Understanding Lien Position: First, Second, and Joint Liens

The short version: Lien position is the order in which claims against a property get paid. First is ahead of second. A joint lien shares a position with another lender. Under the Private Lending program, position generally follows loan size.

Why order matters

If a property is sold or liquidated, the proceeds are distributed to claim holders in a defined order.

Whoever is first is paid first, in full, before anyone below receives anything. Whoever is second receives what remains, if anything remains.

In a strong market with a comfortable margin between the property's value and the total claims against it, the distinction may never be tested. In a weaker one it can be the difference between full recovery and partial recovery.

Which is why lien position deserves to be a question you ask early rather than a term you notice later.

The positions explained

First lien

Your recorded claim ranks ahead of others against that property. On a sale or liquidation you are satisfied before subordinate claim holders.

This is the strongest ordinary position for a secured lender.

Second lien

Your claim ranks behind a first. You are satisfied only after the first lien has been paid in full.

A second lien is a genuine security interest and it is subordinate. Both of those things are true and both matter. The relevant questions become how large the first lien is relative to the property's value, and how much cushion exists beneath it.

Joint lien

Two or more lenders share a position on the same property, typically ranking equally with each other.

This is common where a loan amount is large relative to a single property. Sharing a first position with one other lender is a materially different proposition from sitting behind a first lien, and the two should not be confused.

How this works under the program

Under the Private Lending program, lien position generally follows the size of the loan.

Loans under one hundred thousand dollars are typically secured as secondary liens. Loans from one hundred thousand to two hundred thousand dollars are typically primary with one joint lien. Loans above two hundred thousand dollars are typically a sole primary lien.

The minimum loan is twenty five thousand dollars. Terms run from two to five years, and current terms and rates are available on request.

There is a straightforward logic here. Larger loans command stronger positions because they represent a larger share of what a property can support.

What position alone does not tell you

It is tempting to treat first lien as safe and second lien as risky and stop thinking. That is too crude.

The value of the property matters. A second lien on a property worth considerably more than the total claims against it can be better positioned than a first lien on a property with no margin.

The size of the claim ahead matters. A second lien behind a small first is a different thing from a second lien behind a large one.

The borrower matters most of all. Lien position determines what happens if things go wrong. Whether things go wrong depends on the operator.

That last point is worth dwelling on. Under the program, interest is paid from all of the developer's income sources rather than only the collateral property, and payment is backed by a promissory note. The collateral is the backstop. The company's operations are the plan.

The transferring note

One feature specific to this programme is worth understanding alongside lien position.

Because the borrower is an active builder that sells properties in the ordinary course of business, the property securing your note may be sold during your term. When that happens, the note is transferred to another residential property in the collateral portfolio.

So your security is not extinguished by a sale. It moves. It is reasonable to ask how position is handled on transfer, and to get the answer in writing. We cover the wider structure in how the Private Lending program works.

The risks, stated plainly

Lien position does not remove any of these:

• Your funds are not liquid during the term.
• This is not a bank product and is not FDIC insured.
• Real estate values can change.
• Interest rates can change at renewal.
• Past performance does not indicate future results.

Questions worth asking

What lien position applies to the amount I am considering. What sits ahead of me, and how large is it. Which property secures my note and can I identify it. What happens to my position if that property is sold. And can I see the recorded instrument.

These are ordinary questions and they should be answered without friction. Our fuller list is in questions to ask before you become a private lender, and the documentation itself is covered in how a Deed of Trust protects a private lender.

If you would like the position that would apply to your situation explained plainly, schedule a free consultation. There is no obligation.

This article is for general education and is not financial, tax, or legal advice. Please speak with a licensed professional about your situation.