $191,520 |
| What you give up | Every future payment | The next five years | A lump sum now |
Illustrative example. Totals add up the payments as scheduled; they assume the payer keeps paying and are not adjusted for the value of money over time.
Your note and recorded lienStatement for the first loanPayment historyRecent estimate of property valueSeller-financed second liens come about in two ways. In one, your buyer got a bank loan for the larger share of the price and could not cover the rest in cash, so you carried a smaller note for the difference. In the other, you sold the property with your own bank loan still on it, and the note your buyer signed sits behind that loan.
Either way, you hold a second-lien note. A lien is a claim on a property that secures a debt, and when more than one sits on the same property they are paid in order if the property is sold to cover what is owed. That order is called lien position, and it is generally set by the order in which the liens were recorded.
If the payer stops paying and the property is sold, the first lender is paid in full before the second receives anything. If the sale does not cover the first loan, the second gets nothing, and a foreclosure by the first lender can remove the second lien from the property altogether.
The holder’s main defence is to step in and keep the first loan current or pay it off, and a buyer of your note has to be ready to do that.
Buyers price that risk by wanting a higher return on their money, and a higher return lowers what they pay. That is the link between lien position and note value: a second sells at a deeper discount than a first on the same property.
Combined equity. Equity is what the property is worth less everything owed against it. For a second, the buyer adds the first loan and your note together and compares the total with the value. As an example, a property worth $200,000 with $120,000 owed on the first loan and $30,000 owed on your note has $150,000 against it and $50,000 of equity, which is 25% of the value. A wide margin is what makes a second sellable, and a thin one gives a buyer little reason to bid. It is the first thing we work out, so when you send us the details, give the first loan’s balance alongside your own.
The first loan. Its balance, its payment, its rate, whether it has a balloon coming, and above all whether it is being paid on time.
The payer’s record with you. Seasoning, meaning the length of the on-time payment history, counts for more on a second than on a first, because the buyer has less collateral to fall back on.
Find out whether the first lender knows about your note. A bank loan may restrict further borrowing against the property, or contain a due-on-sale clause that lets the lender demand payment if the property changes hands.
Ask the payer for a current statement on the first loan before you go to market.
A buyer who hesitates over the full term of a second may bid on the next few years of payments, because the shorter the period, the less can change with the first loan. And if every offer is too low, keeping the note is a reasonable answer.
The statement for the first loan is the item a holder of a second cannot produce alone, and it bears directly on whether a second mortgage note can be sold. If the payer will not share it, say so, since that is a different problem from a first loan in arrears. Among the note types, a second is the one whose price depends on a loan you do not hold.
Check whether another loan was recorded against the property before yours. If your buyer used a bank loan as well as your financing, you are almost certainly second. A title search settles it.
Some buyers will, when there is real equity above both loans and a solid payment record. Others decline seconds outright because the lien can be wiped out. Expect fewer bids and a deeper discount than on a first.
The first lender is paid before you from the sale. If the proceeds do not reach your note, your lien on the property can be removed, though the payer may still owe you the debt. An attorney can explain how this works in the state concerned.
Sometimes. If the offers are well below what the payments are worth to you and you do not need the cash, keeping it is a sound choice. We will show you the numbers for both and leave the decision with you.