A bank first and me in second on my own 8 unit. I don't like it.

I've been the second and it cost me real money, so here's what happened. I sold a package of three small rural houses, 214k, buyer got a local bank first, I carried 62k behind it at 9%. Buyer paid me for fourteen months and paid them for nine. I got a courtesy call from the bank's workout guy that was not required by anything I had signed, by which point they were four payments behind plus escrow. To stay alive I brought their loan current, 11,400, and then paid another 7,600 in legal before he handed me a deed in lieu. I got the houses, and I got them with the bank loan still on them, which I then had to service until I could sell.

What I would have needed in writing to make that survivable:

• A written notice agreement from the first lender that they tell me the day he goes 30 days late, plus my right to cure without them accelerating.
• The bank's actual subordinate debt terms, read by my attorney, not a verbal from the buyer's mortgage broker.
• Proof of paid taxes and insurance to me every year with me named on the policy, not just to the bank.

And the bigger point. A second at 9% behind 65% LTV is priced like debt and behaves like equity. If you can't get the cure rights and the notice in a signed document, counter with yourself as the only lien. 8.5% on 585k with a recorded first position and 25% of his cash in front of you is a different asset than 9% on 195k in second. You said you don't need the lump. That's the whole answer.

Foreclosure sequence and what a junior lienholder can do varies by state, so get a local attorney to walk you through your state's order of operations before you sign either version.

Carry the whole thing. You've owned it six years free and clear, you don't need the money, and the bank in the middle adds a party whose interests come before yours in every bad scenario. I'd rather have 585k out at 8.5% with a first lien than 585k in a brokerage account and 195k of hope.

Before the position question, check whether the stack services itself. NOI 58k. A 507k first at, say, 7.5% on 25 year amortization runs roughly 3,747 a month, about 44,970 a year. Your second at 9% interest only adds 17,550. Combined debt service is around 62,500 against 58k of NOI, which is a coverage ratio near 0.93. Rate and term on his first are assumptions, so get his term sheet, but at anything close to those numbers the building does not cover both loans. He would be funding your payment out of pocket from month one, and your 9% coupon is the first thing he stops paying because the bank can foreclose faster and he knows it.

That reframes the choice. Your own version, 585k at 8.5% on 25 year amortization, is about 4,712 a month or 56,500 a year, which is still tight against 58k of NOI but it's one lender who can be talked to. Either way the deal needs a bigger down payment or a lower price, and you should be underwriting his ability to carry the payment out of the building rather than out of his salary.

On second position generally, a junior lien can be protected with a written notice and cure agreement and a standstill, and whether the first lender will sign one is a negotiation with them, not with the buyer. The remedies available to a junior lienholder and the timeline to use them differ by state, so confirm yours with a local real estate attorney.

One more assumption worth naming. You mention a lukewarm 1031 idea. Installment sale reporting and exchange treatment interact in ways that depend on how the note and the closing are structured, so settle that with your CPA before you pick a structure, since it may change the down payment you want.

You said you don't need the 585k and the 1031 idea is lukewarm. Both of those sound like reasons to keep the income and skip the bank. What would you actually do with the lump?

What's your basis after six years of depreciation? If the gain is large, spreading it over an installment note is doing work for you that the lump sum isn't, and if it's small, that argument goes away and it's purely about position. I'd want that number before I countered anything. Also curious how you got to 58k NOI, is that with management priced in at market or you doing it?

I'm deep in tenant screening right now and it strikes me that everyone in this thread is talking about lien position and nobody has asked what the buyer's file looks like. What does he own already, has he ever run eight units, and does he have reserves after the 78k. @rena-expert's coverage math says he'll be feeding the building, which means his reserves are the actual collateral.

@hollow's version is the one I'd copy. First lien, 25% down, no bank in the room, 8.5%. Boring, and you can explain it to yourself in one sentence at the closing table.