Alternative
Sources To
Institutional
Lenders...
Subordination is
another real estate financing
alterative. For
example, a person
owns a $20,000
vacant lot suitable
for building, and a
builder wants to
build an $80,000
building on the lot.
The builder has only
$10,000 cash and the
largest construction
loan available
$80,000. If the
builder can convince
the seller to take
$10,000 in cash and
$10,000 later, he
would have the
$100,000 total.
Note, however, that
the lender making
the $80,000 loan
will want to be the
first mortgage to
protect its position
in the event of
foreclosure. The lot
owner must be
willing to take a
subordinate
position, in this
case a second
mortgage. If the
project is
successful, the lot
owner will receive
$10,000 plus
interest, either in
cash after the
building is built
and sold or monthly
payments. If the
project goes into
foreclosure, the lot
seller can be paid
only if the $80,000
first mortgage claim
is satisfied in full
from the sale
proceeds.
Subordination
To Contract For Deed
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