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Ely
Ely, Counselor at Law
Category: Real Estate Law
Satisfied Customers: 100014
Experience:  Qualified attorney in private practice including business, family, criminal, and real estate issues.
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I own a rental property that has market value of 250k. I owe

Customer Question

I own a rental property that has market value of 250k. I owe the bank 35k on the 1st mortgage. I dont have income or credit now to refinance or get equity out. Can I borrow $100k from a private party and put up my property as collateral? I will only need to borrow this money for 48 months and pay monthly as if its an auto loan.
In the unlikely event that I dont pay back this promissory note, how can I assure this particular private lender that he will receive his money through my property?
Does he put a lien on the property? How will the process work and the cost involved? I suppose only mortgage or deed of trust can be recorded with the property and not a promissory note?
Submitted: 1 year ago.
Category: Real Estate Law
Expert:  Ely replied 1 year ago.

Hello and welcome to JustAnswer. Please note:This is general information and is not legal advice. No specific course of action is proposed herein, and no attorney-client relationship or privilege is formed by speaking to an expert on this site. By continuing, you confirm that you understand and agree to these terms.

I am sorry to hear about this situation.

Can I borrow $100k from a private party and put up my property as collateral?

YES. The private party would then be a "junior lender." See HERE. This is not unusual.

In the unlikely event that I dont pay back this promissory note, how can I assure this particular private lender that he will receive his money through my property?

This should happen by default if the numbers you mention are true. If you default, the junior lender will then have the right to trigger a foreclosure. The primary lender will get the money at sale to cover their outstanding contract, and the rest will go to the junior lender.

Example:

$250 property foreclosed upon
$35 goes to primary lender
$100 goes to junior lender

Rest ($115) goes to you.

Does he put a lien on the property?

Yes. Or rather, he includes himself as a junior lender.

How will the process work and the cost involved?

If you use an attorney, this will likely cost about $2,000 or so in legal fees to draft everything. Without counsel, there is no legal fees per se, and the recording fee is minimal ($50, etc), but it may be very complicated to get all of this on paper without an attorney.

I suppose only mortgage or deed of trust can be recorded with the property and not a promissory note?

He would become a junior lender - his mortgage note can also be recorded.

I hope this helps and clarifies. Please use the SEND or REPLY button to keep chatting, or please RATE when finished. You may always ask follow ups at no charge after rating. Kindly rate my answer as one of TOP THREE FACES/STARS and then SUBMIT, as this is how I get credit for my time with you. Rating my answer the bottom two faces/stars or failing to submit the rating does not give me credit and reflects poorly on me, even if my answer is correct. I work very hard to formulate an informative and honest answer for you; please reciprocate my good faith with a positive rating.

Customer: replied 1 year ago.
How much will the fees be for this "junior lender" to start the foreclosure? How long will it take?
After he forecloses, who does the sale of this property? So even if it is worth 250k, they can decide to
just auction it off for $135k to satisfy their debt and leave me with nothing?My unit has a moderate income restriction (covenant), I believe by default, that restriction is taken off when its foreclosed. This shouldn't prevent me from getting a private loan and recording a "junior lender"?
Expert:  Ely replied 1 year ago.

How much will the fees be for this "junior lender" to start the foreclosure?

A few hundred dollars filing fees, plus legal fees which can be in the thousands.

How long will it take?

This depends on your jurisdiction but can take a few months - 6 months on average.

After he forecloses, who does the sale of this property?

Whoever bid the most.

So even if it is worth 250k, they can decide to just auction it off for $135k to satisfy their debt and leave me with nothing?

No. They cannot "undersell" it. See HERE. The property will normally sell for what it is worth in majority of ases.

My unit has a moderate income restriction (covenant), I believe by default, that restriction is taken off when its foreclosed. This shouldn't prevent me from getting a private loan and recording a "junior lender"?

This should not be an issue provided the restriction specifically prevents a junior lender (never heard of this being a restriction, however).

Gentle Reminder: Please, use REPLY or SEND button to keep chatting, or RATE POSITIVELY and SUBMIT your rating when we are finished. You may always ask follow ups at no charge after rating.

Customer: replied 1 year ago.
I meant who auctions off the sale of my property? The court once the foreclosure papers are filed or the banks?
So the senior lender gets the first pay, junior gets 2nd, and rest comes back to me unless there are other liens on it?
Expert:  Ely replied 1 year ago.

I meant who auctions off the sale of my property?

Normally a third party will be contracted to auction off the home.

The court once the foreclosure papers are filed or the banks?

No, more like the Court will give the lender the right to auction and the lender will use a third party to do so.

So the senior lender gets the first pay, junior gets 2nd, and rest comes back to me unless there are other liens on it?

Correct.

Gentle Reminder: Please, use REPLY or SEND button to keep chatting, or RATE POSITIVELY and SUBMIT your rating when we are finished. You may always ask follow ups at no charge after rating.

