Generally 2nd mortgages have more risk than a 1st mortgage. For a Seller, the major risk is in the event of default. In a default situation, the equity position of the 2nd mortgage is behind the equity position of the 1st. At the time of liquidation (either through a Power of Sale or Foreclosure proceeding), any equity would only be realized after the 1st lender is repaid in full (inlcuding any associated costs). You may also be behind any unpaid property taxes, which have priority and can serve to squeeze your equity position even further.
Enough said on the negative risk side. There may be a legitimate case to consider holding a 2nd - consider the following:
i) Adequate equity exists in the property to hold a 2nd and at the outset appears 'secure' position wise
ii) For the return it provides - often 2-3-4% higher than a 1st
iii) Property cannot be readily financed any other way - due to its condition, unavailable bank lending, poor market conditions, etc.
iv) Familiarity with the property and comfortable with its value overall
v) Confidence with the Buyer to be able to meet the total mortgaging obligations (both 1st & 2nd)
vi) Possible tax benefits on Capital Gains (see your accountant) and for the cash flow the mortgage provides
VTB 2nds are not the solution for every seller, but there may be sound reasons to consider them in certain situations. Most importantly, do your due diligence with respect to the Buyer - meaning are they a good credit risk, capable of servicing the total debt obligations of the property, have good intentions and the right plan for the property?...
As always, consult with experienced commercial brokers in your area to learn more about the opportunities for VTBs.
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