Home Design Idea from WorldLand

It is obviously less appealing to the investor than a simple second mortgage or trust deed on the seller’s equity, but it may be a good alternative if the seller rejects such an approach. These second mortgage strategies not only reduce the investor’s cash requirement but also transfer part of the risk from the buyer to the second mortgage holder.

To illustrate, consider the implications of an unexpected drop in the value of an investment property to less than the original price paid by the investor. In the event that the investor concurrently experiences unanticipated financial difficulties (such as job loss) and is unable to meet mortgage payment obligations, the property would be repossessed to meet creditor demands.

The holder of the first mortgage would probably recover his or her money without difficulty since the original loan amount was substantially lower than the purchase price. However, the holder of the second mortgage might recover only a portion of the amount he or she loaned due to the drop in value and the fact that their claim is subordinated to the first mortgage.

The borrower is still personally responsible for this loan, and the lender could conceivably recover the amount owed through other assets belonging to the borrower. However, as a practical matter, if the borrower is in financial difficulty it may be costly, time consuming, or impossible to recover the balance owed. The second mortgage holder could therefore incur the loss that would otherwise be borne by the investor.

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