Weighing a bank first with a seller second against carrying the whole note on an 8 unit sale

Take a seller who carries a second position behind a bank's first, say a 214k package with a local bank first and 62k carried behind it at 9 percent. A buyer pays the seller for fourteen months and pays the bank for nine. The bank's workout department eventually calls, not because they're required to, but as a courtesy, and by then the loan is several payments behind plus escrow. Bringing the first current and covering legal costs to get a deed in lieu is not unusual in that position, and the seller ends up owning the property with the bank loan still attached, needing to service it until a resale. What would have made that survivable in writing: A written notice agreement from the first lender specifying they'll report a 30 day late the day it happens, plus a right to cure without acceleration. The bank's actual subordinate debt terms, reviewed by an attorney rather than taken as a verbal from a buyer's mortgage broker. Proof of paid taxes and insurance delivered annually, with the seller named on the policy directly rather than only the bank. The bigger point: a second position at 9 percent behind 65 percent LTV is priced like debt and behaves like equity. Without cure rights and notice in a signed document, a seller in that spot is often better served holding the only lien themselves. 8.5 percent on a larger balance with a recorded first position and a substantial buyer down payment in front is a materially different asset than 9 percent in second position. Foreclosure sequence and what a junior lienholder can do varies by state, so a local attorney should walk through the order of operations before either structure is signed.

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 is 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 cannot, and if it is small, that argument disappears and the decision is purely about lien position. That number belongs on the table before any counter goes out. Also curious how the 58k NOI was built, is management priced in at market or is that you doing the work?

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.

The version from @laurenkim53 is the one to copy. First lien, 25% down, 8.5%, and no bank in the room. It is boring, and it can be explained in one sentence at the closing table.