A lien position refers to the priority order in which creditors are repaid if a property is sold or foreclosed.
The first lien position is paid first.
The second lien position is considered only after the first has been discharged … and so on.
For instance, consider a property that sells for $600,000.
The first lien is owed $500,000 and the second lien is owed $75,000.
Both creditors are paid in full with the balance of $25,000 reverting to the former owner after costs.
But if the property only sells for $520,000, the first lien is still paid in full.
The second lien may recover little or nothing after costs and stands to lose the lion’s share of its $75,000.
The concept of lien position is important to understand when borrowing capital from any lender in California.
That is because lien position determines risk profile and in turn interest rates and terms.
When another lender has first call on a property and that property is sold or foreclosed, the second lender takes on a great deal more risk because they risk being left with nothing.
Why first position matters in California
First lean position is especially critical in California because it is a non-judicial foreclosure state.
That means that the first lien holder has the ability to initiate a trustee sale if the borrower defaults under the terms of the loan.
They may be missed payments or a non-monetary default such as a failure to maintain the property, violation of occupancy requirements or a failure to maintain required hazard insurance.
To initiate a foreclosure in California, there is no requirement to file a lawsuit.
It leaves junior leans in vulnerable positions and with the potential to be wiped out, provided they were legally and properly notified of foreclosure proceedings.
This dramatically escalates the risk of junior lien holders.
Pricing differences
In California, terms and rates of hard money lenders differ significantly depending on their lien position.
First lien position
Loans are typically underwritten based on the property condition, exit strategies, borrower experience and the LTV or in the case of flips, loan-to-ARV (After Repair Value).
Their may be structured as:
- 65-75% ARV for flips
- 9-12% interest
- 1-3 points up front
Second lien position
Loans will be underwritten based on the amount of equity remaining after the first lien, the strength of the borrower’s liquidity, the likelihood of refinancing and using a CLTV (Combined Loan-to-Value)
The typical structure is:
- Total CLTV capped between 70-80%
- 12-16% interest
- more points
- shorter terms
CLTV vs LTV
Second lien holders use CLTV (Combined loan-to-value) as a metric to measure the risk of loan.
LTV (loan-to-value) measures the risk of a single primary mortgage against a property’s value.
CLTV measure the total risk by adding all secured loans (primary mortgage + HELOCs + second mortgages) against the property’s value where HELOC is a home equity line of credit.
Essentially, it factors in the first position lien and all other monies owed on the property along with its own loan.
The lower the CLTV percentage, the lower the risk to the lender.
For example, a property is worth $1,000,000.
It has a first lien position of $650,000 and a second lien of $100,000.
The LTV is 65% (650,000 / 1,000,000)
The CLTV is 75% (650,000 + 100,000 / 1,000,000)
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Lenders with a first lien position can feel confident about their investment.
This helps build trust and foster a stronger relationship with the borrower.
Lenders with a second lien position engage in riskier business.
They are often speculative lenders who dabble in shorter-term, higher risk loans.
Ultimately, they don’t all get paid.
Equidy is one of California’s most experienced and reputable hard and private money lenders.
They focus on strategies that create:
- lower risk
- faster enforcement
- cleaner underwriting
- greater certainty for investors
This ultimately benefits borrowers who enjoy a stronger capital partner that can execute a deal with greater certainty and speed.
In some circumstances, Equidy will approve loan applications in as little as 48 hours.
They stand by their core belief that anything is possible and they are determined to prove it every single day.
Even in challenging economic times, they love to reward entrepreneurship and strive to see their clients realize their wealth creation dreams.
But their services do not end there.
Equidy is an invaluable mentor to flippers and developers and invested in building lasting relationships with their clients throughout their wealth creation journeys.
They have an intimate and personal history with all aspects of real estate and property development in California and have done for more than 40 years.
Their prime concern is to maximize the return on your investment without putting yourself at unnecessary financial risk.
Equidy works closely with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimize the risk to all parties.
Contact Equidy today to book your free strategy call.