Customer: replied 1 year ago.
Can the "junior lender" keep my place by paying off the senior note once he forecloses? Or does he have to auction it off (Is this an expensive process for him to contract this "third party"?) If he decides to keep the place (if he/she even can), will he/she have to pay me a portion of the "fair market value" at the time? I am not saying it will go here, but I better cover the bases. I don't want to lose this unit by screwing up.Also, my unit is in CA, and I live in another state, where do we draft up this "loan? Do I use an attorney in the state of CA or the state that I live in? Or does it even matter?
Sorry for asking so many questions, but I need to be sure before I present such deal to a potential private lender.
Expert:  Ely replied 1 year ago.

Can the "junior lender" keep my place by paying off the senior note once he forecloses?

Yes. The auction sells the property to the highest bidder. If the junior lender wishes to bid, they can.

Or does he have to auction it off (Is this an expensive process for him to contract this "third party"?)

No. Lenders often end up buying back the property at their own auction.

If he decides to keep the place (if he/she even can), will he/she have to pay me a portion of the "fair market value" at the time?

No.

I am not saying it will go here, but I better cover the bases. I don't want to lose this unit by screwing up. Also, my unit is in CA, and I live in another state, where do we draft up this "loan?

Wherever the property is.

Do I use an attorney in the state of CA or the state that I live in? Or does it even matter?

Wherever the property is.

Sorry for asking so many questions, but I need to be sure before I present such deal to a potential private lender.

No problem - these are good questions.

Gentle Reminder: Please, use REPLY or SEND button to keep chatting, or RATE POSITIVELY and SUBMIT your rating when we are finished. You may always ask follow ups at no charge after rating.

Customer: replied 1 year ago.
What if I don't pay the senior note of $35k, then it triggers the foreclosure by the bank by default? The court will appoint the bank to auction it off and the proceeds will still be distributed the same way? 35k to senior, 100k to junior, rest to me.So if an unexpected event were to happen, and neither note is being paid, who triggers the foreclosure?
Expert:  Ely replied 1 year ago.

What if I don't pay the senior note of $35k, then it triggers the foreclosure by the bank by default?

Then the same as above applies. Either the primary lender or the junior lender can trigger a foreclosure.

The court will appoint the bank to auction it off and the proceeds will still be distributed the same way?

Yes.

35k to senior, 100k to junior, rest to me.

Yes.

So if an unexpected event were to happen, and neither note is being paid, who triggers the foreclosure?

Whichever of the lenders are not being paid.

Gentle Reminder: Please, use REPLY or SEND button to keep chatting, or RATE POSITIVELY and SUBMIT your rating when we are finished. You may always ask follow ups at no charge after rating.

Customer: replied 1 year ago.
Thank you, ***** ***** of deals/situations are common? Let me do a recap, just want to make sure I got it figured out.1. Find someone willing to lend me $100k (whatever terms we want)
2. Find real estate Attorney in CA to draft up paper for this "junior lender" - loan ($2000 fees approx)
3. Record these paper work with the county
4. Make payments, after 4 years or when paid in full, the contract terminates. Do I have to notify the county?
5. In case of default, it will go through foreclosure - "junior lender" gets his money back via auction.
Customer: replied 1 year ago.
Do you have anything else to add, or for me to watch out for?
Expert:  Ely replied 1 year ago.

These types of situations are not uncommon. Junior lenders / second mortgages are common.

Recap is correct.

Once the payment is repaid to junior lender, they will release any lien/instrument against the deed.

I cannot think of anything else per se, but your attorney will likely, depending on the nuances of the situation.

Oh yes I can - one wants to make sure that the primary lender is not opposed/does not restrict junior lenders. Check the contract or ask your attorney.

Gentle Reminder: Please, use REPLY or SEND button to keep chatting, or RATE POSITIVELY and SUBMIT your rating when we are finished. You may always ask follow ups at no charge after rating.

Customer: replied 1 year ago.
primary lender can have such restriction?also, i almost forgot -- what if this lender is from overseas? will they be able to make this loan or do the rules change?
Expert:  Ely replied 1 year ago.

Sometimes they can yes.

It does not matter if the lender is from overseas; same rules apply.

Gentle Reminder: Please, use REPLY or SEND button to keep chatting, or RATE POSITIVELY and SUBMIT your rating when we are finished. You may always ask follow ups at no charge after rating.

Expert:  Ely replied 1 year ago.

Hello again. This is a courtesy check in to see if you needed anything else in regards ***** ***** question. I am simply touching base. Let me know. If you are satisfied, please do not forget to rate positively. Thanks!

Customer: replied 1 year ago.
I don't have an attorney right now to review my "note".
Do you have some keywords that I should scan for as to knowing if they will allow a "junior lender" or not?
How else can I figure this out? Call the bank itself?
Expert:  Ely replied 1 year ago.

Thank you for your reply.

Every contract is different and may have different verbiage. I am afraid that providing keywords would not be efficient. You simply have to read it.

Frankly, calling the mortgage or mortgage servicer is a great idea - they should be able to tell you most of the time.

Gentle Reminder: Please, use REPLY or SEND button to keep chatting, or RATE POSITIVELY and SUBMIT your rating when we are finished. You may always ask follow ups at no charge after rating.

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