Wednesday, November 4, 2009

The Second Mortgage An Option In Tougher Times For Both Buyer, Seller

A lot of deals on commercial/investment properties of all sizes are including second mortgages these days. Why? Because there are fewer commercial lenders, and they are being tight-fisted about who they lend to.

They have that right. I wouldn't want to lend to anyone I didn't think was creditworthy, either. But the pendulum has swung too hard toward the "do not lend" side of the equation. As it sloooowwwwwwly moves back to the center, deals are getting done via other means.

The second mortgage, for example. And it benefits both buyers and sellers alike.

Here is the example. The seller carrys back a second mortgage for 10 to 20 percent of the purchase price, while the buyer obtains a new first mortgage. The buyer makes monthly or annual payments to the new mortgage company for the first, and a second payment to the seller for the second mortgage. Make sense? This approach makes it easier for the buyer to obtain a first mortgage, and the seller gets ongoing income in addition to the lump sum payment for the majority of the property.

In addition, there are "note brokerages" I have written about previously that have buyers for such private notes. In this case, the second mortgage is a note. You can sell the second mortgage to a third party at closing, or at some time in the future. The seller of the note would anticipate taking a much deeper discount on the second mortgage if they tried to sell it immediately. Unless it has "seasoned, the risk is higher for the purchaser of the second mortgage.

Just some points to consider as we hear from both buyers and sellers that they want to get deals done but cannot get banks to cooperate.

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