There are cases when a home does not appraise for the contract price, especially when a bidding war results in high offers. Your real estate agent may have mentioned that the potential buyer is asking for a second trust. What does this mean? Many lenders will not loan on more than 80% of the appraised price of a property. If the property appraises for less than the contract price, the borrower must often find a way to make up the gap. For example, the contract sales price on a property is $300,000. The purchaser is originally looking at a loan in the amount of $240,000, 80% of the purchase price. The appraisal only came in at $275,000. The lender will only lend 80% of the appraised value, or $220,000. The purchaser still wants to buy the property, but is now $20,000 short of the contract price. He or she may ask you to take back a second trust in this amount. The first trust puts a lender in top priority position. If the mortgage (also called deed of trust) is recordered among the land records, the property cannot be sold without the lender's permission and the lien paid in full. This is normal when you have a mortgage. If the borrower goes into bankruptcy or forfeits on the property, the lender will get the property. The first trust lender is secure in the property. A second trust is basically asking you to finance the second trust, or the $20,000. You will hold the second deed of trust, which means if the property is foreclosed on, you will be paid off after the first trust. For example, if the property only brings $220,000, that money will pay off the first trust holder -- leaving nothing to pay you off with. This is a higher risk. Second trust holders usually charge slightly higher interest rates. Of course, you could always sue the person who owes you money, but if they have none, your judgement will be pretty meaningless. The chances of collection are slim. You have to decide how much risk you are willing to assume. Clearly, a second trust can help you in selling your home, and may be the only way to get more than the appraised value for the property. A second trust can make sense, if you have the proper protections in place in the form of legal documents for the second trust. It is important that you follow each step of preparing a second trust to the letter. Each state has different rules governing second trust financing, and you should have an attorney handle the usury laws, recording details and other requirements that state law may impose on a second trust. To protect yourself, make sure that you investigate the credit-worthiness of your buyer. Verify the buyer's income and get written permission to perform a credit search. If the credit bureau report shows a history of slow or delinquent payments, you may want to reject extending any credit to an already over-extended purchaser. You may want to make sure that enough security be placed in the property to protect against a foreclosure. In the above example, selling your home for $300,000, and the buyer will obtain a first trust of $220,000. You will take back a second trust of $20,000 and the borrower will put down $60,000 of his own money to close the deal. This seems to be a significant amount of money put in equity, making the buyers reluctant to walk away from the property and lose the money. In this example, if the house must be sold, it could go for $240,000 -- giving enough money to pay off the first trust and the second trust. When you take back financing, you are lending money to your buyers. They will need to sign two pieces of paper: a promissory note and a deed of trust (the mortgage document). You will also want to make sure that the first trust lender will advise you if the borrower is in default on payments. You want to make sure that someone visits the property regularly. If the property appears rundown, its value could be diminishing and taking your security away. Most standard deeds of trust require the borrower to maintain the property in decent condition. A second deed of trust can be a valuable tool for a seller. Make sure that it is property drafted and protects your valuable investment. |
