Why We Only Lend in First Position and Why It Should Matter to You
What First Position Actually Means
When you lend in first position, your capital sits at the front of the repayment queue. In any default or foreclosure scenario, the first-position lender is made whole before any other creditor, equity partner, or investor sees a dollar.
This is not a preference. It is a legal priority, documented in a recorded instrument.
Subordinate positions sit behind the first lien. If the property sells in distress and the proceeds are insufficient, subordinate lenders absorb the shortfall. This is where private lending risk concentrates. Not in the first position. In every position behind it.
Why We Do Not Negotiate This
There is pressure in some deals to accept a second-position lien in exchange for a higher yield. The logic sounds reasonable until the deal goes wrong.
Second position means the first-position lender gets paid first. If the collateral is not sufficient to cover both, you learn about it after capital has already been lost. No yield justifies surrendering the legal protections that first-position status provides.
This is a line that does not move. Not because attractive deals are not presented. Because the protection that makes lending reliable disappears the moment you leave first position.
Three Elements That Make the Position Genuinely Safe
First position alone is not sufficient. The position has to be built correctly.
Conservative loan-to-value. We lend at sixty-five to seventy percent of a verified, current property value. That cushion means even a meaningful market correction does not threaten the principal. The borrower has equity in the deal. That equity absorbs the downside before your capital is touched.
Clear and enforceable documentation. A promissory note, a recorded deed of trust or mortgage, and a personal guarantee where the situation warrants. The lien has to be filed correctly and in the right jurisdiction. The instrument is the protection. The paperwork is not a formality.
A credible exit strategy. How does the borrower repay? Refinance, sale, or cash flow? The answer has to be specific and realistic given current market conditions. A deal with no credible exit is a deal with no defined end point. That is a risk we underwrite out before the money moves.
The Rule That Does Not Change
Would you be comfortable taking this property back at the loan amount if you had to?
If the answer is yes, the structure supports the investment. If the answer is no, first position or not, the deal needs more work before capital is committed.
This question eliminates more bad deals than any other point in the underwriting process. It forces a concrete evaluation of the collateral independent of the borrower’s projections.
If you are considering a private lending position and want to review the structure before you commit, reach out. A 20-minute session with no pressure or agenda. Book at GualterAmarelo.com.
Further Reading
How to Evaluate a Private Lending Deal — The complete five-step underwriting framework that covers the exit strategy, lien verification, and loan-to-value stress testing discussed in this post.
The Banker Mindset: Why the Safest Investors Stop Thinking Like Operators — The identity behind the discipline: why the lender who builds lasting wealth is not the one who chases yield but the one who never negotiates on structure.
Dead Equity: What Your Paid-Off Property Is Really Costing You — How idle equity sitting in appreciated properties can be repositioned into exactly the kind of first-position lending structure this post describes.
