Investing In Residential Property: First Position Vs. Second Position

When investing in residential property, it is important that you become familiar with all the different terms and concepts

. One concept that you need to become familiar with is first position versus second position. In certain situations, knowing if you are in first or second position is very important.

To begin, you have what are called either a first trust deed or even a second trust deed on any property. Of course, it can go beyond a second to a third and so on. A trust deed is another name for mortgage paperwork. A first trust deed is the one that is in first position. Who is in first position is decided by who records their paperwork first with the county recorder. If you and another party were to both loan somebody money on a house at the same time, and you were the first to record the deeded trust at the county recorder, you would become the first trustee.

Who is first trustee is an important fact when investing in residential property. The trust deeded first has all the power in the manner of being able to collect the amount that is owed. Normally with a trust deed, you have a promissory note. The promissory note is not recorded along with the trust deed. It does not become a public document.

If the piece of property you have invested in needs to be foreclosed on and you have the first trust deed, you can foreclose the property without having to go through the party in second position, if there is one. If you decide to put the property up on an auction and no one buys it, then you would officially own the property. If there is a party in second position, once you own the property, the second trust deed is gone.

There is no value there anymore and no way for party in second to collect, unless they bid on the house when it is auctioned. The party in second has very little reason to bid on the house, unless there is still a lot of equity left in the house

There is very little protection if you are investing in residential property, and you are in second position. Being in second is a very precarious situation. The party in first will always have priority over other deeds.

When investing in residential property, it is important to look at all your options. Research is key in real estate. Make sure to analyze the various scenarios that can occur when investing in residential property and plan for them.

by: Greg Hughes

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