First vs. Second Trust Deed Investments: Understanding Lien Position

Lien position is the order in which lenders are repaid from a property if the borrower defaults. A first trust deed is paid first, a second trust deed is paid only after the first has been satisfied, and so on. Position alone does not tell you how risky an investment is. It has to be read together with how much total debt sits on the property compared with its value.

Trust deed investments are speculative and illiquid. They are not deposits, and they are not insured or guaranteed by any government agency. Nothing here promises any return.

What lien position means

In California, a loan secured by real estate is evidenced by a deed of trust recorded against the property. When more than one is recorded, the order of recording generally sets priority, subject to exceptions such as certain tax liens and any agreements between lenders. The holder of the first position has the senior claim.

If a property is sold or foreclosed, proceeds go first to the senior lien, then to junior liens in order. That ordering is the core of the difference.

First versus second: the practical differences

• Priority of repayment. A first position is repaid before a second. A second takes what remains after the senior debt.
• Dependence on the senior loan. A second position holder usually has little control over the first loan. If the senior loan goes into default, the junior investor may need to act to protect their position.
• Sensitivity to value. Because the second sits behind more debt, a smaller decline in property value can reach it.

This does not mean one is safe and the other is not. It means they describe different layers of exposure.

Position and loan-to-value work together

Loan-to-value, or LTV, compares debt to the property's value. For a junior lien the figure that matters is the combined LTV, which counts the senior debt plus your loan.

For illustration, suppose a property is worth $1,000,000. A first trust deed of $500,000 covers half of the value, so there is $500,000 of equity cushion beneath it. A second trust deed of $200,000 behind a $600,000 first sits behind $600,000 of debt, and the combined debt is $800,000, leaving $200,000 of cushion. In this hypothetical, the first sits behind no other debt with $500,000 of equity beneath it, while the second sits behind $600,000 of debt with $200,000 of equity beneath the combined total. The same property can look very different depending on which position you hold and how much debt is stacked ahead of you. These figures are invented examples, not offerings.

What to ask a sponsor or lender

1. What is my lien position, and is it confirmed by a title report?
2. What is the senior debt, and who holds it? What are its terms and maturity?
3. What is the combined loan-to-value, and how was the property value determined?
4. What is the borrower's plan for repayment, and what is the fallback?
5. What title insurance covers the investment?
6. How will payments reach me, and how will I see the status of the loan?
7. What happens if the borrower defaults, and who handles it?

Our article on title reports explains how position is verified, and how private lenders value a property covers the valuation side.

How we approach investor protections

For investors in our loans, we provide title insurance coverage up to 125% of the investment, a 24-hour investor portal, and direct-deposit payments through a nationwide loan servicer. Investor information is never sold or shared for marketing. These are features of how we operate, not assurances about results; any investment can lose value.

Where to learn more

Our trust deed investing basics article covers the broader picture, and our investor page describes our program. Consider speaking with your own financial, legal and tax advisors before investing.

Questions about lien position or how our loans are structured? Call us at (800) 943-1314 or start an application online. General information only; not legal, tax or investment advice.