1st vs 2nd Position Notes

One key attribute of notes is it’s “position”.  This determines the order on which each debt tied to a property will be paid off in the event of a foreclosure.


In the event of a Foreclosure, the first priority on what notes will get paid off is any outstanding property taxes.  After that, any other liens are prioritized by Position, so 1st Position notes first, 2nd position notes after that, and so on.  Most of us only have 1 mortgage on our home, so by default it is in 1st position.  2nd position notes might be a second mortgage on the property or a home equity line of credit.  If a home is foreclosed upon and there is money left over after any tax liens and 1st position liens have been paid off, then the 2nd position liens are paid.  It is possible that there won’t be any funds left over, and the 2nd lien holder might be out of luck.  The borrower is still technically required to pay off every lien, but it will no longer be attached to the property.  A 2nd lien lender might have to resort to a lawsuit in hopes of recovering their investment.

If you invest in 2nd position notes, it is important to due extra due-diligence on the true value of the property (what it would sell for in a foreclosure sale), the outstanding balance in the senior loan (1st position) and if those payments are being made ontime, and if there are any outstanding tax liens.  2nd position notes can be more lucrative than 1st position, but there is added risk and added complexity.  Personally at this time, I have stuck with 1st position notes to keep things simple.