Is it risky being a 2nd mortgage holder? New construction apartment deal
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[{"id": "gw4k3e4", "text": "Buyer seems capable of not putting in any money?   Yes, it is risky when you are at 100% LTV.", "replies": [{"id": "gw4ko8s", "text": "Yea it\u2019s hella shady. Even if he shows that he\u2019s got the funds to make the payments. I just never seen something like this before.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gw4mlfi", "text": "You have to assume this totally goes south from day one, buyer never makes a payment, instantly goes into foreclosure. What type of position is the seller in then?\n\nEven if seller can take it back, they're out the commission and transaction costs. If first loan forecloses, does seller have capacity to buy them out so seller's position isn't cleared out in a foreclosure sale?\n\n\nI'm all for seller financing in the right circumstances, but no way I'd do this.", "replies": [], "depth": 1}, {"id": "gw4ozix", "text": "Make the buyer personally guarantee the 30% financing. Consult a lawyer with the best way to do this. You may be able to have the seller sign a note that is only due if they default on the loan - that may prioritize the note within the buyers total net worth that helps avoid complete loss if the buyer goes into BK. \n\nAlso ask the buyer for their personal balance sheet.", "replies": [{"id": "gw4ra0u", "text": "Not a tax person but my understanding is that a full recourse loan gets punitive tax treatment. I know for assets held in a REIT (which this isn\u2019t) you can\u2019t put it in because the loan wouldn\u2019t be considered to have any risk. Believe that also flows through on taxation on the sale, you\u2019re paying tax on phantom income. Full recourse loans are bad; that\u2019s why you don\u2019t really see recourse go past bad boy carveouts and completion guarantees.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gw4phep", "text": "New construction as in the building is built, or he plans to build a new building?  \n\nif you are the Seller, just take out a 70% loan and keep the building.  Tell the Buyer to call him when he has the money to buy it.  Seller is basically capping their upside and holding the bag on the downside being in second position.", "replies": [{"id": "gw4poe2", "text": "Phase 1 is built. Phase 2 which buyer also wants to purchase will be built after phase 1 is done", "replies": [], "depth": 2}], "depth": 1}, {"id": "gw4qf9b", "text": "New construction apartments are a risky place to be right now. There\u2019s downward pressure on rents in lots of urban areas. Who knows how long that will last but it\u2019s probably blown up a lot of proformas recently. Being second in line to get paid back amplifies that risk for the seller. Buyer may not be able to get 70% leverage. \n\nAlso a question for the masses: Is the seller note going to complicate the buyers ability to get financing in a year?", "replies": [{"id": "gw4r0ah", "text": "Sources and uses wouldn\u2019t pass sniff test on a refi if the buyer doesn\u2019t have any at risk money. Would be super tough to get a loan even in today\u2019s environment.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gw4tm85", "text": "Yes.  I\u2019d never carry behind a hard money 1st.  Hard money lenders are sharks and opportunists just waiting for a default to take the property and wipe you out.", "replies": [], "depth": 1}, {"id": "gw5y65p", "text": "The risk you run in any second position is that a foreclosure by the first position will wipe away 100% of the value of your position.", "replies": [], "depth": 1}]