V.I.P. Trust Deed Company
February 1996
Q: I have a potential buyer for my property and I am getting almost everything I have asked for. The buyer is going to build a house and, in the paperwork, has asked me to sign a subordination agreement. He explained what it is, but I would like to hear your definition.
A: Trust me, subordination is a four-letter word.
If you wish, you may classify it with things like the Ebola virus or high-speed car chases. Let’s just call it disaster waiting to happen.
If you haven’t caught my drift yet, let me give you this four-letter word (if my editor will permit me): D-O-N’-T!
The most common subordination agreement is a seller carry-back first trust deed on a piece of bare land or an old house that the buyer intends to demolish.
Almost always, a new house, condominium complex, office building or other structure will be built. The buyer plans to obtain a construction loan for the building of the new structure. The construction loan lender will demand that it be a first trust deed in first position. Since the seller is carrying the first trust deed, the buyer hopes to get the seller to “subordinate” to the new construction loan. Sub-ordination is another way to say “move over” or “step out of the way”.
A subordination agreement is a recorded document that basically says, “Yes, I am first, but I am going to allow a new trust deed to be recorded in a position ahead of me in line. I agree to take a subordinate position.
“I remember an electrician from many years ago who hated Realtors. he was so proud that he had sold his land in Montrose for “full price” without using a Realtor (though he hated Realtors, he tolerated me). He carried a first trust deed for most of the sale price, and yes, it contained a subordination agreement. Any Realtor worth his or her salt would have cautioned this seller and dissuaded him from carrying a trust deed with a subordination agreement.
In this case, units were built on the property; the builder ran over budget and exhausted the funds from the construction loan. This seller carry-back first trust deed had “subordinated” to the new construction loan, and was now a second trust deed behind a construction loan in foreclosure.
You guessed it – the seller was totally wiped out, solely because of the subordination agreement. Commission for the real estate on the sale of that lot would have been between $2,400 and $3,200. The seller’s loss was more than $35,000.
Bottom line: If you don’t like Realtors, consult with an attorney. If you hate attorneys, check with a CPA. If you hate them all, seek counseling!
Peter Rosenthal
VIP Trust Deed Company