Unless I read this wrong, the $140K first has to be paid off. Subordination and substitution-of-collateral are negotiated prior to the mortgage being recorded. The terms should be referred to in the note and security document. No bank is ever going to go for it unless the remaining equity is enormous. Even then it may be against the bank?s policy because they don’t see themselves as a second mortgage lender.
Hard Money lenders don?t do over-financing. Their loans are based upon real equity that can be accessed if the borrower defaults. A significant percentage does go into default.
Subordination is common where the owner of a parcel of land will subordinate to a new construction loan for a piece of a larger pie. That?s how Ray Kroc built his restaurants.
SOC is primarily in the domain of residential seller financing. Most often in second position purchase money mortgage loans.
The short answer is that this will work even if the property has existing loans or encumbrances. In the example given, if the seller owed $50,000, and you could get an eighty percent LTV loan, you could give the seller $30,000 cash and a junior note for $70,000. Disregarding closing costs, which are impossible to do, you have a no-money-down deal. Good for you. The seller has $120,000 worth of loans on a $100,000 house. That?s not very good for the seller. Most of the time, it?s a tough sell if you are straightforward with the seller.
The short answer is correct - so long as you can borrow as much as the seller owes it will work.
But, I’m not sure where you got the 120% LTV from my example? Using my idea, you would give the seller a note for the difference between market value and the 1st (including closing costs wrapped into it). So, for a $100,000 house, you borrow $80k and give the seller a 2nd for $20k. $50k of the borrowed money goes to pay off the seller’s 1st, $3k or so will go to your loan closing costs, and the seller would be $27k or so in cash.
What if say we have a TH for 160K, seller owes
140K, and willing to sell to me for 140K:
Approx 50K down from hard money lender
Seller will hold 2nd for 90K
Seller still owes 140K - but he gets 50K cash
from hard money lender, plus 90K loan he created
for me. Guess he could use the 50K to pay down
his loan to 90K - then I would owe him 90K, and he
would owe the same.
I was wondering if the DOS clause would/could come
into play - and how that would affect me (since I now
own it…???)